Langton Capital – 2020-09-01 – PREMIUM – Eat out to help out, London, CVAs, TUI, Gear 4 Music etc.:
Eat out to help out, London, CVAs, TUI, Gear 4 Music etc.:
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A DAY IN THE LIFE:
So, with the summer by some accounts over, it was perhaps telling that we had to put the heating on over the weekend.
That because it got down to 4 degrees overnight, which is a tad chilly.
Still, the days are longer than the nights and, with staycations being the feature of the year, that’s something to be grateful for.
On that note, the consumer, read Langton Inc, must have saved a bit of money on hols this year. We reckon the cost of a fortnight in the UK is around 50% of the cost of a similar break on the Continent and perhaps 25% of the cost of a break in North America.
That’s without trying to factor in depreciation of your own motor, that is, but nonetheless, flights are the killer and there haven’t been many of them recently.
Anyway, with Tuesday now established as the new Monday, let’s move on to the news:
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EAT OUT TO HELP OUT – AND ITS SUCCESSORS: The scheme has been successful in tempting operators to reopen more units and to remove staff from furlough. But what now? 2 Sept 2020:
• EOTHO has allowed many operators to make hay. Some operators, inexplicably, didn’t take part whilst others are continuing it at their own expense.
• Overlaying this, Oliver Twist-like, the industry is asking for more.
Upcoming problems, hurdles etc.:
• We’ll try not to use the phrase ‘cliff-edge’ as its been bagged by Brexit commentators.
• But the hospitality industry is facing many major hurdles, none of which have been removed by the admittedly very helpful EOTHO scheme.
• We’ll type this quickly, so it doesn’t feel so bad. The furlough scheme is tapering and then ending, the weather’s getting worse, customers may be about to lose their jobs, there could be a 2nd wave, pubs & restaurants may be thrown under the bus to save schools from shutting, landlords will get their teeth back next month, VAT quadruples in January, the banks will want their money back and all those deferred rent, VAT and duty bills will need to be paid.
What that means:
• There’s no getting away from the suggestion that, particularly for operators who had struggled through 2019 hoping that things were going to improve, that any single one, let alone seven or eight, of the above events might not be survivable
• Bring in material discounting (albeit known as EOTHO or Rishi II or whatever from now on) and many operators will not be able to compete
• The Telegraph quotes a restaurateur as saying that ‘there were too many mediocre restaurants in Britain, even before Covid-19 came along, offering neither value to customers nor a particularly rewarding workplace for staff.’
• Given the CVAs in 2018 and problems some operators faced last year, this is likely correct.
• A mass extinction event may not have been what Mr Sunak had in mind but 10yrs plus of evolution and attrition in the casual dining market in particular could be squashed into the next six months
Near term developments:
• The EOTHO scheme has now officially ended. There is talk that it might be tailored to help cities and London – but no news yet.
• The £10 discount, whilst material in the provinces, might not do much to the overall cost to consumers of a meal in a white-tablecloth restaurant in London once the cost of the meal and travel expenses are taken into account
• As we comment below, the taxpayer is off the hook, but a large and growing number of companies have extended it out of their own pockets. JDW has said it will continue with the discounts until at least 11 November.
• S4 Labour tentatively suggests that the scheme could have been tapering off a little in the last week (see below).
• This is understandable in some ways as the consumer only has so much cash, last week was the run up to payday and a long weekend and families will be focusing on the upcoming return to school.
• Nonetheless, the scheme has been nothing less than transformative with Open Table saying that there were 106% more seated diners last Tuesday than the same day in 2019.
• It will be very interesting to note just how the companies that continue the scheme off their own bat perform.
• Smoothing the labour schedule (and fixed costs) over more trading sessions should be helpful longer term but, by its very nature, the scheme was not intended to be longer term
• Some companies, for example Tasty publicly, could be considering re-closing units now that the scheme has ended
Asking for a little more:
• Liabilities have been stacking up for many operators. VAT has been accrued. Ditto rent, duty payments (if applicable) and other costs & these will need paying.
