Langton Capital – 2020-05-28 – PREMIUM – The 2m rule, suppliers, distributors etc, more aid, job losses & other:
The 2m rule, suppliers, distributors etc, more aid, job losses & other:
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A DAY IN THE LIFE:
Not that we’re spending inordinate amounts of time staring out of the window, of course, but watching the blue-tits hanging upside down on the bird feeder, the magpies stripping the cherries from the thinnest of branches and the squirrels running effortlessly up and down the vertical tree trunks outside Langton’s regional HQ in the North of England, we got to thinking about animal superpowers.
Flying, acrobatic skills etc are obviously on the list alongside the defensive qualities of the neighbourhood hedgehogs, the wiliness of the foxes, the swooping grace of the swallows and all the rest and then we considered rabbits, and had to pause a bit.
Because they can’t fly or climb or run very fast.
They haven’t got claws of steel or huge fangs and, when it comes to intelligence, there simply isn’t much pressure in that tyre so their only superpower seems to be the ability to, well, breed like rabbits and, as they’ve been on the planet in one form or another for perhaps 40m years, that’s served them well enough.
Anyway, we could go on. Which reminds us, we should review The Selfish Gene in this email before too long and, perhaps, watch the film Mystery Men again. It’s all go this side of lockdown. On to the news:
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• The Consumer, Retailers, Distributors, Suppliers & Landlords. Who’s in the least favourable position?
THE CONSUMER, RETAILERS, DISTRIBUTORS, SUPPLIERS & LANDLORDS: Covid-19 is good for virtually nobody. But is it worse for some than others? 28 May 2020:
We’re all in this together?
• The Cummings row illustrates that the belief ‘we are all in this together’ is a little fragile.
• The above may be a case of hypocrisy (or a misunderstanding, depending on your politics) but the differences between The Consumer, Retailers, Distributors, Suppliers and Landlords is structural.
• This is the most populous group. It is the group that votes at the ballot box and, on a human level, it’s the group that perhaps needs to be protected more than the others
• This is clearly being done via the furlough, protection for employers etc.
• Re the furlough, 80% of wages (which in many cases is topped up to 100% by employers) for not going to work – and not spending on commuting, sandwiches and coffees out of the office, cosmetics (for some of us/you), hairdressers (ditto), work togs and the like – may be around the same as 100% for going in every day
• It has to be finite but, if the lockdown ends in anything like a reasonable period of time, consumers may not be too badly disadvantaged
• This, of course, excludes 1) those who lose their jobs (or have actually lost them already but simply don’t know it yet) and 2) the mental ‘damage’ that may have been done and the spending habits that may have been changed etc.
• There are a lot of them. They are ‘vital’. They have a lot of staff and need to be protected.
• The suspension of business rates for all companies and the windfalls of £10,000 or £25,000 for smaller companies (per site) along with furlough payments for staff do provide a great deal of protection
• Indeed, whilst nobody would have wished this situation upon us, state aid of this magnitude would have been almost unthinkable only three or four months ago
• There will be real issues with re-opening. If aid is stopped or tapered but demand doesn’t come back (and costs increase), then there could be a raft of retail collapses (in addition to many units simply not re-opening) over the summer and autumn
• But some retailers can keep a skeleton operation going via delivery, click and collect and takeaway.
• The staff are ‘still there’ and, though it will cost money and working capital to re-stock and re-staff units, many will be able to reopen successfully (we hope)
• In some ways, this group is in a worse position than both the retailer (below them in the supply chain) and the supplier or manufacturer (who is above them)
• This because distributors tend to have a customer base (pubs, restaurants etc.) than can’t be switched over to a different group of people in a short period of time
• We believe that a number of distributors are in a tough spot. They will benefit from the furlough but business rates should be a smaller part of their cost base as most of their operations are on the road rather than in a factory or a shop
• These companies could have some trouble re-starting – this will clearly have an impact on their customers, the pubs & restaurants, that may have to source product from other sources
• There will be a difference here depending on what is supplied.
• A supplier of pub signs and shop fittings will not be getting any work but, when we speak of suppliers, we tend to mean food and drink.
