Langton Capital – 2020-07-15 – PREMIUM – V shapes, VAT, Pizza Express, inbound travel, TUI, GDP etc.:
V shapes, VAT, Pizza Express, inbound travel, TUI, GDP etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
This is a Hull City comment free zone.
So straight on to the weather which, though dreadful at 12 degrees with horizontal drizzle promised later, is still materially better than Hull’s football, where our team managed to concede eight, lucky, breakaway goals last night, seven of them before half time.
Possibly a going away gift from the players.
Lots of ‘out-of-office’ reports coming back now of a morning. Would appear that summer is upon us. Anyway, avoid the football and follow us on Twitter at @brumbymark. Let’s move on to the news:
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WHAT ODDS A V-SHAPED RECOVER? And what would it look like if the UK were to achieve one? 15 July 2020:
• We’re human and stories tend to trump facts.
• Facts can be boring but a sharp, to the point story conveys ideas swiftly.
• And, once lodged, a story or a soundbite that conjures up a mental image is hard to shift.
• That’s why chefs and menu-writer so often use a mouthful of words to describe a product (sun-dried tomatoes, olive oil drizzled cabbage or whatever) when one word would do
• It’s just the way we are, and it explains why soundbites such as ‘a V-shaped recovery’ have traction.
• But what does it mean?
A little more detail:
• We would hazard to say that many of the people, particularly politicians, who mention a V-shaped recovery, don’t know what they mean.
• They may have an impression.
• They know what a V looks like. It’s sharp on both sides (unlike Martin Sorrell’s famously dog-in-a-manger comment about some recessions being ‘bath-shaped’) and both sides are the same height.
• But is that even remotely likely? Isn’t an L shaped response to a shock also possible?
• Indeed, a glance at stock market movements, which should be a proxy for the economy over time, shows that shocks are steeper on the way down than they are on the way up
• And M Albert Camus says, in his novel about human interactions The Plague, recovery from a shock, in his case the aforementioned Plague, often takes much, much longer than the downturn did
What constitutes a V?
• The politicians may be talking about GDP. In which case, with GDP down 25% in a month, possibly 20% in a quarter and 12.4% (per the OBR) in a year, any hope of a V shaped recovery must likely be misplaced
• But GDP measures are famously slow in coming through
• Unemployment is a faster measure. We can see it with our own eyes and, though the furlough scheme and help for the self-employed is disguising what is currently called ‘unemployment’, we know how many people were not doing any work in May, which was likely the low-point for unemployment
• If we take jobless as a measure. We know at the peak there were 9.4m workers on the CJRS and 2m self-employed people also getting help because they were not working – and were not allowed to work
• Add this to the 1.6m officially jobless and we get 13.0m unemployed at the peak of the lockdown
• This is a horrific number but it is not out of line with the 40m to 50m who were jobless in the US at one point
• This numbers is now coming down as workers are taken off furlough and come back to work in shops, pubs, restaurants, hairdressers, tattoo parlours and the like
• But how far up the other side of the V will we get?
Some other comments:
• A few truisms. First, since many shops & restaurants in addition to manufacturers have announced closures and layoffs, it is not likely that the UK will add the 11.4m jobs that it would need to make a perfect V any time soon
• Bank of England Governor Andrew Bailey said on Monday that the outlook for jobs a particular worry. He said ‘we are seeing the economy come back now somewhat, because obviously the restrictions are beginning to be lifted.’
• Bailey said ‘there’s a long way to go, we are very worried about jobs, as are a lot of people.’
• If we were to add back three quarters of the number currently jobless (or at least workless as they have not yet ‘lost’ their jobs) this would 1) arguably be a fair result and 2) would imply unemployment of about 4.25m going into the winter
• This a) may be wrong (but in that cash, how and why is it wrong?) and b) would not be a popular message to get across.
• As Niccolò Machiavelli said, get underlings to give bad news. Or better still, don’t give it at all
• We could go on but we’re running out of time
• Firstly, tills are ringing, which is good.
