Langton Capital – 2020-12-07 – PREMIUM – Covid-inspired changes, trading, rates, Wales, Nando’s, rent & other:
Covid-inspired changes, trading, rates, Wales, Nando’s, rent & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
So, do the actions of a street juggler (or a magician, singer etc) increase GDP?
The person has used up some calories gallivanting around and has probably turned a few heads but, has he/she added anything in terms of global output?
And would the answer to the above question change if you toss 20p or 50p into their hat?
Sound like simple questions but what’s the answer.
And what is money? And can you really destroy wealth, or do you just move it around?
We may love to criticise politicians for not answering direct questions but, when you think about it, there aren’t many one-word answers knocking about.
Anyway, after studying economics to degree level, I don’t know the answers to any of the above questions but what I do know is that, like quantum mechanics, if you think you understand economics you’re just confirming that you don’t understand economics.
Time to change the subject, have another cup of tea and to move on to the news.
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SHORT TERM VS LONGER TERM CHANGES: Which changes in consumer behaviour, if any, will be changed permanently by the Covid-19 pandemic good? 7 Dec 2020.
• Definitions are important here because a) even longer term need not necessarily mean permanent and, on a different tack b) some things the pandemic has caused, but others it has just accelerated
• Arguably, the changes that the pandemic has accelerated (rather than caused) are those most likely to be permanent
• The things that the pandemic has ‘caused’ such as no-singing in pubs, no sport, cheering, hugging, dancing etc, are likely to be undone over the weeks and months after the pandemic has passed
What has Covid accelerated? Other suggestions happily accepted.
Online buying of goods & services.
• This has been around since before Dotcom Boom 1.0. But there can be little doubt that this has accelerated over recent months. Some ground will be recaptured by Bricks & Mortar, but probably not all of it.
• Implications. There is too much high street and retail park shopping space. This will impact sandwich shops, coffee shops and other operators that are reliant on retail footfall.
Working from home.
• There had been talk of four-day weeks and the like pre-Covid and remote working has been possible for some time. Covid has certainly accelerated the move in this direction and not every office-bound worker is likely to return to commuting when the virus has passed.
• Implications. Transport hubs, trains, busses will be less busy – as will the coffee shops and pint on the way home bars nearby. Sandwich shops will have a smaller customer base throughout the day.
The move away from cash:
• Langton last drew money out from a hole in the wall perhaps two months ago. It used to be weekly. Purchases of even very small amounts are now by card, usually contactless. Even traditional, cash-heavy areas such as fish & chip shops have succumbed. Pubs had been moving this way for some time.
• Implications. Cash will likely never regain the supremacy that it enjoyed only a few short years ago. The impact on hospitality should be broadly neutral, perhaps slightly positive, depending on the scale of charges.
Film releases via streaming rather than cinema:
• Hollywood frequently tests this model to see how it can maximise revenues. Film, The Irishman, was released via Netflix only a couple of weeks (rather than several months) after its limited cinematic release in November last year. Warner has just announced that it will release all of its 2021 films to streaming at the same time as to cinemas.
• Implications. Cinemas enjoyed a 20+ year renaissance until Covid forced closure and, later, social distancing. At the same time, Netflix, Amazon Prime and other streaming services boomed. This was obviously not lost on Hollywood and, unless customer habits revert rapidly, which they may not, there could be too many cinemas out there going forward.
The use of Apps:
• Table service and remote-ordering apps have been around for some time. The attempt to reduce human-to-human contact has led to an increase in their usage during the pandemic. Tech developments in this area have been speeded up. integration with EPOS and the like has been facilitated.
• Implications. There are differing views as to how good a thing this is. Fuller’s said it wanted to see a return to majority bar-service whilst M&B and Loungers said that apps would be retained wherever possible in order to smooth service and cut costs. Some jobs may be lost as a result of this.
What has Covid stopped? Arguably, most of this will come back post-Covid.
• Dancing, cruise holidays, hugging, shouting, singing and kissing. These are all likely to come back perhaps cruise holidays slower than the rest.
• Sports viewing in pubs, later night drinking, drinking at all in Wales. These should all bounce back.
And the Covid beneficiaries?
• Streaming of videos, see above. This may last but the boom in bicycle sales may not.
• Staycations are a trickier one. This year and next should be positive but, thereafter, demand may return to normal unless travel is difficult due to Brexit issues etc.
• Use of BBQs, drinking at home, rose wine, home-cooking etc could also abate.
• Waitrose, which arguably has an interest it seeing people cooking and eating at home (as well as holidaying in the UK etc) says that there has been a ‘seismic shift’ in the way consumers behave.
