Langton Capital – 2021-04-06 – PREMIUM – Deliveroo, reopening confirmation, R-rates, demand, overseas hols etc.:
Deliveroo, reopening confirmation, R-rates, demand, overseas hols etc.:
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A DAY IN THE LIFE:
I cut the grass at the weekend and, after wrenching the sit on mower around one too many corners, the steering rod snapped.
This left me spinning the steering wheel like an idiot while the mower kept going in a straight line. It then developed a bit of a list to the right and deposited me in a bank of thistles. I had to push it back to the garage and now find myself leaving messages on the answering machine of the local repair shop over what must be one of the busiest weekends of the year for mowers and the like, ignored all winter, to develop faults on their first or second outing.
On a brighter note, the Mighty Hull City (don’t ask which division we’re in, it will spoil the magic) has now taken 23 points from it’s last nine matches with seven wins and two draws.
That’s good by any standards but, elsewhere, we had email problems last Thursday. An unformatted version of our note had to go out to some subscribers. This wasn’t a chronically unfunny April Fool’s joke (see Deliveroo’s attempt at humour below) but hopefully it’s behind us now so, without further ado, let’s move on to the news:
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DELIVEROO: Horizontal vs Vertical Integration:
This matters because it should influence the way in which growth is viewed – and how it is valued.
Horizontal integration (or organic growth):
• Horizontal integration (i.e. just getting bigger doing what you do) works if there are substantial economies of scale. Think Netflix. Whether it distributes The Irishman to one subscriber or to 203.4 million subscribers will cost (with a little license taken here) the same. Think a recording artist. They write, record and market their record and it may sell no copies of ten million copies. If these are delivered via download rather than vinyl, the benefits of organic (same product) volume growth are obvious.
• Selling an existing product (that is paid for & which has negligible marginal costs of production) into a new market is a good idea.
• As mentioned, horizontal works if there are limited marginal costs. The marginal unit costs nothing. Or next to nothing. It does not work so well if an additional pizza still needs to be sourced and delivered. Indeed, marginal costs may not fall noticeably with volume for many industries. Yes, there will be a contribution to fixed costs – but there will still be a marginal cost of production (or delivery) and that won’t go away.
• If horizontal integration doesn’t magically generate free revenues, then it is doubly important that the business model, in its natural state, is profitable.
• This is perhaps riskier as it may involve completely different skill sets. It means an operator, e.g. Deliveroo, might choose to buy restaurants (or establish dark kitchens) in order to take more of the value chain.
• This can work. But, it’s very different to your initial business model and you may meet the other players in the value chain coming in the opposite direction. Or they may combine to favour a competitor.
• It’s possible that Deliveroo has come to the conclusion that it will need to vertically integrate. The company has had eight years to decide. As mentioned, this can work but it involves risk, adaptation and money. And the company that you buy today may not turn out to be the one that you own tomorrow.
PUBS & RESTAURANTS:
Covid – The rules:
• PM Boris Johnson yesterday confirmed 12 April as the day on which pubs & restaurants will be able to serve guests outdoors. Mr Johnson said there was no visible reason why the 17 May indoor opening would not go ahead as well.
• The PM said there ‘was no question’ of vaccine passports being demanded as a requirement for entry into pubs next week. He said there were no plans at present for 17 May either. The future thereafter was left slightly hanging. The BBPA has welcomed the reopening confirmation. However, it said it ‘was important to remember that just 40% of pubs in England – 15,000 – would be opening for outdoors service from the 12th, making it all the more important that the Government sticks to its roadmap dates to ensure pubs can reopen indoors from May 17th and without any restrictions from June 21st so they can all reopen and begin their recovery. It reiterated that those opening from 12th April will almost certainly be making a loss, but are desperate to welcome back their customers and serve their local communities.’
