Langton Capital – 2020-05-04 – PREMIUM – CVA companies falling over, demand, re-openings, Hot Choc & other:
CVA companies falling over, demand, re-openings, Hot Choc & other:
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A DAY IN THE LIFE:
So, as we were working on perfecting that bum-shaped dent in the sofa over the weekend, we considered the art of story-telling and reconfirmed our belief that stories, though often wrong, are much more evocative that those pesky things, what are they, yes, facts.
A point wasted neither on biblical parable-tellers nor on the present occupant of number ten Downing Street but have you ever wondered why so many of them are contradictory and how, for example, it can’t possibly be a good idea for both the worm and the bird that will eat him to get up early?
I mean two heads are better than one but too many cooks spoil the broth. And, whilst it’s better to be safe than sorry, nothing ventured, nothing gained.
And though you shouldn’t judge a book by the cover, clothes make the man; you shouldn’t look a gift horse in the mouth but you should beware Greeks bearing gifts; the best things in life are free – but there’s no such thing as a free lunch, etc, etc.
Hence, when somebody tells you a story to make a point, it might be worth turning the telescope around, look at the problem from another direction etc. but anyway, enough of that. On to the news:
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• Turning demand back on
THERE IS NO MAGIC SWITCH RE DEMAND. Supply has been turned off by government decree. Demand followed. Supply can be switched back on but consumer behaviour may be slower to readjust. 4 May 2020:
• How a question or a situation is framed is important. It is linked to anchoring. It means that pre-conceived ideas are injected even before rational thought has kicked in.
• Warning, we have no medical idea if these comments are specifically accurate – though they should be directionally correct.
• If you asked consumers if a 3x normal flu season would change their behaviour, they would likely say no.
• If you asked them the same question re a pandemic that was one tenth as bad as The Black Death, they may say they would never leave the house again.
• The two outbreaks may be ‘the same’ in terms of deadliness but, in terms of consumer behaviour, the outcome will be materially different
The problems of success:
• The ‘Stay at Home’ campaign has been extremely successful.
• People are doing the ‘right thing’ and the R0 is below one.
• That is great news re squashing the spread of the virus but it has had a huge impact on consumer behaviour and it could have shifted the mindset going forward
• This is not just an issue in the UK.
Weaponised frowning and the creation of social justice warriors:
• And people have come on board.
• So much so, in fact, that it is a little distasteful at the edges with police telling people to get out of their own gardens, giving brownie points to consumers for not browsing the non-food aisles in supermarkets and curtain twitchers only a whisker away from sending poison pen letters before moving on to informing on their neighbours for breaches of various rules
• We’re not libertarians here, just making observations
• Ipsos MORI has said that 67% of Britons say they will feel uncomfortable going to large public gatherings, such as sports or music events
• it says only 17% would feel comfortable attending such an event
• Judging by the way people give you a wide berth in supermarkets these days, the 67% could be an underestimate. Some consumers may wish to appear bolder to a pollster than they would be in real life
• Ipsos Mori says 61% of Britons would also feel uncomfortable using public transport or going to bars and restaurants.
• it says while 29% feel comfortable going out to eat and drink, only 21% would be happy to use public transport to get to their destination.
• Consumers feel much more comfortable about supermarkets. This is likely to be to do with linger times and the ‘park outside and in and out’ nature of food shopping.
• Younger people are more comfortable than their older peers
• Some 49% feel comfortable going back to work but 35% will be nervous to do so. Nervous workers will likely have plenty of opportunities to ‘self-isolate’ when the lockdown ends and many may choose to do so
• Ipsos MORI says ‘the public are looking forward to seeing family members again in person and a clear majority are comfortable doing so.’
• It adds ‘however, there is clear unease at other consequences of the lockdown ending. In particular, clear majorities of Britons are nervous about using public transport again or going to bars, restaurants or live music and sporting events. These numbers suggest that it will take some time for parts of the British economy to return to any semblance of normality, even after lockdown has ended.’