• If these are ‘too’ specialised (e.g. sandwich maker Adelie has called in administrators), then there may be a problem, but for others, this is less of an issue
• These suppliers, provided that the same number of calories are being consumed in the UK now as were being consumed 3mths ago, will have switched their products to a different customer – that is a food retailer rather than a restaurant
• There could be a (not good) margin impact here
• But some suppliers, such as Premier Foods (Bisto, other sauce mixes, Mr Kipling etc.) has seen increased demand as consumers have eaten at home
• Whilst the disruption to the customer chain for these operators will have been a nuisance, some will be doing rather well.
• Few people have a good word to say about landlords – but we’ll have a go. They’re not all evil.
• There, that’s done.
• But getting back to the main topic, it has to be said that there are many more tenants than there are landlords meaning that the latter will not often by a recipient of sympathy
• But their business model is perhaps the one with the least flexibility.
• They build a design, plan, fund and build a shell, advertise it, let it & then pay the interest on their loans whilst collecting rent
• They are static. Think a tree rather than a rabbit.
• If things change, they can’t move. They can’t refocus either. At least not without massive expense. They can’t pivot from retail to residential. Voids will be a problem and many of the levers that they can pull will be passive rather than active
• Hence, whilst they ‘only’ have to sit back and collect the rent (or bask in the sunlight as a tree might do), they can’t do much if a bigger tree grows next to them or there is a landslip or earthquake whilst a humble rabbit can leg it to greener pastures
• But this is business. What the above means is that, in the final, final analysis, tenants have more power than perhaps the landlord would like them to know they have
• The landlord could, should and probably will give all manner of concessions rather than accept voids and, if this causes problems with the landlord’s own banks and shareholders, then this perhaps cannot be avoided
PUB & RESTAURANT NEWS:
Covid-19 & ‘new normal’ news:
• Please sir, could we have more?
• The BBPA, UK Hospitality & the British Institute of Innkeeping have jointly called upon the Chancellor to extend the CJRS until October to provide support for the pub and hospitality sectors. The bodies have called for the support to remain at 80% during that period as the sector ‘is 2 months behind reopening compared to the rest of the economy.’
• The bodies say that ‘thousands of furloughed pub jobs could be lost, unless pubs can safely re-open and be operationally and commercially viable businesses by July, so that they can afford to pay their staff.’ It is likely that businesses will have to pay a further one-fifth of the wages of furloughed employees from August.
• The Chancellor is to speak on the CJRS later this week.
• As well as demand likely to be subdued – and supply restricted if social distancing is to be maintained – costs will be increased as a result of enhanced cleaning, door staff to limit entry and the like. The BBPA says ‘we very much welcome the Government’s extension to the furlough scheme’ but adds ‘unless social distancing restrictions are reduced to the WHO’s suggested one metre, two-thirds of pub jobs could be lost.’
• It says ‘pubs have been closed since March with no income coming in. Expecting many to contribute to furlough costs whilst they are still closed is madness. The decision for the Chancellor is simple, extend the furlough scheme at 80% for our sector until October to save hundreds of thousands of jobs.’
• UKH says ‘some businesses will reopen in July, but many will be trading at far below full capacity. They will be operating with reduced income and will likely incur additional costs to ensure social distancing measures are in place. Businesses will have to continue to furlough some staff members and they will need Government support to do so.’
• UKH adds ‘the reality is, that after five months of virtually no earnings, facing start-up costs up and additional ongoing costs, businesses will simply not be able to contribute to the furlough scheme from August. The sector will only be taking its first baby steps and to expect businesses to go from a standstill to full speed immediately will only lead to venues shutting their doors for good and see staff lose their jobs.’
• Various government ministers have conceded that the hospitality industry was the first to feel the impact of reduced trade (considerably prior to the formal lockdown) and it will be amongst the last to have restrictions lifted.
• As hospitality venues are, by their nature, socially interactive places, this is perhaps necessary. However, if the UK spends 99yrs out of every hundred not in a pandemic, there will need to be some help forthcoming to ensure that, if hospitality bears the full force of the financial impact of Covid-19, it is able to survive into tomorrow.