• Waitrose identifies some of the trends above and says that a quarter of consumers shopped online for food for the first time this year.
• There have been larger, and fewer, food shops. Certainly, in the earlier days of the pandemic.
• Waitrose says ‘rosé wine had its biggest year ever last year and will only continue to grow in 2021.’ It is ‘expecting sales to be bigger than we’ve ever seen at Christmas before and up 50% at least on last year.’
• Sales of cask ales will have been moving in the opposite direction.
• Waitrose suggests alfresco eating could also remain popular all year round
• good news for some of the food producers in that Waitrose says ‘an increase in the importance of food and its power to bring us together has pushed many of us back to old-fashioned meal planning and recipes.’ It says ‘comfort and nostalgia are back.’
PUBS & RESTAURANTS:
Current trading environment:
• Save for pubs in Cornwall & the Isle of Wight, pubs in England are having to operate (or not operate) in Tiers One and Two. Operators in Wales can’t sell alcohol and must shut at 6pm and operators in Scotland are also operating under severe restrictions.
• UK Hospitality says that around a third of operators may not survive until Christmas. It says that 94 per cent of restaurants are nonviable or trading at a loss and adds ‘we need a hospitality recovery fund to keep the sector alive.’
• The Daily Mail says rents are a problem alongside, obviously, a lack of income and patchy government support. UKH would like to see a recovery fund established. It says ‘the sector’s preference is to trade itself back to recovery but, with restrictions denying us the chance, many venues will fail unless the government provides much more substantial support.’ CEO Kate Nicholls adds ‘the restrictions of the new tiers mean that 94 per cent of our members are nonviable or trading at a loss. That’s a £7.8 billion hit which will see businesses go under and jobs lost.’
• Ms Nicholls adds ‘for any chance of survival, we need replacement of the Job Retention Bonus, extension of the rent debt moratoria and compensation for business losses. Tesco has just refunded nearly £600million in support to the government, with other supermarkets rumoured to be following suit. That can be used to establish a Hospitality and Tourism Recovery Fund to keep the sector alive.’
Plea for a share of the supermarkets’ returned cash:
• The British Beer & Pub Association has also backed calls for the £2bn of business rates relief that supermarkets have repaid to be repurposed into a comprehensive relief package for Britain’s struggling pubs and brewers. It says ‘the trade association applauded the supermarkets’ decision, saying it could constitute the “vital lifeline” brewers and pubs need to ride out the punitive new restrictions that came into place this week, wiping out a huge proportion of trade in the most valuable of months.’
• The BBPA says ‘as the money has been repaid by supermarkets it would require no new borrowing from the Treasury and would have no additional impact on the UK’s bottom line, giving the Chancellor an unexpected opportunity to give the sector some Christmas cheer. The woefully insufficient £1,000 per-pub payment announced this week can now be boosted and rolled into a complete overhaul of the existing grants system which has to date overlooked brewers and leaves English hospitality and supply chain businesses hugely disadvantaged relative to those in Wales.’
• The BBPA would also like to see business rates relief extended beyond March next year for UK pubs. CEO Emma McClarkin says ‘this week’s derisory £1,000 top up payment doesn’t plug the gaps but the Government now has the chance to put in place a proper, comprehensive support package for thousands of brewing and pub businesses, allowing them to continue to serve their local communities and help lead the much-needed economic recovery next year.’
• William Lees-Jones, MD of JW Lees brewery says ‘we are calling for the Government to create a COVID Hospitality Recovery Fund…This could be the salvation of the many hospitality venues and the critical supply chain businesses that have been forced to close through the pandemic and are now really struggling in tier two and three areas.’
• The Press has mentioned that some units in London were busy over the weekend. Operators themselves have been a little less upbeat. Many units are shut, and down 100% LfL terms. Units that are open are trading perhaps down 40% to down 70% on normal, with some performing markedly less well than that.
• Forward bookings, unsurprisingly, have been poor. Larger gatherings are still not allowed under the law.
• KAM Media says that Gen Z has continued going out (where possible). It says, however, that ‘alcohol plays a smaller part in their fabric compared with previous generations. Two in five 18-24 year olds describe themselves as teetotal. More than twice the number of UK adults in general.’
• Welsh pubs now must close at 6pm and they cannot serve alcohol. Many are not opening. Those that are seem to be adopting a ‘try it out’ approach to see if there is enough (or any) business to go around given the smaller number of units open.
• Alcohol free lunches are still possible. Not, it must be said, often associated with Christmas celebrations.