• Elsewhere, Hitachi Capital Business Finance has said that the proportion of UK small businesses predicting growth has plummeted from 39% to just 14% in the last three months
• Some 31% of business owners are scaling back the size of their business’s operations
• Commenting more generally on small businesses, Hitachi says ‘small business outlook in recent years has at times defied gravity’ but adds ‘we expected to see a big fall in confidence for this quarter.’
What this means:
• Michael Gove was asked over the weekend whether the government would changed its amber, red and black podium message ‘Stay Home, Protect the NHS, Save Lives’ soon as its very success could stymie attempts to end the lockdown
• Mr Gove did not respond but the message will have to change
• Because switching the consumer back on is going to be far from easy. And social venue could be most-impacted (see comments on the Irish lifting below).
• Hence calls for continued support are based on realistic estimates as to levels of demand (and reduced supply in terms of cover numbers if social distancing remains in place)
• The government, which may have bigger fish to fry, will have to decide whether we, as a country, want to have pubs and restaurants or not
• If we do, then financial assistance will almost certainly be necessary
• The 2018 CVA companies, see below, are falling like flies and, whilst at least some of the units will end up in the hands of other operators, attrition is already setting in
PUB & RESTAURANT NEWS:
Government and other aid:
• The British Beer & Pub Association has welcomed an announcement by the FCA that it will obtain a court declaration to resolve contractual uncertainty in business interruption insurance cover. It says ‘there have been widespread concerns amongst businesses, and especially pubs, about the lack of clarity and certainty on Business Interruption insurance claims.’
• The BBPA says its members have had ‘very little success when they have tried to claim on their insurance policies.’ It says re business interruption insurance that ‘56% of those applications made through Business Interruption cover have been rejected, whilst 44% await an outcome.’ Regarding pandemic cover, it says ‘67% of applications have been rejected, with 33% awaiting an outcome.’
• CEO Emma McClarkin says ‘there has been a severe lack of clarity for pubs on Business Interruption insurance claims. This had added to the terrible uncertainty our sector faces in what is already a very precarious situation.’
• UK Hospitality has called once again for urgent commitments from the government to support the hospitality sector beyond the end of lockdown. See below for comments on ‘the new normal’ and what it might mean for demand (and supply).
• Colliers International suggests that many local authorities have been slow to pay out the £10,000 or £25,000 grants due to small businesses on a per site basis. Colliers says the pay-out rate is inconsistent across the country with Ealing having paid out 94% of the money owed but Birmingham and Manchester having both paid out only 37%. There are more small businesses claiming rates relief windfall payments in Cornwall than in any other part of the country.
• The Scottish Beer & Pub Association has suggested that there are still 1,500 pubs in Scotland waiting for their cash.
• Businesses will be able to apply for business continuity loans of up to £50,000 from today. Such loans, which should be delivered quickly, will carry interest at 2.5% and will be 100% backed by the government.
The new normal:
• The BBPA reports that beer sales by the brewers to UK pubs & restaurants fell by 40% in March ‘reflecting immediate impact of first two weeks of pubs lockdown.’ It says ‘pub sales in April to be zero.’ The PM Boris Johnson advised on 16 March not to visit pubs and on 20 March he ordered them to close.
• The BBPA says that sales in the off-trade were up by 10.6% in March. This was not sufficient to offset the drop in pub sales and total beer sales were down by 12.7% on the month.
• March will have been very much a month of two halves – and April will be a separate story again. Margins the off trade, where sometimes small brewers must negotiate with Tesco, Sainsbury etc., are historically lower than those in the on-trade.
• The BBPA says ‘the data is a clear demonstration of the cliff-edge impact of the Prime Minister’s advice to avoid pubs, followed by the order for them to close for lockdown. With March data showing the impact of 11 days of closure on pubs, April`s data will reveal the full impact of total closure with no sales in pubs at all.’ The BBPA says ‘when this crisis is over, the first place many will want to visit with their friends, family and neighbours is their local pub. The Government must invest in them now to save them for the future.’
• CGA reports that ‘the COVID crisis is making consumers more cautious and apprehensive, but far from driving them to drink, the majority of the country seems to be adopting a more sober lifestyle.’
• CGA’s BrandTrack survey reveals that the ‘main concerns centre on finance, health and job security, with 85% of consumers worried about the long-term financial implications of COVID-19 and an even greater proportion (89%) worried about their health and that of their families. Over half (54%) are worried about job security.’