• The earlier leaked suggestion that all customers over the age of 16 will have to sign into pubs & restaurants via the NHS app from next week (not just one member of each group) has caused some concern as UKH and others have said it will add to pubs’ administrative burden. Pubs & restaurants will have to take “reasonable steps” to ensure this is done or face a £1,000 fine. UK Hospitality, the British Beer & Pub Association and the British Institute of Innkeeping have said the rules would add “more confusion and inconvenience for customers and staff”. The three trade bodies say that ‘it now seems the hospitality industry could be burdened with vaccine passports, over-complicated test and trace rules and an inability not able to take payments indoors at reopening – a triple whammy for hard-pressed publicans who have been forcibly closed for months.’
• The trade bodies referenced above say that they are incredulous ‘at the Government’s stealthy backsliding on pub reopening rules.’ Looking, perhaps, on the gloomy side, the bodies says ‘the review into Covid Status Certification, led by Michael Gove, looks likely to recommend that pubs and other hospitality venues must demand immunity proof from people, to allow them to enter – with the threat of fines for venues if non-compliant. This could prevent millions of young people visiting the pub for months, unless they get themselves tested in advance.’
• Langton comment: This (excluding younger people) would indeed be potentially very damaging as younger, would-be customers would have to devise alternative strategies when it came to their social life and these, by law, would not involve pubs. For a 21yr old, a third of his or her legal drinking years have already been disrupted by Covid and, if this continues for much longer, a whole generation of customers could be lost to the pub.
• Some may suggest that this is the pubs’ problem, rather than the tax payers’ or the government’s but, as the pub has provided a safe, legal and regulated environment in which to drink for many decades, driving drinkers ‘underground’ (which has arguably been happening as a result of widening price differentials for some years anyway) may not be a move in the right direction.
• The trade bodies say ‘adding further disproportionate and discriminatory measures threatens the very survival of thousands of businesses. It’s unfair to single out our sector again with these added impractical burdens that will have economic consequences and risk our recovery.’ They conclude ‘we We want to trade our way back to prosperity, not rely on state handouts but if Government insists on restricting our ability to trade then they will need to stump up more business support. We need to see a further extension of the business rates holiday through to October and more furlough support to save the millions of jobs we support.’
• A government spokesperson has said ‘no final decisions have been taken on whether COVID-status certification [vaccine passports] could play a role in reopening our economy.’ The BBC reports that Mark Harper, who chairs the Covid Recovery Group of Conservative lockdown sceptics, argues: “Covid status certification will lead to a two-tier Britain.”
• The NIESR estimates this weekly. It says it is currently between 0.9 and 1.0, unchanged on a week ago. As most over-50s have been vaccinated, and groups representing 85% of Covid deaths have had the jab, this (the R-rate around 1.0) is still consistent with improving health stats.
• Langton Comment: The NIESR says its number ‘is again higher than SAGE’s estimates. Our estimate was obtained after controlling for enhanced testing in schools that started when they reopened on the 8th of March.’ The good news is that ‘based on our model, by 12th April when non-essential retail is scheduled to reopen, we expect the trend value of daily cases to be around 3,800; admissions to be around 200, and deaths to stay below 50.’ It says ‘our forecasts for cases and deaths are unchanged relative to last week, but our forecast for admissions is higher by 100.’
• The NIESR says ‘cases are still decreasing but at a slower rate than they were when schools reopened. Looking ahead, the key as to whether the R number moves above 1 and cases start to rise will be the trade-off between increases in transmission due to increased social interaction and any effect the continued rollout of the vaccine has on reducing transmissions. Reassuringly, hospital admissions and deaths due to Covid-19 continue their steady decline.’
• S4 Labour suggests that ‘hospitality operators are forecasting 70% of revenue compared to the same week in 2019 (not 2020). The figure of 70% is somewhat remarkable considering that the vast majority of capacity, i.e. inside, will be unavailable. The research is also encouraging as the sector prepares to re-open with over a week left to secure even more bookings.’
• Langton comment: This is just for opened units. A large number of units (more restaurants than pubs, more high street than suburban) will remain closed next week as they simply do not have outside space. These units will see demand at 0% of normal levels. S4 recognises this and says ‘the figures represent only sites that are preparing to re-open on the 12th of April and it is important to note that a large number of operators either have no outside space or not enough outdoor space to make opening feasible.’ We would suggest that the fact that so many units will remain shuttered helps those that are open to drive revenues (and is part of the answer to the question posed by S4 Labour above).
