Langton Capital – 2020-07-24 – PREMIUM – Supply & demand, masks, trading, Hot Choc, Naked Wines & other:
Supply & demand, masks, trading, Hot Choc, Naked Wines & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, the number of out-of-office replies to our morning email show no signs of abating and, rather than try to beat them, Langton will be joining them.
Hence, there will be no email next week or the week after as we jet, or rather drive, to the sunny climes and beaches of the Yorkshire Dales followed by the steamy jungles of the Lincolnshire Wolds the week after.
We’ll be undertaking on-the-ground, staycation research, chatting up publicans and we’ll tweet the odd bit on @brumbymark. On to the news:
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MORE ON JOB LOSSES: If only c25% of restaurants are open (see Tracker) and the furlough tapers from next week, job losses in hospitality are all but nailed on as operators cannot afford to pay non-working staff. What are the implications (and who could be the winners)? 24 July 2020:
Implications (see also yesterday’s email):
• These fall into two broad categories. Implications for hospitality because of job losses in hospitality (i.e. supply-side issues) and implications due to job losses elsewhere (i.e. customers losing their jobs – demand-side issues).
• In simple terms, the one may be good, the other bad.
Reductions in supply:
• Re supply, the last man (or woman) standing should make a packet.
• This because, as we’ve mentioned, though property owners could be worried because there were no office blocks, tube stations or retail parks 2,000 years ago, there were certainly pubs, restaurants & hotels suggesting that, whatever history has thrown at them, they have survived
• Of course, it’s not the last pub or restaurant but likely the last 45,000 pubs or c45,000 restaurants (depending on definitions) left standing that will prosper because ‘only’ a tenth or a fifth of restaurants and a much lesser number of pubs will close for good
• And here, definitions are important and we should look at net closures (not closures and re-openings – such as some Carluccio sites into Boparan etc.)
• Many sites will be churned as there will be a lot of redundant kitchen assets being offered by bereft landlords to any operator willing to come in and pay a (lower) rent and assume the rates liability in due course
• And this isn’t altogether helpful as, if the local car or property dealer fancies dabbling in restaurants, he/she is likely to a) get £750k worth of F&E for nothing and then b) make a mess of operating it
• This might lead to discounting and failure and, just as the second best use of redundant restaurant assets is a restaurant, so, sadly are the third, fourth and fifth best uses.
• This iteration could take some time to work out but, in the end, a reduction in supply will benefit surviving operators
Reductions in demand:
• We’ve been told many times (and we believe) that job losses (and the fear thereof) are one of the main determinants of demand.
• Certainly, the actual loss of a job anywhere in the economy will reduce the demand for pub and restaurant food and drink from that individual – but the fear of job losses could impact demand much more widely
• If this is the worst recession since the war, then 10% to 15% of workers could lose their jobs.
• The impact on demand therefrom is bad enough but the spending patterns of the still-employed 85% to 90% will also be impacted – and not for the better
More on potential winners:
• In addition to the last man standing, new entrants could be amongst the winners.
• Rents are likely to fall. Colliers recently pointed out that rents fell sharply for units involved in the various CVAs of 2018 as they were re-rented, and the impact of the current pandemic is likely to be much greater.
• New entrants may be able to pick up some choice units (alongside a lot of poor units that will be on offer). The F&E in such units could come cheap. Or free.
• New entrants will also benefit from lower levels of competition (but demand will also be lower, at least in the short term).
• And new entrants won’t have other baggage such as a) a tail estate of underperforming units, b) a crazy, indebted balance sheet and c) legacy products that are not appreciated by consumers but which may be hard to drop
• Sounds ideal but there are problems
• Though the 30-somethings and 40-somethings that could and probably will end up running such dream units do exist, financing may be hard to come by
• A balance sheet without debt costs money. Equity will be needed and the appetite to invest is arguably rather depressed at the moment
PUB & RESTAURANT NEWS:
• The latest Coffer Peach Business Tracker reports that ‘managed pub, bar and restaurant groups with businesses open in England have reported improving sales in the second week after shut-down was lifted as more sites also reopened.’
• Figures for the week beginning July 13 showing collective like-for-like sales in sites trading 31.6% down on the same week last year. The Tracker points out this ‘was a better performance than the minus 39.8% level recorded in the first week back.’ An improving trend is helpful, especially since the fact that operators will have opened the sites for which they had the highest hopes will have been pulling in the opposite direction.
• Total sales across the managed pub, bar and restaurant market were up 40.6% on week one trading. This is partly due to the continued move to reopen sites. The Tracker says ‘a total of 60% of group-operated sites were open for eating and drinking inside, up from the 55% trading during the first week after restrictions were lifted.’
• Restaurants ‘saw the biggest shift, with like-for-likes down 26.9%, compared to 40.0% down in the first week.’ This is good but there are still very few sites open. The Tracker says ‘restaurant groups have generally taken a more cautious approach to reopening, still with only 24% of sites open for business, compared to 17% in week one.’