• UK Hospitality Cymru says hospitality is ‘unjustly bearing the brunt of government actions when retail and other areas are allowed to trade relatively unhindered.’ Indeed some shops can now stay open 24/7.
• The BBPA says ‘evenings are the key trading period for pubs and enjoying a beer, with or without a meal, is one of life’s simple pleasures – forcing pubs to close at 6pm and banning alcohol sales all but closes them down in reality.’
• Barrels of beer are being poured down drains in Welsh hospitality venues. The BBC quotes Glamorgan Brewery alone as saying that it has had to put 58 of the company’s 64 employees back onto furlough an pour 45,000 pints down the drain.
• Livelihoods are at stake and attempts at humour re Scotch Eggs and dog passports are perhaps misplaced. Loungers’ co-founder Alex Reilley tweets ‘dear Media UK, This scotch egg thing is really quite amusing isn’t it? Only it’s not. Stop trying to make light of a catastrophic situation – people in hospitality are losing their businesses & their jobs. This is not amusing it’s heart-breaking.’
• Scientists, who may end up amongst the whipping boys of this whole affair, are allegedly suggesting customers should not talk in restaurants.
• Certainly, contaminated breath can spread germs. Singing, shouting and cheering probably more so than whispering. Trying to make light of this all, this is the season to be jolly careful, etc, may be something of a deflection.
• See earlier emails for comments on accrued liabilities on company balance sheets, the end of the eviction moratorium etc.
• UKH has warned that ‘the sector is on a countdown to a devastating rent tipping-point that will trigger a new year bloodbath of hospitality business failures and potentially hundreds of thousands more jobs lost.’ It says that the eviction moratorium ends on 31 December adding ‘there is still substantial unsettled rent from the Covid crisis period within hospitality, estimated at around £1.6 billion. This will increase further with December’s rent quarter payment date looming (25th Dec). The debt burden is mostly held by otherwise viable businesses that cannot pay rent bills due to lack of revenue during many weeks of closure and suppressed sales under tier restrictions.’
• UKH says ‘an extension to the moratoria is needed immediately, as this issue is threatening the future of so many otherwise viable businesses and their teams. The rent crisis, with the December quarterly rent day and the end of the moratoria fast approaching, is the biggest threat to the recovery and future of hospitality.’ It proposes an extension to end-June with tenants making ‘a reasonable offer of rent debt payment.’ There should be a ‘reset rent review’ and a ‘50% reduction in rent debt’ alongside ‘a long-term commercial property review.’
• The Telegraph reports that ‘Nando’s [is] in debt crisis talks after spending millions to be Covid-secure.’ It says restaurant chain boss Rob Papps is “confident in the long-term prospect for the business”. The company has reportedly spent £20m to make its UK restaurants Covid-secure.
• Reportedly ‘bosses are holding discussions with Barclays to secure potential waivers to the covenants on £300m of loans.’ The chain is ‘expecting to breach strict banking terms – an event that, if unaddressed, would leave it in default. Its UK arm employs almost 17,000 people and operates nearly 400 sites.’ Many companies have had to approach bond holders and bank lenders in recent months as covenants would have been breached due to low (or no) EBITDA and reduced sales.
• KPMG is reported to have said ‘the group is reliant upon agreeing waivers of covenants in May 2021 with the bank. If this is not successful further financing would be required.’ Auditors at the moment are very nervous regarding ‘going concern’ and ‘material uncertainty’ provisions.
• Nando’s says ‘whilst the current period remains extremely challenging, we remain confident in the long-term prospect.’
• Moody’s has pointed out that the repayment of business rates relief by listed supermarket group’s Tesco, Sainsbury and Morrison’s will ‘strengthen the public image’ of the companies but will increase leverage.
• The Sunday Times reports that restaurant operators are turning their backs on ‘rip-off Deliveroo’ and are turning to local operators. Deliveroo is reported to charge up to 37.5% of the meal price to smaller operators whilst charging their larger competitors only 18%. The company is under pressure to show a pathway to profitability. Back in October, observers were prediction an imminent IPO for Deliveroo. IG Index said at the time ‘with a possible valuation of up to £3.2 billion, the Deliveroo IPO – though unconfirmed – is one of the most anticipated listings of the year.’
• The IWSR Drinks Market Analysis suggests that UK beer sales will fall by 13.4% in 2020, but low and no-alcohol beers will fall by just 0.5%. Trends in the UK are said to mirror those globally.
• The ICAEW interviews Shepherd Neame’s Jonathan Neame, who says that ‘the positivity and enthusiasm from pub-goers gave the sector, and Shepherd Neame, a much-needed boost, which lasted until early October. There was some hope that the worst would be over by the end of the year.’ This clearly has not happened.