• S4 says ‘there has been a scramble and huge investment to prepare outside spaces for the 12th of April, however, it comes with a large dose of caution as much of the pent-up demand could quickly be washed away with poor weather.’ Alastair Scott, MD of S4labour and owner of Malvern Inns who operate 3 pubs, added “we have seen an unprecedented amount of bookings in all of our sites with customers showing a clear desire to meet up and start enjoying hospitality once more”.
• CGA says ‘consumers are set to prioritise eating and drinking out in their spending after lockdown, but remain cautious about longer term financial impacts of the pandemic.’ It says 29% of GB consumers are ‘planning to spend more there [in pubs, bars & restaurants] over the next 12 months than they usually would. It puts hospitality ahead of international holidays (26%), domestic holidays (25%), clothing (22%) and home improvement (19%) in the list of priorities for spending.’
• CGA says prospective customers are confident about their safety but many remain cautious about the impact of the pandemic on their finances. CGA says ‘74% of the population remain concerned about financial implications, though this is down from a peak of 85% in April 2020. Numbers worried about finances have overtaken concerns around the health of friends and family (73%) and personal health (68%) for the first time since the start of the pandemic.’
• Clearsight takes a more cautious line, saying that ‘the improving public outlook on the COVID crisis suffers a setback in March.’ It says ‘after 2 months of consistent improvement in the public’s outlook from the start of the year, the positive trend comes to an end in March. Relatively few of us feel that there is cause to believe the worst is still come, but there is a prevailing sense that the UK now finds itself in something of a holding pattern – this, despite the fact that the long awaited relaxation of restrictions is within touching distance.’
• Langton comment: There is, we would think, room for some sort of ‘post traumatic’ response to set in post Covid (or at least when the majority opinion is that the worst is behind us). Unfortunately, we don’t know – and won’t pretend to know – what this is. The history books will have a much clearer opinion than any of us currently living through the pandemic in real time. The response could be some sort of euphoria (post WW2 baby boom, consumers spending boom etc) as suggested by Andy Haldane’s ‘wall of money’ theory. Or it could be somewhat (or greatly) more subdued.
• It could, indeed, be both, the one followed by the other. Anyone of this opinion will find examples (PTSD, the Roaring 20s followed by the Depression etc) to support the argument but, perhaps more tellingly, it is beginning to fit some of the feedback from CGA, Clearsight and others, that suggests there are some fears re the financial impact of the pandemic creeping into some people’s decision-making.
• Clearsight says ‘the mood of UK business leaders continues to improve.’ It says ‘business sentiment is now ahead of consumer sentiment. Nearly half of all decision-makers believe the worst has passed, while confidence in the government’s handling of the crisis has recovered to levels last seen in May.
• The Welsh Beer & Pub Association has responded to indications over the reopening of pubs in Wales. The indication is that they will be able to reopen outdoors from April 26th, with a view to reopening indoors between May 17th and the late May bank holiday.’ The WBPA says ‘we look forward to further discussions with the Welsh Government concerning the types of restrictions that will be in place and a funding package going forwards.’
• SIBA says the dates ‘are weeks behind England and there are no clear dates when indoor pubs will open. Struggling small breweries and community pubs only have an ambition from the First Minister that he will consider reopening in advance of the Spring Bank Holiday.’ It says ‘small breweries and the community pubs they serve in Wales have been badly impacted by this crisis and these delays show that more support is needed for the sector. In Scotland they have introduced a Brewers Support Fund and it’s now time that Wales introduced the same package before these businesses close for good.’
Other Covid news:
• The BBPA says UK pubs will miss out on selling 85 million pints this Easter due to forced closure.
• The Guardian says that vaccine passport were being considered in secret as long ago as December.
