Langton Capital – 2020-07-08 – PREMIUM – Re-opening, the new normal, Chancellor Sunak & other:
Re-opening, the new normal, Chancellor Sunak & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
As an accountant and then a stockbroker, Langton clearly didn’t read the manual when it came to learning about the more traditionally exciting careers to take up.
Because, whilst there are plenty of books written about police officers, detectives, private eyes and even journalists and lawyers, we’ve yet to see someone slip into a phone box, tear off their shirt, emerge to a throng of goggle-eyed spectators and drooling admirers and say ‘out of the way, I’m an accountant!’
And stockbrokers aren’t much better.
But who says excitement is everything? Being able to add up can be a real advantage and, whilst there are no guns or badges in evidence, no car chases and drug-busts, no screaming matches in court, just hard work in the office, more work in the evening, exams to break the tedium, more work….
Ah, yes. I’m beginning to see what the books were getting at now.
Anyway, who said ‘virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience’?
Follow us on Twitter at @brumbymark and let’s move on to the news:
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BUILDING ON TRADE FROM CURRENT LEVELS: Although a reported three pubs have closed due to contagion fears, the 4 July reopening went largely ithout incident. Can we build from here? 8 July 2020:
• Around 45% of the UK’s licensed outlets may have now completely or partially reopened. This number will grow over the coming days and weeks
• Trade at the weekend 1) existed, which is a relief but 2) was at subdued levels
• Wet and community pubs did relatively well, despite average weather, but food and city centres remain a little more subdued
• Commuter-sensitive sites (see comments from Pret and office worker numbers in Canary Wharf, remain either shut or very quiet
• But a) what are the current moving parts to keep an eye on and b) can and how can we grow from here
A bit more on where we are:
• Whilst supply is down, demand is also lower. As Peter Backman has commented, if half the industry opened and that half was half full, then demand is down 75%
• This is what it is. At least it’s not zero and it allows companies to move to the left along the demand curve
• This means discounts have gone and prices have risen.
• Consumers that have come out have not been price sensitive. Menu choice is down (so margin should be up) and prices of dishes are up by maybe 30p with drinks up by 10p to 30p with some outliers (like Sam Smith’s) putting prices up by £1 per pint
The various incentives – The Press:
• The Press would like good copy. To a hammer, everything is a nail. In descending order of copy, the Press would have been excited to see:
• Disorder, assaults on police, general drunkenness and A&E departments bursting at the seems
• Failing that, blatant distance-flouting, secondary outbreaks and worry.
• Then comes perhaps the rather boring wet summer, business collapses and general difficulties
• Most boring of all is a dull start to the reopening, a steady build and no fireworks
• Thankfully, for the industry at least, we have been nearer the bottom of that list than the top
• Customers have been placed at a crossroads not of their own making.
• They have not been out for a drink (or often to their workplace) for over three months and new habits have taken hold
• Commuter / customers, by not commuting, not buying coffees and sandwiches at lunchtime and on their way to the office and by not popping out for a beer after work or for the occasional pizza, have saved perhaps £50 to £100 per week
• If they have got their head around coming out for a drink again, consumers will split into a number of categories
• Millennials and hard-core consumers may have been out already. Others may have ‘not got around to it’ (many of us). Whilst others may still be concerned (e.g. the grey market). And some may not come out every again (or at least for a long while).
• The top and the bottom of this list either 1) don’t need any work or 2) would be a waste of time working on, leaving the middle two as yet to be persuaded
• And a few weeks of steady build, a little bit of sunshine and no major news re outbreaks, drunkenness or whatever may do the trick here
• Operators would like to see a steady build in trade, further relaxation of the rules, an acceptance by consumers of he new conditions and warm weather
• Not a lot to ask for and, looking at the weather forecast, we could have a good spell from around Friday
• They would also like to see the furlough scheme maintained, business rates to remain on hold, VAT to be cut, jobs to be subsidised and access to loans be made simpler.
• Perhaps a little more to ask for here but Rishi Sunak should say at least one or two helpful things over lunch today
• Covid-19 has been the biggest shock to the consumer and to the hospitality industry in several generations
• The consumer and business ‘needs to get its mojo back’. This is easy to say but hard to enact – and it may not be possible in the short term
• Crisis therapists and grief counsellors and the like will know more about human reactions than we do but the passage of time (without incident) should help
• The most obvious conclusion is that there is no conclusion. This is a continuum rather than a story with ‘The End’ written at some random point.
• However, whilst that is true in the macro sense, in the micro sense, there will most definitely be a ‘The End’ for a material number of operators
• This because we are back to that ‘holding your breath underwater’ thing again and here some companies will be more robust than others
• The characteristics that were helpful before Covid (strong balance sheet, good management, attractive product etc) will be helpful during and after
• And throw in overcapacity and the CVAs, administrations and distressed sales would seem to attest that some companies have the above and some do not
• As always, things will be clearer ex-post than they were ex-ante because saying ‘a horse will win this race’ isn’t much use to anyone.