• UKH has also said that additional business support from the Scottish Government does not go far enough.
• Two metres or one metre?
• There are increasing hopes that the 2m rule will be relaxed as PM Boris Johnson has suggested that he wants the rule to be eased to help shops and pubs reopen. He has asked the Sage experts to look into it. Germany and the Netherlands recommend 1.5 metres. CEO of the BBPA Emma McClarkin says that only around 20% of pubs would be able to reopen with two-metre distancing, but a one-metre gap would bring the majority back.
• Industry leaders continue to press for the above to be relaxed. The WHO recommends one metre. Operators such as Jonathan Downey (London Union) and Andy Hornby (Restaurant Group) say that a reduction in the distance would save thousands of jobs.
• Downey says ‘it would make a massive difference; it will mean firstly that more businesses will open and people can come off furlough and secondly that more businesses can open profitably or won’t lose so much money.’ Andy Horby says ‘if the social distancing guidance was to be set at one metre, in line with the WHO guidelines, then the industry should be able to operate at around 70% capacity and thousands of jobs will be saved.’
• A further significant factor is outside versus inside space. Whilst ‘studies’ are being weaponised by all sides, there appears to be little evidence of transmission out of doors.
• The BRC says non-food retailers are losing £1.8bn a week in lost sales. CEO Helen Dickinson says ‘with sales expected to remain weak, even as shops begin to reopen, many retailers will still be in a fight for survival.’
• NPD has said that 63~% of British consumers say they will return to hospitality outlets in the first month after the end of lockdown.
• Spare a thought for suppliers.
• Adelie, one of the largest sandwich makers and food-to-go suppliers in the UK, has called in Deloitte as administrators of the company. Deloitte will consider its options. Around 2,000 jobs are at risk. Food companies Greencore and Samworth are reported to be in talks about potential rescue deals.
• And for landlords?
• British Land yesterday said that problems collecting rent from retail tenants had knocked £1bn off the value of its retail assets.
• Wireless Social has said that footfall has continued on a very slow, upward trend.
• Global drinks analyst IWSR Drinks Market Analysis has suggested that the global drinks market could take up to four years to recover from the events of this year. Whilst the off-trade globally has been strong, total sales of drinks worldwide are down by ‘double digits’.
• JRS in the UK. Some 8.4m workers (working for c1m employers) are now claiming under the government’s job retention scheme. The scheme is said to be costing around £15bn per month.
• Papa John’s in the US has said that sales rose by 33.5% on a LfL basis in May. Sales rose by 7% LfL in the month globally.
• McDonald’s is set to reopen all its drive-through restaurants from next week.
• John Lewis has become the latest retailer to say that it may not reopen all of its stores post lockdown.
• Bakery Gail’s is reported set to push ahead with plans to open a new bakery in Windsor.
• Up to 800 jobs are reported to be at risk at catering equipment supplier Nisbets. The company says ‘Nisbets is a strong business but we are sadly not immune to the extreme difficulties that are facing the whole of the hospitality industry right now.’ It adds ‘in the face of reduced demand and historically challenging trading conditions, we are undertaking a new restructuring process. Sadly, we have begun a 45-day consultation period with colleagues across the whole business on potential redundancies and anticipate up to 800 job losses.’
• Nisbets says ‘these are difficult decisions being taken in unimaginable circumstances.’ It says redundancies will be made in all levels of the business.
• Operators preparing for the new normal.
• Gregg’s is to open 800 stores from the middle of next month. A handful of branches were opened in the North East this month. The menu will be somewhat restricted. Gregg’s says ‘we have planned and delivered robust shop trials using our new operational safety measures and they have progressed well, allowing us to now move to open an increased number of our shops from mid-June.’
• Flat Iron Steak Ltd has reported full year numbers to 25 August 2019 to Companies House. The numbers, which are somewhat historic, show revenues up by 25% at £18.2m with EBITDA (adjusted for a number of items including donations, onerous lease provisions, opening costs and exceptional items) coming it at £1.54m, up 18% on the prior year.