• One quarter’s addition VAT is likely to be payable next spring but, looming up more rapidly, is the end of the lease forfeiture moratorium
• There is a ‘rent hangover’ and both landlords and tenants could end up turning to the government, i.e. the taxpayer, for help
• Some have suggested that a third of rent is forgiven for 2020 (effectively a hit to the landlord), a third is paid by the tenant, and a third is paid by government
• This could work – but the admin could be challenging, particularly when deals have already been struck (would they be unpicked?) and many companies have gone bust (would they be reinjected with capital?)
• Help with accrued payments to government, the quadrupling of VAT next January and the possible reintroduction of business rates in April are problems for tomorrow
What ‘should’ the operators do?
• There have been a lot of ‘firsts’ this year, and mostly not the good sort. This is recognised by operators, government and consumers so, so far, so good.
• For the extreme winners (who they?) and the extreme losers, the likely outcome is clearer than it is for the bulk of operators ‘in the middle’
• For them, surviving the wave that has crashed over the industry had to be goal no1.
• Thereafter, and hoping that there isn’t a second major wave, operators will have to deal with the damage and, if possible, take market share
• Hence JD Wetherspoon, Franco Manca, certain M&B brands and others are continuing the early-week discounting in order to strengthen their positions
• And, calling a spade a spade, to put competitors under pressure
• There will have to be some careful positioning otherwise operators could cement in losses to their Monday to Wednesday model
• Where margins are low, as they are at JDW, this could be an issue. Pizza, on the other hand, is a high margin product
• For other operators, those that are keeping their heads down, they will have to assess whether their business has a future on a fully-costed basis
• This will involve asking themselves a) can the subsidies of various sorts last forever? c) can we survive if they don’t and, in a more nuanced version of b) can we survive longer than the competition?
• Tough choices. Human emotion, optimism and over-confidence may end up pulling one way and banks and other creditors in the other
WHEN WE GET TIME, A LONGER LOOK AT LONDON.
• Commuting, office work, demand, rents and the like. Contributions welcome.
PUB & RESTAURANT NEWS:
Making news at the moment: Getting people back to the office and the ending of the (official, taxpayer funded) Eat Out to Help Out.
The new normal – empty city centres?
• The government is not pushing for employees to get back to their places of work. The pandemic has moved onto the next stage but, after months of saying the opposite, such a move was always likely to be open to (sometimes wilful) misinterpretation. Some of the facts below, see Premium Email for analysis & comment.
• Springboard has reported that, though coastal towns have been busy, the UK’s major cities, and particularly London, remain quiet.
• Transport minister Grant Shapps says that some jobs cannot be done remotely. That’s true but bus-drivers and builders aren’t the target of the current move to get people back to normal. Rather office workers. Whose jobs, as we have seen over the last six months, actually can be done remotely.
• Interestingly, Health Secretary Matt Hancock has said he cared more about how employees performed than where they were working. The same view would not be expressed by Pret, Costa, TfL and a whole host of other companies for whom commuters provide an important source of income.
• Ministers in Scotland, Wales and Northern Ireland are still advising people to work from home where possible. Some mischief may be being sown. Various observers have gone with the title ‘save Pret, forget about the NHS’. This may be somewhat disingenuous.
• There is real concern that some of the UK’s larger cities, London chief amongst them, will struggle to recover in the short or medium term from the shock to working practises brought about by Covid-19. London will still be London in 20yrs time – but the companies within it may have churned if some of those currently operating there do not have any customers for a sustained period of time.
• New West End says West End footfall was down 2% week-on-week on Saturday, 29 August. Compared to the same day last year, footfall was down 48%. For last week as a whole (week 35), West End footfall was up 7% week-on-week (and down by 52% on the week). The above suggests that early-week trade has been better than that at the weekend. This may be linked to EOTHO.
Eat Out to Help Out:
• This has now officially ended. Chancellor Rishi Sunak says ‘the scheme reminded us why we as a nation love dining out and I urge diners to maintain the momentum to help continue our economic recovery.’
• The taxpayer is off the hook, but several companies (including JD Wetherspoon, Bill’s, M&B brands Vintage Inns, Harvester & Toby, Pizza Hut, Franco Manca, Gaucho Grill, Pizza Pilgrims, Darwin & Wallace & others) have extended it out of their own pockets. JDW has said it will continue with the discounts until at least 11 November.