• You have to bet on a named horse (or horses) rather than horses as a genre and here we have strong views.
PUB & RESTAURANT NEWS:
Covid-19 reopening – see Premium Email for further comment:
• A slow start. But hopefully steady. And something from which to build.
• KAM Media has suggested that 28% of UK adults visited a pub or restaurant over re-opening weekend, and a further 17% plan to visit in the next week. It cautions, however, that ‘customer experience was not up to scratch for some who visited.’
• KAM MD Katy Moses says ‘these first few days and weeks will be critical for operators as they welcome people back through their doors. It’s worrying that 18% say they will now not be returning for a while – operators need to act fast to understand why customers may have negative feelings about their first experience so that they can turn that sentiment around, fast.’
• KAM says that safety is the consumer’s no1 priority. Communication ‘is key within these first few weeks and that shouldn’t be one way. Operators need to pro-actively ask their customers for feedback on their first experiences to ensure they can continue to amend and improve their offer.’
• The Huq Index for Restaurants & Pubs suggests that footfall across UK hospitality was just 21% of pre-Covid levels over this past weekend. There is clearly still a long way to go.
• Huq suggests QSR has recovered to 26% of pre-Covid levels with Restaurants at 18% of pre-Covid levels and Pubs at 14%. This is a start and trading over the coming weeks – and hopefully the establishing of an upward trend – will be crucially important.
• Analyst Peter Backman says ‘this sluggish performance is in line with other, anecdotal evidence from restaurants. The Huq Index has been trending upwards since early June but this reflects the opening up of restaurants for take away and delivery. The hoped-for surge on Saturday did not materialise and the restaurant sector still has a mountain to climb.’
• The BRC says that general retail footfall is still only around half the level that it was a year ago.
• Operators would like to build from what they have. As regards the hospitality industry, the weather looks to be helpful from mid-week on (over the short term) and, over the medium term, staycations should provide something of a boost.
Covid – the new normal:
• Pre-bookings will be more important than ever. But so too will minimising the flip side, avoiding no-shows.
• Additionally, consumers must be made aware of the fact that they do not absolutely need to pre-book. Of course, some units may choose to serve only customers who have booked space but this is by no means universal.
• Increased costs will be a feature. Disposable menus, napkins, paperware etc and increased cleaning costs and the like. Prices are also rising, meaning that there are a number of moving parts to keep one’s eye on.
• Currently, it is ‘not about price’. We are on the demand curve, but to the left of where we used to be. There is no need to discount to attract a half or two thirds of the people that you attracted at this time last year.
• This will change as demand returns. If they have to cut prices to 100% to attract the last 10%, some operators may decide that they didn’t want the last 10% in any case.
• Wet sales at the moment seem to be a little stronger than food. Buying and consuming a drink perhaps involves less risk in the eyes of the consumer. But these are still early days.
• Millennials seem to be coming out more quickly than the grey market. Hopefully, this will evolve over time. There seems to be a widespread ‘see what happens’ attitude across some consumers that have not yet come out. See Premium Email.
• Secondary shut-downs, either of units or of whole towns (such as Leicester), may be something that we have to get used to. The trade press is reporting that at least three pubs have already had to close once again after receiving calls from customers who have tested positive for Covid-19.
• Lessons from America, e.g. the re-closures in Florida, suggest that there could be more disruption in future. Texas has registered an all-time high for the 8th day in succession in the number of people hospitalized at any one time with Covid-19.
Covid-19 – other news:
• Much is riding on Chancellor Rishi Sunak’s speech due later today. As he is splashing the cash, he is the man of the moment. VAT could be cut. Putting taxes up next year won’t be so popular.
• Sunak is likely to concentrate on jobs and almost-jobs. Training could be subsidised. Some jobs may be kept alive by non-market means but, when in a crisis, needs, must. As we mentioned yesterday, cutting VAT on services would keep the cash in the UK. Cutting it on clothing & consumables would see imports soar.
• UK Hospitality, SIBA, the BBPA, the BII and other bodies including CAMRA have come together to press the Chancellor to provide more help to the UK pub industry. The bodies say ‘the employment, revenue and social value for communities provided by pubs will be vital to the recovery of our economy as we return to a new normal, however, with distancing measures in place, fewer customers and higher costs will severely impact the profitability and survival prospects of hospitality businesses.’
• The trade bodies go on to say ‘government has already recognised the importance of our sector to British society and the financial support provided over the closure period has been welcome. We now urgently need to extend that support along with the collaboration of industry leaders with Government, to ensure pubs can remain as the essential hubs of their communities.’
• No shortage of advice for the chancellor in the papers and across various trade bodies. One thing that does seem to have been clearly flagged is the £2bn job creation scheme to help prevent younger people from becoming a blighted ‘Covid generation’.