• CGA says that 17% of regular drinkers are drinking more than usual with 28% drinking less. Wine remains the most popular drink in the home.
• CGA’s Business Confidence Survey reports that a moratorium on debt servicing is top of the list of on-trade demands. It says ‘confidence is at rock bottom among the bosses of Britain’s pubs, bars and restaurants.’
• Hospitality bosses are concerned about their lack of cash-flow though it says ‘many operators are tentatively developing recovery plans, but with predictions of a return to vastly different and contracted market to pre-COVID times.’
• Confidence had been at a four-year high as recently as February. Only 15% of industry bosses are now optimistic about their own company’s future, down from 83% in February. Some 69% admit to being pessimistic.
• CGA reports some 70% of industry bosses would like to see a nine-month rent free period to December. Many would like to see a phasing of the removal of financial payroll and other support.
• NPD reports that pantries are still stuffed in the US. This could impact demand when the lockdown is lifted.
• The FT reports on the Square Meal survey that found around three quarters of restaurant and bar operators in the UK do not believe their businesses could survive (without government support) if social distancing measures remain in place. Adventure Bar says it would have to reduce capacity by up to 70% in order to comply with other operators saying that operating at 50% or less of normal revenue levels would lead to chronic losses.
• Many UK operators have expressed the opinion that reopening ‘too early’ would be the wrong thing to do.
• Nielsen says that 22% of people in the US would return to restaurants when they reopen. That leaves a lot of other people who were not prepared to make the same commitment. It says US restaurant sales are running down around 68% having been down by around 75% at earlier points in the crisis.
• The Guardian asks whether ‘the great Chinese buffet’ could be out of fashion in the ‘new normal’. Certainly shared platters might be less popular.
• Barclays economists have suggested that GDP will fall by 8.0% this year and by a further 6.3% next year. It says the unemployment rate could hit around 9.0% in Q2 this year. It expects 8m workers to be furloughed. This is likely to cost the Exchequer around £40bn for the three months that it may be in place.
• The Local Data Company says ‘the years of restaurant brands opening 20 to 50 sites per year using private equity money have long gone.’ It says
• Industry analyst Peter Backman has reported in his latest quarterly briefing that a number of themes are making themselves apparent during the lockdown. He says ‘perhaps one of the most powerful of those themes is the feeling of liberation now that executives are no longer constrained by the need to hit “this month’s numbers” and they no longer have to explain their current Like for Like performance, because to do so is almost meaningless.’
• This should allow executives to think more strategically. On the other hand, they may be making a virtue out of a necessity and, though the government is currently picking up the bill for a large part of their labour force, operators cannot survive indefinitely without reopening their doors.
• Backman reports that more operators are reopening a limited number of their units for delivery or takeaway. He mentions that in the past week ‘Burger and Lobster, Farmer J, Nando’s, MeatLiquor, Pizza Pilgrims, Paul, and Tortilla, and QSR chains Chilango, Costa, I am Doner, Five Guys, Taco Bell, and Wingstop, joined those that announced re-openings in the previous week which included Burger King, Homeslice, KFC, Pret a Manger and Wimpy. More brands, like Honest Burger, are possibly going to open over the next week or so.’
• Around ten sector companies (excluding retailers such as WH Smith and excluding the huge Carnival Corporation fund raise) have tapped the market for fresh equity to date.
• These raisings have totalled over half a billion pounds to date led by SSP £215m, JD Wetherspoon £141m, Restaurant Group £57m, Gym Group £41m and City Pub Group £29m. Money has also been raised by Hotel Chocolat, Everyman, Hollywood Bowl, Loungers and Ten Entertainment.
• Ireland has said that pubs, bars and nightclubs won’t reopen until August under government plans to ease the country’s lockdown. The relaxation will come in five phases, to be introduced 3wks apart, and pubs & bars will reopen in the last. The Irish Licensed Vintners Association said ‘we’re bitterly disappointed really’. It adds ‘social distancing challenges are the same for all hospitality businesses and all hospitality businesses should be able to open at the same time.’ The staggering is likely to be about linger times rather than the suggestion that customers pop into both a department store and a pub – so they should be treated the same.