• The ICAEW says on Neame re the increased restrictions from September onwards ‘there is a feeling across the sector that pubs and restaurants have been unfairly scapegoated and penalised. Neame laments the lack of clarity in the government’s strategy since restrictions started to come in.’
• Kent-based Shepherd Neame says ‘we’ve got 320 pubs, two-thirds of which are in Kent. If we’re lucky, we’ll open 20% of our pubs by between now and the end of January.’ CEO Jonathan Neame calls for an extension of measures such as the 5% VAT rate for hospitality businesses and cancellation of business rates through to the end of 2021 and early 2022. It will be exceedingly tough for the industry, and job losses and insolvencies are likely.
• Neame concedes that staycations could be a positive. He says ‘from a sort of staycation point of view, people will probably stay in the UK for a couple of years, so next summer holds a lot of good prospects. Getting from A to B is not going to be easy. Clearly, we do rely on government support, which is not enough. It’s not as much as it was in lockdown one, we need more.’
• Lidl is also to repay rates rebate cash. The focus will shortly be on who has not repaid the money, chief amongst them upmarket food retailers Waitrose & M&S Food. Admittedly, both companies have large, non-food operations that were hit by lockdowns (and which will have lost share in clothing, kitchenware etc to the supermarkets whilst the latter were open and non-food was closed).
• In the US, NRN says ‘the restaurant industry’s recovery from the spring depth of the COVID-19 pandemic appeared to stall in November, according to employment, sales and traffic data released this week.’ Case numbers in the US are soaring.
• NRN reports Black Box Intelligence as saying that November US restaurant LfL sales were down 10.3%. It says ‘restaurant sales saw another decline during November, posting the worst results since August.’
HOTELS & LEISURE TRAVEL:
• Britannia has been voted the UK’s worst hotel chain for the eighth consecutive year by readers of Which? Magazine. The group fell down on cleanliness and a number of other measures. The chain says ‘we are totally committed to providing a safe environment for visitors. We have so far spent around £2m on COVID-19 precautions, but we accept there is more to do.’
• The top chains were Sofitel, Whitbread’s Premier Inn and IHG’s Holiday Inn Express. At the bottom, second only to Britannia was Mercure, followed by Days Inn and Old English Inns.
• Hotelplan UK, which owns Ingham, has cancelled ski holidays until February.
• Travelodge is offering 20% off selected bookings with Vouchercodes.
• Passenger numbers at Luton airport have fallen by 90% during Lockdown 2.0 reports the company. The company says ‘we welcome the introduction of the new test to release scheme for aviation. It is a vital first step in restoring confidence in air travel and supporting the airport’s gradual recovery. We hope to welcome more passengers back to the airport in December, particularly as people look to reunite with loved ones over the Christmas break.’
• Games Workshop has updated on trading saying that ‘our preliminary estimates for the six months to 29 November 2020 indicate sales of c. £185 million (2019: £148 million) and profit before tax of not less than £90 million (2019: £59 million).’ It says ‘we are delighted with the global team performance in the first half given the backdrop of major projects and some government restrictions. Further updates on performance will be given as appropriate.’
• The government is proposing a wide-ranging review of gambling laws that will consider banning sports sponsorship and limiting online casino stakes. The review, says The Guardian, could lead to ‘vast swathes of the Gambling Act 2005’ being rolled back.
• The Guardian quotes ‘multiple sources’ as saying ‘officials at the Department for Digital, Culture, Media and Sport (DCMS), which is leading the process, would take aim at almost every area of gambling law, in what one insider termed a “reformer’s shopping list”’.
• Santa Monica-based Esports One has raised an additional $4m in funding.
• The City of London Corporation is reported to be ‘bailing out’ the Barbican in order to head off problems. The Telegraph reports that ‘a string of theatres up and down the country have fallen into administration or have had to cut jobs.’
FINANCE & MARKETS:
• Post-Brexit trade talks are ‘going down to the wire.’ The Guardian reports that there has been a significant breakthrough in discussions over fish.
• The pace of jobs growth in the US slowed sharply last month. The country and its corporations are dealing with a major second wave of Covid-19. Employers added 245,000 jobs in November and the jobless rate dropped to 6.7% from 6.9% a month earlier.
• Markit has produced its PMI for the UK Construction Industry saying that the data ‘indicated a sustained recovery in UK construction output, with the rate of expansion accelerating from the previous month.’
• The PMI was 54.7, up from 53.1 in October. Markit says ‘UK construction output stayed on a recovery path in November and there were signs that the main growth driver has transitioned from catch-up work to new projects.’