• The NIESR says Sunak should ‘maintain the government’s jobs furlough scheme, which has been highly successful in protecting over 9 million jobs over this period and continues to support around 6 million furloughed workers. Ending the scheme prematurely could lead to permanent long-term damage to the economy if those who become unemployed lose their skills and attachment to the labour market resulting in permanently higher unemployment and weaker productivity.’
• The NIESR goes on to say that ‘premature withdrawal of the support that lowered productivity permanently by 1 per cent and raised unemployment by 1 per cent would lead to GDP being about 2.5 per cent lower than it would otherwise be, leading to the need for higher tax rates to make up for lost revenue. This would amount to a permanent loss of GDP of £50 billion per annum (as of 2022) or £750 per person.’
• A pool of effectively free labour will be created with the government seemingly paying the employment costs for up to 300,000 people aged 16-24 for six months from August.
• China is cutting back on meat imports from the West due to Covid fears concerning outbreaks at some meat processing plants.
• The cost of the Coronavirus Job Retention Scheme & other job support is currently £35bn. The OBR expects this to rise to £75bn. Supporting jobs has kept the consumer in place.
• Job losses announced at the Daily Mirror, Express and Star group (c550) with plans elsewhere to build a new car plant in Wales apparently dropped. Hoseasons (below) is cutting 150 jobs. Unions have now agreed to British Airways’ proposed job cuts. Distributor DHL is to cut 2,200 roles supplying parts to the UK motor industry.
• Most of Vapiano’s UK units have been bought out of administration.
• Still awaiting news from Azzurri (ASK & Zizzi), Busaba, Byron, GBK, Pizza Express, Prezzo, Wasabi and others.
• Coca Coal is dropping its Odwalla juice brand
• The Rick Stein restaurant group has said that it catered for over 5,000 diners at its 10 restaurants over last weekend.
• McDonald’s is reopening another 55 branches from today. Some 1,329 will now be open leaving only 92 still shuttered. The chain says ‘our opening hours continue to vary, the quickest way to check your local restaurant will be via the My McDonald’s App, where new users can also get a free coffee upon registration.’
HOLIDAYS & LEISURE TRAVEL:
• Airline body IATA has said that consumers are still about flying. It says that 58% of respondents to a recent survey had avoided flying already and 33% would continue to do so in the future. It says that temperature checks at airports are considered ineffective and social distancing on aircraft does not seem to allay these fears. Empty seats would lead to uneconomic flights.
• Hurtigruten will offer cruises from the UK from September
• Around 150 jobs are at risk at Hoseasons and cottages.com.
• Funway Holidays will cease trading in September
• STR says that the pipeline of hotel rooms being built in the US actually rose in May.
• UK Hospitality has published reopening guidance for escape rooms. CEO Kate Nichols says ‘escape rooms have been one of the biggest hospitality success stories of recent years.’ Ms Nicholls adds ‘Escape rooms have been shuttered throughout this pandemic and businesses that may still have been prospering will have been hit.’
• Disney+ registered over half a million new downloads over the US Independence Day weekend. It says this represents a 46.6% increase over the average seen during the previous four weekends
• GambleAware has said that banks should improve their systems in order to more effectively block spending on gambling for customers who have registered that they have a problem.
• US Secretary of State Mike Pompeo has told Fox News that the US is ‘certainly looking at’ banning TikTok over privacy concerns.
FINANCE & ECONOMICS:
• The European Commission reports that the bloc could see economic activity contract by 8.7% this year with growth of 6.1% next. The EC had previously been forecasting a decline of 7.7% and a 6.3% bounce.
• EU and UK Brexit negotiators met yesterday evening.
• The CEO of Huawei says that the UK could destroy its relationship with the world’s second largest economy if it does not award 5G contracts to Huawei. In a number of other confrontations, the UK is imposing sanctions on Russia and Saudi Arabia.
• Sterling up at $1.2554 and €1.1133. Oil a shade higher at $42.98. UK 10yr gilt yield down 2bps at 0.18%. World markets broadly lower yesterday. London set to open down around 50pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Boohoo: After a further, alarming c12% slump in its share price yesterday to just c260p (not helped late on by the news that Boohoo had been dropped as a wholesale brand by Next, Asos and Amazon), the suddenly embattled Boohoo has hit back this morning, with the announcement that it is launching an independent review of its UK supply chain, led by Alison Levitt, the eminent QC. The company also points out that the clothes featured in the Sunday Times undercover investigation were actually made in Morocco, not Leicester, and it has not found any evidence of workers being paid as low as £3.50 an hour. Boohoo also flags that Wholesale accounts for only 1.4% of its turnover and that it plans to recruit 2 more non-exec Directors. John Lyttle, the Group CEO, says: “As a Board we are deeply shocked by the recent allegations about the Leicester garment industry. We wish to reiterate how
News Flow This Week: The Chancellor’s major economic policy statement comes out at lunchtime, right after PMQ’s. The Pets at Home and Land Secs AGM’s are tomorrow, along with a pre-close update from DFS and the Walgreen Boots Q2 out in the US.