• It notes ‘pub groups have generally been more ambitious in their reopening strategies, with 74% of sites open in week two compared to 70% the week before. Pubs that were open over the week saw sales down 32.4% on the same week in 2019, compared to 39.3% down the week before.’
• Bars were down 41.3%, compared to 42.9% in week one. The Tracker says ‘only a few more bars opened for business in week two with the total up from 42% to 44%.’
• CGA says ‘trading at approaching 70% of pre-COVID norms after just two weeks should be seen as a solid performance, in the light of consumers stated caution about going out to eat and drink again after lockdown. The steady improvement on the first week back is also encouraging.’ This is true but we would note that the 26% of pubs and 76% of restaurants still shut are currently minus 100% in terms of LfL sales (a bit less if they are doing takeaway).
• Elsewhere, the latest BVA BDRC Alligator data on consumer trends has reported that ‘the PM faces an uphill struggle to convince the public’ that it is safe to go out and spend as normal. It says ‘there are varying degrees of confidence in the government’s handling of the crisis and in consumers’ outlook upon the crisis, but fears of a second wave of the virus are near-universal.’
• The Alligator data says employers are cautious when it comes to calling their staff back to the workplace. It says ‘this week’s report indicates that 31% of office-based businesses are looking to reduce their office space (and more than half of these, significantly so) – only 10% are looking to scale up their floorspace.’
• The data says ‘as we move through July, we are recording weekly increases in the proportion of consumers returning to shopping malls, outdoor parks and scenic areas, to restaurants and to public transport services, while intention to take a staycation by the end of the summer holidays has risen to the highest point yet.’
Covid – the new (ab)normal:
• Facemasks are now compulsory in UK shops. But not pubs or restaurants. Takeaway ‘shops’ will require masks. At least they do at the time of writing. Some supermarkets, ASDA and Sainsbury included, are reported to have refused to enforce face mask rules saying that their staff are not trained for such purposes.
• On that topic, UKHospitality ‘has hailed the wide-ranging exemptions for hospitality venues as a tribute to the robust nature of the sector’s Covid-security measures.’ CEO Kate Nicholls comments ‘venues have made a huge effort to get themselves open to customers and ensure that premises are safe for staff and customers. That has been reflected in the guidance which makes the bulk of hospitality exempt from the mandatory wearing of masks.’
• UKH continues ‘unfortunately, the announcement lacked clarity around many issues affecting outlets offering both takeaway and on-premises dining.’
• The FT reports that some measures now have the UK economic recovery that began in late April stalling a little. Some have it ‘possibly even moved backwards in July.’ Bank of England payment data and Fable Data card data show ‘a worse picture for spending in mid-July than at the start of the month.’
• Spend on restaurants, pubs and travel has increased, for obvious reasons, but spending on housing, food and health spending has ‘more than offset’ this brighter picture. Bank of England MPC member Jonathan Haskel said there was some evidence that household concerns about health were more likely to drive spending than government lockdown rules.
• The British Beer & Pub Association has welcomed the publication of a Department for Culture, Media and Sport Select Committee report on the impact of Coronavirus but says that it missed a trick in that, whilst it ‘recommends that VAT cuts should be extended for the cultural sector, such as for ticket sales in theatres, beyond January 2021 for the next three years’, it does not suggest the same for the hospitality sector or pubs.
• BBPA CEO Emma McClarkin says that ‘it is disappointing to see the report has less focus supporting tourism. More can and should be done to support the sector. Pubs have been amongst the hardest hit businesses by the COVID-19 lockdown. Any extension to a VAT cut for the cultural sector should also be considered for hospitality and pubs too, and include alcohol sold in pubs, helping them survive through to the next season.’
• The BBPA continues ‘both sectors support one another so it makes sense to assist them together.’ Pubs, which typically generate 60% to 100% of their revenue from drink sales (most of it alcoholic), have been disadvantaged to the extent that the VAT cut does not extend to alcohol. The BBPA calls for more to be done to encourage staycations.
• Writing for Fleet Street Communications, Simon Stenning comments on the VAT cut and says ‘my advice to operators that I talk to and work with is that a VAT cut is a perfect measure to support their business, but a degree of thought ought to be applied; it is designed by the Government to encourage consumers to get back out spending…and ought to be tactically.’
• Stenning says ‘to take a few ‘Known Value Items’, best sellers or competitive dishes, and obviously reduce their prices to reflect the VAT cut, and then apply some menu engineering to show other price cuts, even if the starting price has been artificially pushed higher.’ Whilst customers might be a little disconcerted to see such behaviour, there is arguably some evidence that it is being applied in practise already.
• The view from America.