• JDW Chairman Tim Martin comments ‘the Government’s Eat Out to Help Out scheme was extremely popular with our customers and a great boost to the hospitality industry. We are keen to offer our customers a superb choice of food and drink at great value for money prices. Our offer means that a classic beef burger in our pubs will be even better value than McDonald’s.’
• Many operators have called for the scheme to be extended. The Daily Mail says that it could be re-booted by Sunak to specifically help city centres. The Telegraph has been told by a minister ‘the scheme has been a big success in general, but it’s all very well going to your local restaurant down the road for a cheap meal when those restaurants are already doing good business because of people working from home.’ The minister continued ‘it is the destination restaurants in city centres that need the help, and that’s where resources should be concentrated.’
• It’s less clear whether a £10 discount would move the dial much at a ‘destination’ restaurant once travelling costs and the like had been factored in.
• Darwin & Wallace says ‘the buzz in August in our bars, thanks to Rishi with 50% off Monday to Wednesday was ace.’ It says ‘we are delighted to announce that we have decided to extend Eat Out To Help Out for the entire month of September.’ This is exclusively for Address Card Members.
• S4 Labour has reported that weekly sales were up by 4.3% in the final week of Eat Out to Help Out. It says ‘this weeks’ Monday to Wednesday sales were also up 1.8% on the week before last, and down 0.5% on the opening week of the scheme. Monday to Friday sales last week were also up a remarkable 82.4% on the week prior to the EOTHO scheme being introduced.’
• S4 Labour says ‘there have been regional differences in the rate of recovery particularly comparing between sites inside London and those outside. While Monday to Wednesday sales were up 60.1% of pre EOTHO levels inside London, they were up 85.7% outside the capital.’ Presumably this is partly to do with traveling costs (and where commuters are, physically, these days).
• S4 Labour says that ‘EOTHO has given many people an incentive to get back to eating and drinking out and operators a welcome boost to sales. We have seen fully booked restaurants and queues for tables; as we prepare for life without EOTHO, we know that customers confidence in the sector has started to return and their appetites grown.’
• Open Table has suggested that there were 106% more seated diners last Tuesday than the same day in 2019.
• There have been geographic differences. Nick MacKenzie, chief executive of Greene King, told the BBC ‘while a lot of our businesses were 50%, 70%, 90% up year-on-year, central London was about 30% down. It is pretty stark.’ MacKenzie says ‘I’ve called for the government to think about maybe doing a similar scheme for city centres and for London. We need to get people back into cities particularly into central London.’
• Deliveroo has launched an Eat In to Help Out’ offer in September.
• The Telegraph reports ‘angry landlords’ as saying that ‘retailers have ‘weaponised’ the use of CVAs.’ There is very likely to be something in this. Re CVAs, the BPF says ‘rather than as part of a sustainable rescue plan for those in genuine distress, they’re becoming a boardroom negotiating tactic for solvent businesses to rip up leases freely agreed with property owners.’ It goes on to say ‘the process is discriminating against property owners, allowing non-affected creditors to vote on a CVA, yet forcing property owners to absorb the lion’s share of the burden.’
• The process also discriminates against restaurants that do not undertake CVAs themselves. This is dangerous as it could mean that the process is contagious. However, CVAs ‘save jobs’ and, in this environment, that will press a number of buttons in the plus column for politicians.
• The end of the lease forfeiture moratorium is beginning to loom. The moratorium does not free tenants from any of their obligations but rather only temporarily prevents landlords from doing much about it.
• Some are suggesting that the cost of rents should be born equally by tenants, the landlords (via rent reductions) and the government for the whole of this calendar year.
• Costa Coffee is testing out a new format with a street-facing service counter in central London
• Beyond Meat Inc has launched a new website to sell its products to US customers
• Amazon has opened its first Fresh supermarket. The unit is in Los Angeles
• CAMRA says that the changes to Small Brewers Relief proposed by the government could threaten the brewing boom of the last two decades
• Moody’s reports that the Alcohol Health Alliance UK’s report criticising existing labelling for alcoholic drinks alongside calls for an increase in the minimum alcohol unit price could be credit negative.