• And there is something to build from but a slight negative is that operators will have opened first the units that they thought would be busiest – rivers, beer gardens etc.
• As they open more marginal units, the average will get dragged down.
• It might also be the case that good trading news is trumpeted quicker than the bad. In fact the latter may not be trumpeted at all.
• We’ve heard from a couple of operators reopening units and subsequently reclosing them. Usually near train stations.
• RTN has said 10% of its units won’t open this year and SSP has made similar comments.
• Some of this news-flow may be intended for landlords’ ears.
• Unintended consequences. The economy isn’t a Petri dish. Everything you do impacts everything else. Cut the price of food and you might depress demand for drink. Set up the CJRS and punters may flock to the beach. Comments gratefully received.
PUB & RESTAURANT NEWS:
Covid – the new (ab)normal:
• The rate of VAT on food & non-alcoholic drinks as well as accommodation and certain other leisure services is cut from 20% to 5% today. The reduction is currently scheduled to last until mid-Jan next year. The jury is very much out as to how much of this will be passed on to consumers.
• Starbucks has said it will pass on the cut in company owned stores. JDW has made a similar comment.
• There’s an ongoing spat about when or whether price reductions should be marketed as such. JD Wetherspoon (see also below) has said it will cut prices on a range of meals and drinks – including alcoholic drinks – despite the latter not benefiting from the reduction in the rate of VAT, from today, from 20% to 5% for some products and services (also see below for the accountants’ take).
• Founder Tim Martin has said ‘Wetherspoon will invest all the proceeds of the VAT reduction in lower prices, spread across both bar and food products, with the biggest reductions on real ale.’ CAMRA and SIBA took offence, suggesting that cross-subsidisation made such reductions possible and JDW has hit back saying that it has not misled customers.
• Although JDW has made its intentions clear, It is by no means certain how much of the reduction in tax, if any, some other operators will pass on to customers.
• Wireless Social has said that footfall has continued to build. It says ‘we have seen footfall continue to rise closer to the February average, with Saturday increasing by 5% and Sunday growing by 10% on last week.’
• Wireless Social says ‘all major cities were in growth and this was aided by Scotland reopening it’s outside hospitality areas on Monday.’ Wales is to be allowed to start reopening from Monday. The footfall tracker says ‘for the shopping areas we have been tracking on Mondays – Wednesdays, we have again seen growth, with Oxford Street having it’s highest amount of people on the streets since pre the 21st March.’
• The company says business areas in London are showing subdued growth whilst the London ‘villages’ are more buoyant. Wireless Social says the West End is down 60% on pre-Covid levels or trade whilst the ‘villages’ are 30% behind where they were towards the beginning of this year. It says there is evidence that ‘consumer confidence in the suburban areas of London is growing at a faster pace than the central / city areas. This will of course be impacted by the majority of people still working at home.’
• Perhaps boring but important.
• The ICAEW (the Chartered Accountants’ body) has reminded us that the HMRC’s VAT cut comes into force today and applies to the supply of: food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs; hot takeaway food; hot takeaway non-alcoholic beverages; sleeping accommodation in hotels or similar establishments; holiday accommodation; and pitch fees for caravans and tents, and associated facilities.
• The ICAEW says ‘the 5% reduced rate will also apply to admissions to the following attractions that are not eligible for the cultural VAT exemption: theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions, and similar cultural events and facilities.’ The reduced rate will be in place until 12 January next year.
• Restaurants and other operators are also being encouraged to sign up to the Government’s Eat Out to Help Out initiative whereby the taxpayer will foot half of the bill for meals up to a £10 reduction (presumably a £20 meal). It would be a shame to miss out on this for want of a bit of paperwork. Registration pages for the offer went live on Monday.
• To facemask or not.