• Black Box Intelligence in the US reports that the growth in sales, which has been evident since the lockdown began to be eased, has slowed. LfL sales are now ‘’essentially flat’ week on week. Black Box says ‘as the number of COVID-19 cases rise and new capacity restrictions are implemented at the regional level, the percentage of dine-in sales has decreased.’
• Black Box goes on to say ‘during week ending July 12, 61% of all full-service restaurant sales were dine-in.’ It adds ‘full-service restaurants seem to have also hit a ceiling in terms of percentage of their restaurants that are open for dine-in business.’ Off-premises sales have continued to grow.
• Eat out to help out.
• With less than two weeks to go till the first Monday in August, only around a quarter of the restaurants, cafes and pubs eligible to sign up for the government’s ‘eat out to help out’ scheme are thought to have done so. The Guardian quotes an HMRC spokesperson as saying ‘although restaurants and establishments can register now for the scheme, some may choose not to register until the scheme is launched to the public. Businesses are working hard to ensure their premises are Covid-safe and have plenty of time to sign up.’
• Business Insider in the US says a remarkable 15,770 of the 26,160 US restaurants on Yelp’s platform that have been closed since March are now permanent closures. Yelp says California has had the highest number of permanent closures since the lockdown, followed by Texas and New York.
• Hotel Chocolat has updated on trading for its full year to 28 June saying that it generated revenues of £136m, up 3% on last year. In H1, group sales were up by 14%. Sales fell by 14% in H2.
• Hotel Chocolat says digital sales were up by 200%. It says underlying PBT will be in line with expectations. It is reviewing the carrying costs of some of its assets and there is likely to be a non-cash impairment charge.
• Re recent trading, Hotel Chocolat says ‘119 of 125 UK locations are currently open for business. Sales in “High Street” locations are performing more strongly than in city-centre “commuter” locations.’ Digital is strong and ‘a similar pattern has been seen in both the USA, and in Japan, which is operated by a joint-venture partner.’ The company says its ‘Board remains confident in the resilience of the Brand, and the potential for growth and success in the future but it also acknowledges less visibility than usual for FY21, given the uncertain severity and duration of the Covid-19 impact.’
• Naked Wines has updated on trading saying that ‘the Group continues to trade strongly, with total sales in June +67% vs the prior year, bringing sales growth for the first quarter to +77%.’ It says it ‘continues to believe that Naked is ideally positioned to be a long-term winner from the inflection in consumer demand for online wine as a result of the Covid-19 pandemic. Uncertainty as to the extent and duration that current trading conditions will persist means that the Group is not providing full guidance for the financial year, but it will keep the market updated on its trading performance as appropriate.’
• Regarding its proposed brewing JV with Carlsberg, Marston’s yesterday reported the it had been ‘advised that for procedural reasons, the UK CMA (rather than the European Commission) will now likely be the relevant competition authority.’
• Greene King is to make £2m in support loans available to its 6,500 independent free-trade pubs. Loans of to £10,000 will be on offer for existing and new trade customers.
• The company says ‘as a result, completion is now anticipated to take place slightly later than expected as the CMA completes its review. Completion is now expected in Q4.’ The group says ‘as stated previously, we do not expect that the Transaction raises any competition concerns and are satisfied that the Group has sufficient liquidity in place to meet its requirements ahead of completion.’
• Boparan Restaurant Group is to remove the £10 cap from the Government’s Eat Out To Help Out discount scheme, effectively offering 50% off all food and soft drinks over £10 per head out of its own pocket.
• Deliveroo has appointed Adam Miller as its new CFO
• The latest GfK Consumer Confidence report shows ‘there’s been little to boost the public’s mood as the cost of the pandemic to the UK’s economy is becoming apparent.’ GfK says ‘amidst significant job losses and the end of the furlough scheme, it is perhaps surprising Consumer Confidence has held steady at minus 27 this month.’
• GfK says ‘many people have been savvy and saved money during lockdown, as the most recent GDP figures show. That could explain the one bright spark on the horizon — the three-point uptick in consumer expectations for the financial position of their households in the next 12 months. The way we perceive our ’future wallets’ is key as it’s the one area over which we have day-to-day control and is a good indicator of our personal financial outlook for the year to come.’
• Consumer confidence overall remains at minus 27. The personal finance index rose one point to minus four with a General Economic Situation reading of minus 61. Consumers remain more confident, or less unconfident, in their own position than they do that of the wider economy.
• CEO Mike Ashley has warned that Frasers’ Group may permanently shut stores. The group says the government has ‘buried its head in the sand on the critical business rates issue, raising unfair and uneconomic revenue sums from already distressed businesses.’
• Reuters reports that Whitbread could cut up to 250 head office roles. The company says ‘we are acutely aware that demand and revenue remain reduced. We anticipate this will be the case for some time to come.’ Against such a backdrop, job losses are highly likely. See our Premium Email comments yesterday re timing.