• Sky reports that Prezzo has called in advisors to ‘consider its post-coronavirus funding options.’ Prezzo underwent a CVA in late 2018. See our earlier comments. Recently property company Colliers claimed that CVAs are ‘delaying’ failure.
• We have said previously ‘companies are climbing up the funnel in a sinking ship. A CVA perhaps does little to stop the company from sinking further. Colliers International claims that since 2016, 13 out of 23 large businesses to have launched CVAs have gone on to file for administration. This number has risen since as Carluccio, which is in administration, underwent a CVA in 2018.
• Sky quotes a Prezzo spokeswoman as saying ‘we entered this entirely unexpected closure after a period of strong trading, which has given us the impetus and momentum to be able to drive through to reopening.’ FRP, who are administrators to Carluccio, are now advising Prezzo.
• Azzurri Group, which owns the Ask Italian and Zizzi chains of restaurants, is reported to have appointed KPMG to help it assess its options.
• Vapiano has appointed PwC to consider its funding options.
• Byron is to launch an auction this week to attempt to sell the business. Sky reports that the group appointed KPMG to consider its financial options. Byron underwent a CVA in 2018.
• Owner Famous Brands has said that it will not continue to support its Gourmet Burger Kitchen subsidiary. Restaurant Group has said the same re Chiquito’s and Food & Fuel and those subsidiaries have gone into administration. GBK also underwent a CVA in 2018.
• There are a number of themes developing here. They could have different endings but, directionally, they seem to be heading the same way.
• In the case of Byron, selling a business in this environment, with units closed for an indeterminate period of time, will not be easy. Boparan are in exclusive talks with the administrators to Carluccio. If Boparan buys that business, we would not expect to see a lot of money change hands.
• We haven’t, as far as we are aware, heard anything from Pizza Express.
• Begbies Traynor has said that as many as 509,000 businesses in the UK were flying red distress flags by the end of March.
• The Telegraph reports that entrepreneur Richard Caring could be obliged to put more money into his restaurant business after auditors BDO ‘cast doubt over their future.’ It says BDO ‘has warned that, while an extension to the group’s credit facility has been agreed “verbally”, material uncertainty related to the coronavirus crisis meant Mr Caring could be forced to foot the bill for any shortfall in funding himself.’
• Issues with auditors (see our earlier comments on ‘going concern’ issue) may become a feature across the hospitality industry.
• Hotel Chocolat has updated saying that it has increased its banking facilities. It says ‘this follows the Group’s recent equity placing, announced on 20 March 2020, from which the Group raised gross proceeds of £22 million to fund growth capital investment and to provide operational headroom.’
• HOTC says ‘Easter is the second largest seasonal peak for the business. As anticipated, closing all retail stores from 23 March 2020 has had a material impact on trading. However, the Group has been able to rapidly leverage its direct-to-consumer multi-channel model to redirect demand to online, and to modify the working methods of its distribution warehouse to operate safely, with a temporarily reduced product range.’ It says ‘whilst not fully mitigating the total retail sales loss in the key three-week Easter period, the Group is encouraged by the agility and resilience of the business model and continues to explore further avenues for online growth whilst working safely.’
• HOTC says ‘our market leadership in digital and subscription chocolate is more valuable than ever and we will accelerate the planned innovations and investments behind these models. Plans are in progress to re-open our physical locations when appropriate, with adjustments in place to make shopping with us safe and pleasurable again.’
• McDonald’s is reported to be in talks with some of its landlords in the UK about reduced rental payments
• Molson Coors has reported beer sales down by around 9% in Q1.
• Costa Coffee is to reopen 29 stores.
• A down day for the sector on Friday. Compass Group, DART Group, Playtech, Restaurant Group and TUI all down 5%. Gregg’s off 6%, DP Eurasia and Carnival off 8% and Cineworld 10% lower. REIT New River managed a 5% rise.
HOLIDAYS & LEISURE TRAVEL:
• The FT reports that a group of 82 landlords are putting pressure on hotel chain Travelodge to pay its rent. They accuse the company of using Covid-19 as an excuse not to pay bills that it could afford to pay.