• McDonald’s has said that its former CEO Steve Easterbrook lied regarding several questions that it put to him
• Moss Bros may shut shops as part of a rescue that is being investigated by advisors KPMG
• The fee for plastic shopping bags in England is to double to 10p next April
HOLIDAYS & LEISURE TRAVEL:
• The BBC has quoted passengers on a TUI flight to Zante as saying it was full of Covidiots, was a ‘free-for-all’ and that the staff did not get a grip of the situation. TUI has launched an investigation into the claims.
• IAG boss Willie Walsh has warned that holidaymakers will face ‘chaos and hardship’ if Portugal is put back on the UK’s quarantine list. He has criticised the ‘ever-changing’ rules. He says that the arbitrary statistics risk ‘destroying the economy’.
• AIDA Cruises, part of Carnival Corporation, will begin Canary Island cruises in November and Western Mediterranean and Orient cruises in mid-December
• The Advantage Travel Partnership has called for testing at airports to boost confidence in aviation safety
• The Post Office Travel Money annual City Costs Barometer says that the cost of hotel stays have dropped sharply, even in European cities to which UK passengers can fly and not self-isolate on their return.
• Vivid Travel is reported to have suspended operations until further notice
• Fred Olsen Cruise Lines suggests that the over-50s are once again keen to travel
• Over 100 MPs have signed a letter calling on the chancellor Rishi Sunak to extend the Job Retention Scheme for the aviation sector until March 2021.
• Windstar Cruises has cancelled all its remaining cruises this year
• Gatwick Airport has reported a £343m pre-tax loss in H1 this year.
• STR has reported that US hotels currently employ about half of the workers they did prior to the Covid-19 pandemic
• Gear4music has updated on trading in a statement that will be read at its AGM later today. The company’s chairman says ‘following the exceptional period of revenue growth during Q1 FY21, I am pleased to report that trading has remained strong throughout July and August, with the Group continuing to generate improved margins alongside proportionally lower marketing costs compared to the same period in the prior year.’
• G4M says ‘whilst still relatively early in the current financial year, the Board remains confident that results for the full year will be at least in line with our recently upgraded expectations.”
• Incumbent Camelot is likely to face competition from two other companies when it bids for a 10yr right to host the lottery from 2023
FINANCE & ECONOMICS:
• Senor Tories are reportedly pressuring the Chancellor not to attempt to raise £30bn from additional taxes this autumn
• The government has come under pressure from its own back benches after polls suggested that its recent series of U-turns had undermined confidence
• PM Boris Johnson and others have said there will be no return to austerity
• Bank of England governor Andrew Bailey has denied that, with interest rates already at record low levels, the bank has run out of fire power
• Sterling higher at $1.3405 and €1.118. Oil higher at $45.79. UK 10yr gilt yield down 2bps at 0.32%. World markets a shade weaker but Far East recovering in Tuesday trade and London set to open up around 25pts.
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 of the Saturday papers were pretty mixed, but the Guardian led with the news of more problems for the embattled Boohoo over allegations of more widespread use of low-pay factories in Leicester (“Boohoo faces fresh crisis over factory pay”) and the Guardian also had a double-page feature on the breakdown in relations between Boohoo and some of its clothing suppliers over audit visits (“How Leicester factories went to war with Boohoo”). The 9% slump in the Boohoo share price on Friday on the back of the Guardian revelations was the lead story in the stockmarket reports in both the Daily Mail (“More tears for Boohoo backers as crisis grows”) and the Telegraph (“Boohoo shares fall out of fashion after new factory claims emerge”).