Companies & other news:
• Deliveroo shares finished last week 28% down on their issue price. Leader writers have had field day with the ‘wheels coming off the bike’ and renaming the company variously Floperoo, Stinkeroo and Deliver-oops. There have been calls for the company to withhold payments to its advisors. The Chancellor is questioned for his ‘true British success story’ comments. The company has been criticised for its pricing, its stance on worker rights, it’s split share structure, its timing etc. The papers have suggested that its future (post Covid) could be tougher than the recent past, not all of the increase in delivery spend will stick, and more.
• Langton comment: Deliveroo may have an efficient but unprofitable model. It hasn’t behaved in line with The Lean Start-up. That is, work out a business model and either fail fast or strike gold as, with the help of £1bn plus of accumulated losses paid for by shareholders, it has done neither.
• Which is perhaps sub-optimal. It might be unfair to say that the company has spent 8yrs building a square wheel. But it does still seem to be a long way from profitability and, if it needs to buy dark kitchens (let’s call them restaurants) in order to do so, then what has it really added? The company is physically highly visible but, surely, it will need to make money at some point if it is to have any real value.
• Having raised £1bn in new money, it may be that the real work begins now. Although some of the funds will have to be deployed to cover the group’s burn rate, a portion will need to be used to secure its future. If the company undertakes a land-grab in new geographies, then start-up losses are arguably more visible than future profits.
• French Deliveroo customers who received fake bills for hundreds of euros’ worth of pizza as an April Fool’s joke are reportedly unamused. The BBC says ‘many took to social media to express anger at the stunt. The Beeb quotes one customer as saying ‘he had “almost had a stroke” after receiving a €466 invoice for 38 pizzas that he had never ordered.’ Many spent a frantic few hours ringing their banks to block what they feared would fictitious payments.
• Loungers is to open a unit in Colchester as part of the £5.5 million revamp of the town’s old Co-op store.
HOTELS & LEISURE TRAVEL:
• PM Johnson said yesterday that there was no decision on non-essential overseas travel (including holidays) yet. There should be an update next Monday. This could be seen as a slight disappointment. The mood music worsened just over two weeks ago. The PM then said he hoped to update earlier than the planned 12 April (i.e. yesterday) but this did not happen. There seemed to be a confirmation that, when international travel is allowed once more, there will be a traffic light system in operation.
Switch to 2022 holidays:
• The PM’s cautious words yesterday evening (there will be a fuller update next Monday) may consolidate what seems to be a move to book holidays abroad for summer next year rather than for 2021. The Guardian says ‘in the past week, Thomas Cook’s 2021 bookings have been overtaken by bookings for 2022.’ TUI says that it has further cut capacity for this summer and put on additional flights for 2022. For an industry that desires certainty (given its high fixed costs) more than many others, the lack of clarity is damaging. TUI has reportedly added more than 100,000 holidays to its capacity for next summer. TUI says ‘we continue to see strong pent-up demand in the UK, with bookings for summer 2022 now around 120% higher compared to summer 2021 bookings. Bookings for May 2022 are recording an increase of more than 150% compared to May 2021.’
• Notwithstanding the above, PC Consultancy says around a dozen countries could be in a position to welcome British travellers by May 17 under a traffic light system. There is no clarity with regard to what the rules will be.
• Langton comment: The trade is reportedly ‘disappointed’ that the government has failed to provide any certainty re the possible resumption date of May 17 for leisure travel. Worryingly, PM Johnson has said that he is ‘hopeful’ that travel can resume but he has said that the trade and its customers must be ‘realistic’ about whether this will happen. ABTA CEO Mark Tanzer welcomed confirmation of the traffic light system and TUI UK boss Andrew Flintham has likewise said that the move is positive. Business Travel Association CEO Clive Wratten says any decision has ‘once again been kicked down the road’.
• Norwegian Cruise Line Holdings has pushed for a 4 July restart for sailings from the US. It says the date is ‘consistent with the CDC’s updated guidance that international travel is safe for fully vaccinated individuals and that Covid-19 vaccination efforts will be critical in the safe resumption of cruise ship travel.’
• Virgin Hotels is to open a 242 rooms unit in Glasgow.