• Flat Iron reports losses before tax of £422k (after interest charges of £211k) compared with a profit of £323k in the prior year. Flat Iron has shareholders’ funds of £1.5m (2018: £2.0m) with accumulated profits since incorporation of £1.0m. The accounts were signed on 20 December 2019, well before Covid-19 had had any impact on trading.
• Non-alcoholic ‘spirit’ maker Seedlip Ltd has reported full year numbers to 31 May 2019 to Companies House. It shows that the group’s accumulated loss since incorporation increased by £4.4m to a total retained loss of £8.5m. Diageo PLC bought a majority holding in Seedlip on 6 August 2019, after the accounting period referred to here ended.
• Retail Week reports that Morrison’s is to open its first standalone clothing and homeware store. The store will be in Bolsover, Derbyshire.
• Lidl is to test a click & collect service. The service is being tested in a number of stores in Poland.
• The US operations of Le Pain Quotidien have been sold to New York-based operator Aurify Brands LLC for about $3 million.
• Big day for positive share price moves with Gym Group and Cineworld up 10% and 11% respectively, TUI up 16%, Restaurant Group up 17%, Revolution Bars 21% higher, Lounger’s up 26% and Saga 27% better.
• Nielsen says that sales at Tesco & Sainsbury grew more rapidly than those at Aldi in the 12wks to 16 May for the first time in more than 10yrs.
• UK Hospitality has launched a new Supplier Alliance to push for more help for those companies supplying the hospitality industry. UKH says ‘the effect of the COVID-19 crisis has been acutely felt by hospitality businesses, and the impact is felt right across the sector. There are many associated businesses which rely on the sector for their livelihood and these have been hammered just as hard.’
• UKH says ‘supplier businesses within hospitality are just as wide-ranging, varied and dynamic as the venues themselves.’ It says ‘the Government has recognised the damage that pubs, restaurants, hotels, bars and nightclubs have suffered and have acted quickly and decisively to provide support and save jobs. There are many businesses integral to the hospitality sector, facing the same existential crisis and they need the Government’s support now.’
• Jonathan Downey has called for a reduction in VAT for hospitality businesses from 20% to 5%.
HOLIDAYS & LEISURE TRAVEL:
• Holiday Extras has said that more than half the people it surveyed still expect to take an overseas holiday before the end of the calendar year. Its research suggests that 43% of UK travellers would still fly abroad.
• TravelSupermarket, on the other hand, says that it is seeing most interest in the months of April and May next year.
• A study conducted by Clickstay suggests that a 14dy coronavirus quarantine period would put most people off holidaying abroad this summer. It says as many as 79% would refuse to travel. Only 13% of consumers are currently confident that they will be able to have an overseas holiday this summer. Some 54% say that they will take a UK holiday instead.
• Overseas holiday companies and airlines have made another plea that the proposal to introduce a 14dy quarantine be scrapped.
• Travel Weekly says ‘a surge in domestic breaks could stretch local infrastructure to the limit, leading to destinations being overrun and endangering the local population.’
• Clickstay says ‘more than half of holidaymakers who usually go abroad are likely to book a holiday in the UK instead. This is going to have massive ramifications.’ Some 19% of all respondents said they were going to go to Cornwall.
• Hotelbeds.com says that it will highlight (and presumably compare and rank) health and safety measures being taken by hotel companies. Consumers will then be free to take such measures into account when (of if) they make bookings. There will be visible filter on websites Hotelbeds and Bedsonline.
• TUI has said it has ‘no plans’ to open its stores on 15 June.
• The Japanese government is reported set to subsidise the cost of holidays in order to encourage a revival in tourism.
• Tour operator Jacada Travel has entered administration. KPMG has been appointed.
• EasyJet is polling customers on which European destination they would like to see the airline resume flights to.
• Commenting on the global hotel market, Hotstats has said that the industry was in ‘freefall’ in April. It says that there are signs of stability in China. Hotstats says that the US saw REVPAR down 95.2% in April.
• Hotstats says New York gross profit per available room fell 145.7% in April. That is, hoteliers moved from a profit per room, to a loss.
• Hotstats says REVPAR in Europe was some 95.4% lower in April versus the same month a year ago. Asia Pacific REVPAR was down 83.8%. It says ‘improvement will be measured in baby steps.’