• Sterling lower at $1.3412 and €1.1056. Oil lower at $49.07. UK 10yr gilt yield up 2bps at 0.35%. World markets broadly better on Friday but Far East lower in Monday trade. London set to open up around 15pts.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front page headlines of most of the Saturday papers were all about the breakdown in the Brexit deal talks: the Times took the Government line (“France derails Brexit talks”), whilst the Daily Mail went with “Le Bust-Up” and the Telegraph ran with “EU’s 10-year fishing demand”. The Guardian simply flagged that “Brexit talks go to the wire as PM steps in”, whilst the FT went with “Johnson in EU call to unblock talks”.
• Saturday’s Press and News (2): In terms of Retailing stories, there was plenty of coverage of the Primark trading update on Friday, with the Times and the Daily Mail highlighting the £430m of lost sales caused by the second lockdown, while the Guardian focused on the news that trading has been “phenomenal” since Primark stores reopened. The veteran City Editor of the Daily Mail noted that Primark and Top Shop “have more in common than you might think”, but he flagged that Primark has been run for the long-term. But the FT came to the rescue of Philip Green, with a supportive column by a former Retail correspondent headlined “Wolfish? Green is a lamb by private equity standards”. Talking of private equity…the Times had a feature headlined “Debt before dishonour on Britain’s High Street”, highlighting “Three retail kings who lost their crowns” (Philip Green, Philip Day and Peter Simon)
• Saturday’s Press and News (3): In other news, the Business Rates relief debate continued to rage…The Daily Mail highlighted the 4 Food retailers still holding out (Waitrose/JLP, M&S, Iceland and the Co-op) and the Business editorial in the Telegraph looked at the “Rates rebels under pressure”, noting that the defence by Waitrose is unconvincing and that Kingfisher/B&Q have yet to explain their position. The Telegraph and the Guardian both flagged that Lidl and Pets at Home fell into line on Friday on returning Business Rates and the Times noted that the Amazon-owned Whole Foods has also done the decent thing. Otherwise, the Times highlighted that the Ann Summers chain has launched a CVA to cut store rents, the Telegraph noted that there has been an MBO offer for the bankrupt Peacocks chain and the Guardian flagged up the 27% slump in new car sales in November reported by the
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were mostly about the brinkmanship over the Brexit deal talks: the Sunday Times, slightly shockingly, went with “Cabinet backs Johnson over no-deal Brexit”, whilst the Sunday Telegraph ran with “”Final throw of the dice”” and the Observer went with “Military planes to fly vaccines in to avoid ports hit by Brexit”, but the Mail on Sunday flagged that “The Queen “will get vaccine in weeks””.
• Sunday’s Press and News (2): In terms of Retail stories, the big news was the Sunday Times splash that #MadMike has made a last-minute bid to rescue Debenhams (with talk that Frasers may operate all 124 stores for 12 months under licence), although the similar Mail on Sunday story implied that he is only interested in c30 Debenhams stores and the Online business. The Sunday Times also had a snippet in its Debenhams article that final bids (including from one Mike Ashley…) for the flagship Intu shopping centre at Trafford Manchester only came in at about £900m (compared to the £1.7bn valuation in February). The Sunday Times also had a big feature on the future of Business Rates (“Fresh light shines on painful tax as stores return rates”), noting that the Treasury will have to do something to protect its revenue, with many retailers screaming for action on the way Amazon has exploited
• Sunday’s Press and News (3): In terms of all the Economics and comment columns in the Sunday papers, there wasn’t as much about Brexit as you might have expected, but there was a good article in the Sunday Times about the threat to the City from other financial centres like Paris: “What’s the City got to do with the price of fish?”. And, we would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“If Scots want independence, they’ll have to pay a lot for it”), in which he noted that “Stranger things have happened than people voting for something that makes them poorer”.
Today’s News: Monday is normally a quiet day for company news, but today is different…On top of the delayed Ted Baker interims (which show a massive underlying loss of £39m for the 28 weeks to Aug 8th), Kingfisher has joined the flood of retailers to follow the lead from Tesco in repaying Business Rates relief (£130m for the UK and Irish businesses, of which £110m falls in the current year), Games Workshop has upgraded its first half profit forecast again (it now expects not less than £90m, versus an estimate of £80m made only a month ago and the £59m profit in H1 last year: the six months to end Nov), the recently floated The Hut Group has significantly upgraded its Q4 and full year sales growth guidance and the hapless Frasers Group has confirmed the press speculation that it is trying to tie up a quick rescue deal for the UK operations of the bankrupt Debenhams.