• STR reports that he US hotel industry saw a REVPAR decline of 78.4% in the week to 25 April. It says that occupancy was down by 62.2% with average rate down by 42.9%. STR says ‘demand has grown slightly across the country during the last two weeks, which could provide some hope that the levels seen in early April were indeed the bottom—especially with some states now moving to ease social distancing guidance.’
• TUI has told some hotel creditors that it will not pay the 75% of money still owed to them for holidays taken last winter until after the coronavirus crisis. This will put hoteliers in resort in a very difficult position. TUI says it is unable to comment on its supplier payment policy.
• Ryanair is to ground 99% of its flights until July. It will make up to 3,000 staff redundant.
• Heathrow has said passenger numbers were down by around 97% in April.
• Eurostar, Delta Airlines and Manchester, Stansted & East Midlands airports are to ask staff and passengers to wear face masks. American Airlines and United have also said that they will require passengers to wear face masks.
• Carnival Corporation has said it will co-operate with the US House Committee’s investigation into the company’s handling of the coronavirus crisis.
• A number of EU countries have called for a suspension in the rule that demands airlines should make cash refunds to customers for cancelled flights.
• Airlines have said that, if the UK were to impose a 14-day quarantine period on incoming passengers, it would ‘effectively kill air travel’.
• Warren Buffett’s Berkshire Hathaway has sold all its stakes in the four largest US airlines.
• Royal Caribbean has suggested that cruise ships may have to reduce passenger numbers if and when they are allowed to recommence operations.
• Transport secretary Grant Shapps has told the Andrew Marr show ‘it is clearly going to take some time for industries like aviation to come out of this.’ He adds ‘I think we have to be realistic about what the shape of that looks like.’
• Rolls Royce could cut up to 8,000 jobs.
• French car hire company Europcar has secured €307m in new financing including a €220m loan 90% guaranteed by the French state.
• Rail unions have said that they have ‘severe concerns’ about plans to increase train services. This may be necessary if the lockdown is to be partially lifted and if passengers are to distance themselves on services.
• Gfinity has reported that it has been appointed to operate a second instalment of the ePremier League Invitational tournament. The company says ‘we are delighted to have been chosen again by the Premier League to operate the second ePL Invitational tournament, where we will see some of the top players battle it out.’
• Twitter has reported a fall in advertising income despite an increase in site traffic.
• Tesla boss Elon Musk has suggested that the value of his company could be too high.
FINANCE & ECONOMICS:
• The UK’s Manufacturing PMI fell to 32.6 in April from 47.8 in March. Markit reports ‘manufacturing production, new orders and employment all contracted at the fastest rates in the 28-year survey history.’
• Markit says ‘UK manufacturing suffered its worst month in recent history in April.’ It says ‘supply-chains also felt the full force of the outbreak as average supplier delays rose to the greatest extent seen since PMI records began.’
• The Nationwide has said that Britain’s housing market is grinding to halt. It says prices were up by 3.7% in April this year compared with the same month last year.
• The Eurozone economy suffered recorded its steepest quarterly contraction ever in Q1 this year. GDP was down by 3.8%. It is likely that Q2 will see an even greater decline.
• Warren Buffett’s Berkshire Hathaway doesn’t do things by halves. It recorded a loss of just under $50 billion in Q1.
• Coronavirus testing has dropped back below 100,000.
• Michael Gove has revealed plans to hire and train 50,000 people to fill in customs forms post the end of the Brexit transition period. 50,000 people at £30k fully costed a year (probably low) comes in at £1.5bn a year.