• STR reports that hotel occupancy in Hawaii in April was running at 9%. It says that REVPAR in China grew by 19pps between February and April.
• Some 12,000 Boeing workers in the US are to lose their jobs in the wake of the coronavirus and falling aircraft orders
• Cineworld has announced that ‘its lenders have agreed to waive the leverage covenant in respect of its credit facility for the June 2020 testing date and has increased its leverage covenant to 9.0x Net Debt to EBITDA for the December 2020 testing date.’
• CINE says it ‘has also agreed the terms of $110m of additional liquidity through an increase in its revolving credit facility. In addition, the Company has secured credit committee approval to apply for an additional $45m through the CLBILS loan scheme in the UK and expects shortly to commence a process to access $25m through the US government CARES Act. Cineworld expects that this additional liquidity, to the extent required, will provide it with sufficient headroom to support the Group even in the unlikely event cinemas remain closed until the end of the year.’
• CINE at the moment believes that government restrictions for cinemas will be lifted in its markets by July.
• Disney wishes to reopen its Magic Kingdom and Animal Kingdom in Florida on 11 July with Epcot and Hollywood Studios set to follow on July 15
FINANCE & ECONOMICS:
• Bank of England chief economist Andy Haldane has said that recent data is a ‘shade better’ than the scenario envisaged by the Bank early this month. He said there are risks that the recovery will be slow and consumers could remain cautious.
• The International Labour Organisation has warned that young people, just entering (or trying to enter) the jobs market, could be scarred by the coronavirus outbreak for the rest of their working lives.
• Sterling down at $1.2254 and €1.113. Oil lower at $34.14. UK 10yr gilt yield down 3bps at 0.19%. World markets mostly higher. London set to open up c70pts.
• Cummings row rolling on. PM Johnson rules out an enquiry. Says people need to ‘move on’.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Boohoo: Mighty Boohoo missed out on the big sector rally on Tuesday, falling victim to a short selling raid by the shadowy hedge fund Shadowfall, despite the company insisting that its 53 side report (which claimed that Boohoo had over-stated its cash flow because of the minority shareholding in the important Pretty Little Thing subsidiary) was without merit. To reinforce the point, Boohoo issued a detailed rebuttal in an announcement just after 9am, but it had to admit that it had changed its accounting policy on the 34% minority in the highly profitable PLT (in the Annual Accounts published last night) and the shares remained under a bit of pressure, slipping by 1% on the day to c335p (below the recent 340p placing price). But things have moved quickly and the company has announced this morning that, to clear up the issue about the PLT minority, it has agreed to buy out the 34%
Retail Sales Watch: The Retail Sales month of May (the 4 weeks to May 30th) is nearly over, but we haven’t seen the final word yet on how bad April was on the High Street, given the coronavirus lockdown of non-essential shops that began on March 23rd…The Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported on Friday that non-seasonally adjusted total Retail Sales by value were down by 18.9% last month (ex-petrol), which was surprisingly similar to the BRC-KPMG measure of gross sales, which was down by 19.1% in gross terms. And the Retailing consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey), has just come out with its own detailed overview of April (the 4 weeks to May 2nd) and their estimate is that gross Retail sales fell in value by 18.9% last month, year-on-year
Grocery Market Share Watch (Part 2): Moving on to Food sales in May…we flagged yesterday that the latest monthly Kantar grocery sales figures (for the 4 weeks to May 17th) were up by a heady 17.2% on an overall “Till Roll” basis (albeit the growth was flattered by the collapse in the “on-the-go” food market and the “food away from the home” market). However, on a pure “Grocery” basis (excluding Non-Food) overall Kantar sales were as much as 19.1% up, with Aldi/Lidl lagging a bit with growth of “only” 16.8% combined (handicapped by their lack of Online presence). Sainsbury was the best of the “Big 4” on this basis, with gross sales 23.1% up, whilst Tesco was 21.3% up gross, Morrisons was up by 20.2% gross and Asda was up 13.4% gross. And M&S Food sales were up by 16.7% gross, notwithstanding the loss of much of its sandwich etc trade at lunchtime. The rival Nielsen grocery sales