• Saturday’s Press and News (2): In terms of other Retailing stories, the news that Waitrose has launched a five-store fast delivery service through Deliveroo was the main Business lead in the Telegraph and was also flagged by the FT and the Times, whilst the Guardian had a big News feature on the upcoming battle between Ocado/M&S and Waitrose ahead of tomorrow’s switch, interviewing both Mel Smith of M&S and James Bailey of Waitrose and noting that Waitrose.com is also to cut its minimum order size from £60 to £40. The other big focus was on the corporate governance backlash over the planned IPO of The Hut: this was a small story in the Telegraph, but the Daily Mail went to town on it, making it its main Busines story (“The Hut Group under fire over £4.5bn listing”) and the veteran City Editor stuck the boot in in his column, calling the IPO a “ramshackle lifestyle float” and
• Saturday’s Press and News (3): In other news, the admission by Greggs that it had had to close a Leeds warehouse because of a COVID outbreak was flagged in the Times and was also mentioned in the stockmarket report in the Daily Mail. The Times also flagged that #MadMike had continued his campaign for Business Rates reform by writing a letter to the Prime Minister, asking for a 10 minute meeting “at any time of the day or night”. Finally, the FT had a feature on the boom on home repair and maintenance spending during the pandemic, noting that it could be short-lived (“Caution greets stay at home spending splurge”)
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were all about the upcoming problems for the Government, with both the Sunday Times (“Sunak plans triple tax raid on the wealthy”) and the Sunday Telegraph (“Bombshell tax hikes to pay for the virus”) flagging the tax rises planned for the wealthy by the Chancellor. The Observer noted that the PM is facing a backbench revolt over the countless number of his “U-turns”: “Johnson faces Tory wrath as party slumps in shock poll”.
• Sunday’s Press and News (2): In terms of Retail stories, the focus on The Hut IPO and the corporate governance row about the powers given to Matt Moulding continued, with the Sunday Times profiling “The shy tycoon who built a £4.5bn Hut” and the Business Leader column in the Observer questioning the high valuation of the group: “Is Hut Group’s vaulting £4.5bn ambition a leap too far in cutthroat Online market?”. There was also more focus on the M&S/Ocado/Waitrose battle , with the Sunday Times flagging that the feisty Ocado boss Tim Steiner has scoffed at Waitrose’s chances of making a success of its Online Grocery push. The Sunday Times also had a double-page feature on the M&S/Waitrose battle (headlined “Percy Pig gets his trotters on the wheel at Ocado”), with profiles of the key players: Archie Norman, Sharon White and Tim Steiner. And the Questor investment column in the
• Sunday’s Press and News (3): In terms of all the Economics and comment columns in the Sunday papers, we would, as usual, highlight the thoughtful column by the Sunday Times Economics correspondent David Smith (“A strong bounce so far- but can it survive the autumn?”), in which he noted that the V-shaped economic recovery is unlikely to turn into a W, but that the risks cannot be denied. We would also flag the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“We cannot keep on patching up a system designed for a bygone age”), in which he said that the long-term death of the office is unlikely, but that it has implications for both public transport and the antiquated Business Rates system.
• Today’s News: There was no Retail company news expected this morning, but Dunelm has stirred things up with a surprise trading update, ahead of their finals (for y/e June) coming up on Sept 10th, to flag that the new financial year has got off to a very strong start. In the Q4 update on July 15th Dunelm had highlighted impressive 20% growth in June in total sales, but they note today that growth accelerated to 59% in July (“partly as a result of pent up demand following the store closure period and the timing of our Summer Sale”) and that even in August sales were up by 24%. The statement is quite short and in terms of the outlook Dunelm confine themselves to the view that “Whilst the year to date performance has been materially ahead of our initial expectations, it is very difficult to provide any meaningful guidance on the future outlook given the uncertainty in the wider
• Last Week’s News: An unexpectedly busy week began with Frasers confirming that it had bought DW Sports from the administrator for £37m and then admitting that its US business Bob’s Stores was being de-listed by Nike. Tuesday also brought a bullish trading update from DFS, whilst New Look launched their controversial new CVA on Wednesday. Thursday brought the news that the well-respected CFO of Ocado, Duncan Tatton-Brown, was retiring for family reasons and was being replaced by the CFO of Rolls-Royce, but the big news that day was that the fast-moving Online group The Hut was intending to float c20% of the company, with a target valuation of £4.5bn and no less than eight investment banks on the ticket to make sure that the float gets away…
• News Flow This Week: As we move into September, this week is quiet, after Bank Holiday Monday, although today brings the Applegreen AGM, the Hammerson EGM and the much-awaited launch of the Ocado/M&S joint venture. Tomorrow evening we get the latest FTSE quarterly index review and on Thursday the Signet Q2 results are published in the US