• Sterling lower at $1.2443 and €1.1376. Oil lower at $26.24. UK 10yr gild yield up 1bp at 0.25%. World markets lower on Friday. Far East down today. UK set to open down around 35pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines in the Saturday papers were mostly about how the pandemic lockdown might end: the FT went with “Offices to stay shut for months”, whilst the Telegraph flagged that “Two-metre rule could be relaxed in exit plan” and the Times ran with “Fever tests for commuters”. In terms of the economic impact, the FT had an interesting article about the problems that lie ahead for retailers (headlined “All change in store after lockdown” and illustrated with a photo of the queue outside a B&Q Warehouse store), with a great quote from a senior retail executive: “There are between 3m and 5m people currently furloughed in the UK. A lot of them are actually unemployed. They just don’t know it yet”. And the Times had a gloomy double-page spread on the possible slump in house prices that lies ahead…
• Saturday’s Press and News (2): In terms of Retail news, the video game tie-up between Games Workshop and the game developer Frontier Developments generated photo opportunities in the Telegraph and the Daily Mail, whilst the c6% slump in the Greggs share price (after it announced that it had dropped its plan to re-open 20 stores) was the lead story in the market report in the Times. The c8% slump in the Amazon share price in the US on Friday after it announced that it would lose money in the current quarter because of higher operating costs was noted in an article in the Telegraph, but won grudging approval from Lex column in the FT: “Faithful Amazon investors know that red ink is no barrier to long-term growth. Right now, rising costs may even prove a badge of honour”. There was also plenty of coverage of the update on Friday from the embattled shopping centre landlord Intu Properties,
• Sunday’s Press and News (1): The front pages of the Sunday papers were dominated by photos of the PM’s amazingly hairy new baby son…as well as more headlines about the pandemic crisis: the Sunday Telegraph went with “Primary skools to go back in June” and the Sunday Times ran with “Set free healthy over-seventies, say doctors”, but the Observer highlighted some gloomy opinion poll findings (“Fearful Britons insist: don’t open restaurants, schools or stadiums”). The main Business story in the Sunday Telegraph was that the Government could subsidise the rent of “furloughed” shops and restaurants to help landlords and the Sunday Telegraph also flagged that many businesses will abandon up to 20% of their office space in the future…
• Sunday’s Press and News (2): In terms of Retail news, the Sunday Times had an interview with the property boss of Frasers Group (aka
• Sports Direct), Michael Murray (who is stuck in the US in lockdown), in which he lambasted the owners of Westfield for refusing to move to turnover rents. The Sunday Times also had a detailed article about the pressure on shopping centre landlords (“Landlords told to face a new reality on rents”) and an article about how social distancing rules and lower footfall will hammer shop sales post-lockdown (“Are you being served – in a face mask?”). The Sunday Times also flagged that the book wholesaler Bertrams has gone into administration and that Ocado faces a revolt from shareholders at its AGM this week about its controversial share bonus scheme for CEO Tim Steiner, whilst the Mail on Sunday noted that the two sides in the Moss Bros bid battle are still waiting for a Takeover Panel ruling on whether the deal agreed on March 12th can be allowed to lapse.
• Sunday’s Press and News (3): In terms of all the Editorial and other comment, we would, as usual, highlight the thoughtful column by the Sunday Times Economics correspondent David Smith (“The economy will be different – but will it be better?”), as well as the column by the Business Editor of the Sunday Times, Oliver Shah, about how the likes of Philip Green are exploiting the pandemic crisis, eg to get more support for his beleaguered Arcadia fashion empire (“How the ruthless turn crisis into opportunity”).
• Today’s News: Hotel Chocolat has pushed out an update, to highlight new banking facilities and wax lyrical about the strength of its Easter trading Online: “whilst not fully mitigating the total Retail sales loss in the key three-week Easter period, the group is encouraged by the agility and resilience of the business model and continues to explore further avenues for online growth whilst working safely”. And the embattled car dealer Pendragon (aka Evans Halshaw and Stratstone) has confirmed the Sky News story that it has held merger talks with its beleaguered Manchester-based rival Lookers, but that its advances were spurned
• News Flow This Week: As we move further on into May, the pace of Retail company news should slow down a bit this week, ahead of the rescheduled Bank Holiday on Friday (aka VE Day), but Wednesday brings the Ocado AGM update, whilst on Thursday we get the Superdry pre-close, as well as the Howden AGM update, the pre-close from The Works and (in Europe) the Zalando Q1. Thursday also marks the end of the latest 3-week UK lockdown period, that began back on March 23rd…with the Government set to delay its exit strategy plan until Sunday…Coincidentally, GFK will be issuing a “flash” UK Consumer Confidence survey first thing on Friday