• The IMF says that countries with a heavy reliance on tourism could be amongst those to feel damage for the longest period by Covid-19. Social trends such as flight-shaming might not help either.
• The CAA is reported to have confirmed the collapse of three firms this week, Ace Point Travel, Williams D and Travel Day.
• Carnival-owned Cunard has reported its busiest day of bookings in the UK for a decade. This in response to the offer of UK to UK cruises for vaccinated passengers.
• Comps are now much easier for travel and hotel companies. STR reports that US hotel occupancy is up 161% on the same week last year for the week to 27 March. STR has reported that US hotel profitability is at its highest since Feb last year. This is as expected. Comps over the same week in 2019 might be more meaningful.
• Film Godzilla v Kong is reported to have set a new global record for pandemic-era filmgoing taking over $385m since it was released two weeks ago.
• Gyms are still on track to reopen next week.
• The UK government will trial measures in England, including Covid passports, to allow the safe return of sports matches & events.
• App spending in Q1 this year hit a new record. App Annie suggests that $32bn was spent through apps in Q1 this year, up 40% on last.
FINANCE & MARKETS:
• Markit reports that the ‘upturn in the UK manufacturing sector gained further momentum at the end of the third quarter.’ It says its PMI hit a decade high of 58.9 in March, ‘its best outcome since February 2011.’
• The FT reports that the UK household saving ratio rose to a near record high in the final quarter of last year.
• The US economy added more jobs than expected in March, at 900,000 positions.
• Sterling stronger at $1.3908 and €1.1774. Oil lower at $62.54. UK 10yr gilt yield down 5bps at 0.80%. World markets broadly higher last seen but London set to open down around 25pts.
RETAIL WITH NICK BUBB:
• Nick is taking a well-earned break after this weekend’s comments. He’s back on 12 April.
• Friday’s Press on Next: The FT wasn’t published on Good Friday, but the FT website feature on Thursday’s finals from Next was headlined “Next lifts full-year profit expectations but warns on future of stores”. There was plenty of coverage of Next in the other papers, with the Times in particular going to town on the results, with a double-page spread headlined “Next clothes itself in glory with online surge” and the Business editorial in the Times raving about how the Next statement was “an object lesson in how to run an big business and communicate with colleagues and stockholders”, noting that CEO Simon Wolfson “sounds human, thoughtful, curious and deeply engaged with the machinery he’s in charge of”. The Telegraph also had a big feature on Next (“The high street is not going out of fashion, says Next chief”), flagging that “Simon Wolfson predicts a sharp economic recovery and
• Friday’s Other Press stories: In other news, the debacle over the Deliveroo IPO continued to generate plenty of coverage in the press on Friday, with the Times noting that the shares slid a further 2% on Thursday, to 282p. The Telegraph flagged that Deliveroo turned down a bid from a US “SPAC” before committing to a float in London and the Daily Mail highlighting that “Deliveroo flop leaves UK tech feeling rattled”. In terms of Business editorial comment, the Daily Mail flagged that UK fund managers gave the IPO of Deliveroo the “Snuberoo”, noting that they had turned a blind eye to the dual share structure at THG when that floated a few months ago, whilst the Guardian noted that although Deliveroo has been a “Floperroo” so far it would be wrong to stop giving private punters access to public offerings like this. The Guardian Business editorial also highlighted the bleak outlook for
• Saturday’s Press and News (1): The front-page headlines of the Saturday papers were very mixed: the FT went with the result of an analysis that shows that an independent Scotland would inherit a larger than expected hole in its public finances (“Price of Scotland breakaway rises”), whilst the Daily Mail ran with an exclusive extract from the explosive memoirs of Alan Duncan, the former Tory Deputy Foreign Secretary (“Minister savages Boris “the buffoon””). The Times and the Telegraph had the same photo of the Queen and her son walking in the gardens of Frogmore House at Windsor…with the Telegraph main story headlined “Foreign holidays for vaccinated” and the Times flagging “We’ll stop you getting sick, says NHS chief”. The Guardian went with an insight from the previous NHS chief: “Patients face “frightening” NHS backlog”.