• Pubs are thus far not covered. However, with policy flapping about, this may change at some point. The government is coming under fire from all sides. The Telegraph says: ‘no Conservative government should even contemplate mandatory masks.’ It accuses the government of ‘mission creep’. The left is saying that the government can’t get its story straight and others are suggesting that it is plainly incompetent. Have I Got News For You says the only mask everyone agrees on is a gag for Michael Gove and ex-PM Tony Blair tells Sky that the current government is at its maximum popularity / minimum competence stage of its evolution.
• Restaurant Business in the US reports that stimulus payments to consumers have ‘had a clearly positive impact on industry sales as consumers were flusher with cash than soaring unemployment numbers would indicate.’ Sales in the US troughed in the 3rd and 4th weeks of March (at down around 62.5%) for restaurants but have rallied since.
• We have been cautioned to remember that operators will have opened their best pubs first. The novelty factor, pubs have after all been shut for three months, will be helping as will the televising of some football matches. Mitigating against this will obviously be the concerns that many would-be customers still have regarding crowded spaces. More feedback welcome.
• The Times reports that Hony Capital, the China-based owner of Pizza Express could be ‘all but wiped out in a restructuring expected to involve a debt-for-equity swap.’ The Times says ‘Hony Capital, which acquired the restaurant chain in 2014, has looked at the possibility of injecting more equity into the business but is now thought to be resigned to ceding control to its bondholders.’
• It says: ‘although none of the parties involved would comment, there were suggestions last night that a financial restructuring, possibly including some restaurant closures, could come as early as next week.’ Many of group’s bonds changed hands last year leading to suggestions that bondholders, ultimately, could seize control of the company.
• Punch Pubs & Co CEO Clive Chesser says that the Covid-19 pandemic is the ‘most challenging period of my career to date’. Speaking in the Morning Advertiser, Mr Chesser says he is cautiously optimistic for a challenging future. He says ‘we were relatively pleased with how the opening went.’
• Chesser says ‘during the closure period we chose to provide support where it was needed most.’ Around 15% of the estate remained open for takeaways during the lockdown. Looking forward, he says ‘we would like to have seen more support for community wet-led pubs, and in particular, a VAT cut that included beer as well, because the challenge for community pubs is still there, we’re certainly not out of the woods.’
• JD Wetherspoon insists that it is not misleading customers. It advertises that ‘lower VAT = lower prices’ and labels four ales ‘Sunak Specials’ despite VAT not being cut on alcoholic drinks. A JDW spokesperson said the pub company would apply a third of the VAT cut to food and the remaining two thirds to draught beer.
• Punch has announced that The Cook House Pub and Carvery in Widnes will reopen after a £1,040,000 investment.
• 22-pub strong Brewhouse & Kitchen has announced sales were up 2.9% like-for-like in its first week trading post the lockdown.
• We have no firm date yet, after two postponements, for Fuller’s full year numbers. On July 3, when it delayed its figures for the second time, the company said its ‘auditors have informed us that they will need additional time to complete the formalities of the audit process, which has resulted in a further delay to the results.’ It added it ‘will now announce a revised date for its Full Year results for the year ended 28 March 2020 shortly.’
• DFS is cutting jobs and shutting stores.
• In the US, a Bank of America report has suggested that national restaurant chains have largely recovered from the worst of the impact of falling consumer spending due to Covid-19. With Florida & California re-imposing lockdowns in some areas, it seems a little soon to be saying that.
• Bank of America maintains that larger operators are performing relatively more robustly than their smaller competitors.
• French wine has been excluded from a list of goods on which the USA proposes to impose additional tariffs reports Drinks Business.
HOLIDAYS & LEISURE TRAVEL:
• UK Inbound has suggested that most UK companies in the hospitality industry that provide services to overseas customers are likely to have to cut staff. A poll of operators suggested that 88% were going to cut jobs.