• Dyson is cutting 600 jobs in the UK and a further 300 globally.
• The Centre for Economics and Business Research has suggested that, post Covid-19, some 25-30 per cent of the workforce could be working from home on any one day, compared with 11.9 per cent last year. That will have implications for the thousands of coffee & sandwich shops partially reliant on commuter-spending. If consumers are working from home, they are not eating & drinking near the office.
HOLIDAYS & LEISURE TRAVEL:
• Travel Weekly reports ‘chaotic scenes have been reported at UK airports with passengers arriving as much as eight hours before departure.’ This will be amongst a number of unforeseen consequences of the various new rules in place.
• UK Inbound has written to PM Boris Johnson warning that job cuts across UK tour operating and destination management companies are likely over the short term unless the government gives the domestic industry more help.
• Barclays head of hospitality and leisure Mike Saul has warned that there will be “more failures” across the UK hospitality industry as it struggles to come to terms with a much-changed market.
• Speaking on a Travlaw industry webinar, Barclays comments that ‘the fundamental issue now is consumer confidence. A lot of people are waiting. A lot of people are looking at alternatives to overseas holidays. When will they feel comfortable to make a booking?’
• Carnival has said that changes it is proposing to make will ‘generate tremendous guest excitement once it resumes sailing.’ Cruising as an industry is in a difficult position as it has a great deal of capital tied up in assets that are currently not operating.
• FCO advice to older consumers is to consider not taking a cruise in the current environment.
• STR reports US hotels saw occupancy down 39% year on year in the week to 18 July. Rate was down 28% with REVPAR 56% lower. STR says ‘US occupancy has risen week over week for 13 of the last 14 weeks, although growth in demand (room nights sold) has slowed recently.’
• Whitbread may cut up to 250 HO jobs.
• Cineworld is to delay the reopening of its US cinemas to mid-August. CEO Mooky Greidinger is looking to 7 or 14 of August. The CEO says ‘it might take a little more time, we might start a little slower, but at the end of the day I believe the world will become a normal place again. If it’s going to take another two weeks or another three weeks, this is really not so much the point. We have to be optimistic.’
• Walt Disney has delayed or postponed a number of major projects. The new Avatar and Star Wars films have been delayed for a year.
FINANCE & ECONOMICS:
• See GfK consumer confidence data under ‘consumers’ above.
• The CBI reports that the balance (up vs down) of UK orders improved to minus 46 in July, up from minus 58 in June. The CBI says ‘there are tentative signs of gradual recovery on the horizon, with firms expecting output and orders to begin to pick up in the next three months. But demand still remains deeply depressed.’
• A cross party committee of MPs set up to look into the Covid-19 epidemic says ‘we are astonished by the government’s failure to consider in advance how it might deal with the economic impacts of a pandemic.’
• Michel Barnier has said that ‘by its current refusal to commit to conditions of open and fair competition and to a balanced agreement on fisheries, the UK makes a trade agreement – at this point – unlikely.’
• South Korea is officially in recession.
• Sterling lower at $1.2731 and €1.0975. Oil down at $43.45. UK 10yr gilt yield unchanged at 0.12%. World markets lower yesterday with London set to open down by around 70pts (as at 7am).
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Today’s News: Today’s Kingfisher AGM at 11am at their HQ in Paddington. Ahead of that, we have had the expected trading update from Hotel Chocolat, along with unscheduled updates from Naked Wines and French Connection. And last night #MadMike issued an RNS responding to the latest allegations in the Guardian, saying that Frasers take the allegations “very seriously”, but asserting that their legal advice is that it is “extremely unlikely” that any employees have been underpaid because of the treatment of rest breaks. The update from French Connection is quite long, but there are no figures in it, apart from the news that the company has had to take out a £15m working capital loan from the scavenger fund Hilco (on undisclosed terms), as trading is difficult and Government support has not been forthcoming. The update from Naked Wines is good, with sales up 67% in June, although the main
News Flow Next Week: A busy week kicks off on Tuesday with the Greggs interims, the Card Factory strategy update and the Games Workshop finals, as well as the Halfords AGM. The much-awaited Next Q2 update is on Wednesday, along with the Dignity interims and the British Land AGM. Thursday brings the Inchcape interims and the Card Factory AGM, whilst on Friday we get the Pets at Home Q1 update and the JD Sports AGM. There is no sign of the final results from the hapless Frasers Group (aka Sports Direct) and we are still waiting for the delayed McColl’s interims.
BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that in w/e Sunday July 19th, BDO Fashion LFL sales were down by only 7.5% (despite a fall of 41.5% in Store Fashion sales) and Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion retailers) were down by only c4% (down c35% in Store sales, but up by c82% in Online sales). However, the index is an unweighted average of percentage changes and the sample base is not huge, so it needs to be taken with a pinch of salt.