• Saturday’s Press and News (2): In terms of Retail stories, the debacle over the Deliveroo IPO generated more coverage in the press, with the FT using the word “shaken” twice in the headlines of its two articles on the subject: “Retail investors shaken after Deliveroo’s downhill ride” (noting that individual investors who applied for shares have had their fingers burnt) and “Deliveroo’s founder is shaken but undeterred” (noting, in a profile of the founder, that Will Shu loves chicken nuggets and still occasionally does deliveries himself). The Times had a detailed feature on how the “Deliveroo fiasco threatens to rip up City’s IPO dreams”, noting that the “UK must decide if it is serious about tech”, although it quoted one banker who didn’t work on the float that Deliveroo is not a tech business but “a company with an app that uses underpaid people on bikes to deliver food” (!).
• Saturday’s Press and News (3): In other news, there were snippets in most papers about the prediction from the Centre for Economics and Business Research that Easter will see a boom in sales at DIY and garden centres while other “non-essential” stores stay closed…The Times flagged that Top Shop was “soulless under Philip Green” (according to Mary Portas in a radio interview) and also noted that the outdoor clothing brand Barbour scrapped its dividend to family shareholders last year. Tesco was the “Share of the Week” in the Daily Mail ahead of next week’s final results (with leaner times said to lie ahead) and the Guardian noted that almost 190,000 retail jobs have been lost over the last year, according to the Centre for Retail Research.
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were mostly about vaccine passports, eg the Sunday Telegraph went with “Passports to normal life…but not for months” and the Mail on Sunday trumpeted “Foreign holidays on track to start May 17th!”, but the Observer ran with “Starmer: I’ll take my mask off and show why I should be PM” and the Sunday Times highlighted “Johnson’s fears over lockdown illiteracy surge”.
• Sunday’s Press and News (2): In terms of Retail stories, there was plenty more about the Deliveroo IPO debacle. We failed to find an apology in the Sunday Times Business section for its highly misleading story a week ago that Deliveroo was expected to price its IPO towards the top end of its range…but the Sunday Times Business Editor, Oliver Shah, did jointly write a big feature on “How the political elite fattened up the Floperoo float”, highlighting that “behind Deliveroo’s disastrous debut is a clique clustered around the former Chancellor George Osborne” (including no less a personage than Simon Wolfson of Next, who is a non-exec Director of Deliveroo…). And the “Prufrock” gossip column in the Sunday Times noted that as Simon Wolfson of Next boasted on Thursday about not being reliant on grand strategy and vision statements he should have a quiet word with Deliveroo…The Mail on
• Sunday’s Press and News (3): In other news, the Sunday Times flagged that the bankrupt Peacocks clothing chain is set to be bought, controversially, by Philip Day’s right-hand man, Steve Simpson, snatching it from under the nose of Mike Ashley…The Sunday Times also had a feature on how the garden centres forced to close in the first lockdown are now “Back in bloom”, a feature on how the founder of Zoopla is backing Cazoo to dominate the second-hand car market (“”Amazon of cars” revs up for $7bn US Spac attack” ) and a feature on the problems that fashion brands like Burberry and H&M are having in China (“Brands’ great wall of silence over China”). The Sunday Telegraph had a feature on the family run department store Fenwicks (“Family-owned Fenwick aims to be the last department store standing”). The Mail on Sunday noted that the fashion brand Jaeger has brought in its own creative
• Sunday’s Press and News (4): In terms of all the Economics comment columns in the Sunday papers, the Sunday Times Business Editor Oliver Shah was on safer ground discussing the looming credit crunch in the main section of his column, headlined “The bursting tech bubble should inspire fear beyond Silicon Valley”. We would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“Will Britain’s consumers splash their stash of cash?”), in which he highlighted that “households, in aggregate, have built up a stash of cash. It is probably best that they do not splash too much of it too quickly”. And we also give the usual shout-out to the columns by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Britain has already missed the boat as peak tech fears floor Deliveroo”), in which he noted that “Marketed as tech, Deliveroo is in truth little