• UK Inbound says ‘the Chancellor’s latest economic recovery plans clearly recognise the value of hospitality and tourism to the UK economy which is very positive, however the measures that have been announced will unfortunately not help the many businesses that are involved in inbound tourism.’ It adds ‘our survey results unsurprisingly reinforce that those tourism businesses that rely wholly on international visitors for their livelihoods are on their knees and that the risk of widespread redundancies and the collapse of previously successful businesses is a very real threat without further government support.’
• TUI has said that customers will return to leisure travel ‘in their own time’. TUI UK’s Andrew Flintham says ‘we want customers to be able to make the decision that’s right for them.’
• Duff & Phelps has said that Q2 this year saw the lowest number of corporate transactions on record in the travel industry.
• Accor reports that a third of corporate travel managers in Northern Europe believe their business travel schedules will recover from the coronavirus shut-down within six months, driven primarily by domestic travel.
• Holidaymakers going to Greece will have to fill in a passenger locator form 24 hours before arriving in the country. Direct flights are starting again today.
• Trailfinders has reported profits of £45.7 million for the year to February 29. The company says it should return to “substantial profit” after Covid-19.
• Sky reports that cruise operator Cruise & Maritime Voyages is in talks with VGO Capital Management, a special situations investor, about a possible rescue deal.
• Spain’s Balearic Islands are now insisting that face masks be worn ‘in all places where it is not possible to maintain a safe distance’.
• Virgin Atlantic has confirmed its £1.2bn refinancing.
• Zest Car Rental has said there is likely to be a shortage of hire cars in popular destinations this summer. A similar problem was encountered in the wake of the 2008 financial crisis.
• Delta Airlines in the US has managed to post a $3.9 billion adjusted pre-tax loss for the second quarter of 2020
• National Holidays is to be resurrected reports Company Rescue.
FINANCE & ECONOMICS:
• UK GDP fell by 19.1% in the quarter to end-May, slightly better than the 20.4% drop registered in the three months to end-April.
• This suggests that one side of the ‘V-shaped recovery’ could be flatter than the other. See Premium Email.
• The BBC says: ‘the UK’s economy rebounded more slowly than expected in May, growing just 1.8% from the previous month, as the gradual easing of lockdown had a modest impact.’
• Rishi Sunak said ‘today’s figures underline the scale of the challenge we face.’ Reuters said this was ‘a first step on the long road to recovery.’ It says this was a ‘weak rebound.’
• The NIESR says ‘the UK economy remains on course to decline by 20 to 25 per cent in the second quarter of 2020.’ It adds ‘we are doubtful about a V-shaped recovery. The loosening of Covid-19 restrictions has provided an impetus to kickstart the UK economy. However, the measures unveiled by the Chancellor at the Summer Statement are a poorly timed change of tack and could trigger a sharp rise in unemployment, and possibly lead to permanent long-term damage to the economy.’
• The OBR says the UK will need to raise taxes or cut spending to avoid an ‘explosive’ debt experience in the very near future. The OBR anticipates a 12.4% drop in GDP for the year as a whole.
• The OBR foresees a return to 2019 levels of GDP at the end of 2022 with unemployment hitting 12% this year before falling back to 10.1% next year.
• Sterling up v dollar at $1.2572 but down v Euro at €1.103. Oil higher at $43.08. UK 10yr gilt yield down 4bps at 0.19%. world markets mixed yesterday. UK set to open up around 60pts as at 7am.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• ASOS: The trading update from ASOS today (which has an August year-end) covers the 4 months to June 30th and after all the focus on the supply chain issues of its rival Boohoo, it is a relief to not have to read about ethical sourcing etc. On the other hand, trading has not exactly been going ballistic, with sales only up 9% in constant currency terms for the period, (with the UK down 1%), but the company talks of “a steady improvement throughout the period, reflecting increasing warehouse capacity, underlying improvement in demand and a beneficial returns profile” and CEO Nick Beighton says “we are on track to deliver strong year-on-year profit growth and to return to positive free cash flow for the full-year”.