Langton Capital – 2021-04-19 – PREMIUM – Reopened sites, roadmap, Deliveroo, Leon, Hawthorn etc.:
Reopened sites, roadmap, Deliveroo, Leon, Hawthorn etc.:
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A DAY IN THE LIFE:
Langton is coming down to that London later this morning, and about time too.
Because the Capital has clearly been struggling without us and, though this will only be the third trip in the last 12 months, a pale shadow of the more usual 30-40 visits, it’s better than nothing and, with London flat on its back, we’ve got to do our bit to help.
But pulling together the files, computer essentials and toothbrushes necessary to make such a trip, it occurred to us that the feeling ‘I’m too busy to go back to work’ is likely to be quite widespread. Because between refilling the bird-feeders, estimating the number of bricks needed to rebuild our outside loo and haggling with the lawnmower repair man, I haven’t had a moment to spare, so where will I possibly find the time to commute and do a day’s work into the bargain?
Well, needs must, I suppose but there are reasons to be cheerful, Hull City and reopened pubs to name but two. On to the news:
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OUTDOOR RE-OPENING – THE FIRST FULL WEEK:
How many units were open?
• CGA and Alix Partner’s Recovery Monitor reports that ‘a total of 20,832 venues were trading again by Thursday 15 April—23.2% of England’s 89,953 known licensed sites.’ The monitor confirms that a larger proportion of pubs (versus restaurants) were open, a function of the fact that there is a greater change that they would have sufficient outside space to make reopening practical. The recovery stats suggest that 39% of food pubs reopened in England alongside 32% of community pubs and 30% of high street pubs. The monitor suggests that only around 12% of independent restaurants reopened and only c24% of casual dining, chain units (although some sites closed for sit-down may have continued with delivery). Within pubs selling both food and drink, drink sales were the stronger. There will doubtless be a weather impact here.
• Langton comment: These stats and others confirm that, though we’re all in it together, not everyone is equally impacted. CGA and Alix Partners say that there was little difference in reopening patterns across England’s regions but there is a definite split between suburban and urban units and between pubs and restaurants (partly because the latter are underrepresented in suburban areas).
How has reopening been received?
• Trade bodies UKH, BBPA and BII have ‘welcomed the reopening of pubs and restaurants who have outside areas, but have warned that there is still a long way to go for businesses to recover from the devastating impacts of the pandemic.’ This is clear from the statistics. This is a ‘not good but better’ state of affairs. The trade bodies, unsurprisingly, ‘are calling for Government to extend the business rates holiday for at least a further three months to allow businesses to get back on their feet.’ They say ‘the majority of businesses are still in very real danger of failing’ and say that, even when indoor trade resumes, because of distancing and other measures, trade will not be back to normal. They say, post Step 3 (indoor trading) operators ‘are estimated to only reach 56% of turnover when compared to pre-pandemic figures.’
• UKH, BBPA and BII says ‘almost a quarter of those [operators] surveyed believe that their business will be unviable before the end of the year based on current trading estimates. A joint spokesperson for the trade bodies said ‘our sector will have a long and rocky road to recovery, especially while any restrictions remain in place in our venues. After a year of closures and strangling restrictions, they are entering the summer, crippled with debt, having to employ more staff to manage the huge number of complexities surrounding Test & Trace data collection, enhanced cleaning regimes, table service and many more requirements placed on their businesses.’ The trade bodies believe that ‘even when restrictions are fully lifted in June, our members will still only be achieving 80% of the turnover seen in 2019, a figure which at any other time would have been untenable.’
• Langton comment: Some of the numbers coming back from operators – admittedly only after one week of trade – are actually very good. This is to be greatly welcomed but it is perhaps inconvenient when the trade bodies referenced above are lobbying for more taxpayer support. The ‘good trading’ however needs to be caveated in a number of ways. Not all units are open, this is a short time period, the weather has been abnormal, operators have benefited as would-be customers have been suffering from cabin fever etc.
• However, we would point out that, when buying shares in pub or restaurant companies (or when deciding as a bank to lend money or as a landlord to provide premises or as a supplier to supply food or drink) you do not supply (or buy) ‘the industry’ but rather a specific company. This is meat & drink to stockbrokers, who say that you need to be ‘stock selective’ and, in this at least, they are correct. Hence, as death is a fact of life, (relative) failure is a fact of business. It’s harsh on those operators who have struggled because of a major event from left field, a true ‘Black Swan,’ but this has been faced by all operators and some have been fortunate (or better) in dealing with the upheaval than have others.
Food versus drink:
• We mentioned last week that early feedback suggested that drink sales were stronger than food. This has remained the case. CGA now reports that ‘drinks enjoyed a 75% share of sales by value on Monday (12 April)—21 percentage points higher than the 54% share they took on the equivalent day in 2019.’ It says ‘beer, cider and other long alcoholic drinks took a 61% slice of drinks sales—slightly ahead of a 58% share back in April 2019. World lager grew its share of draught lager sales from 31% to 44% to make it the category with the sharpest upswing, at the expense of standard lager, whose share dipped from 41% to 26%.’ This is clearly a very short sample period and it will be heavily impacted by the weather.
• Langton comment: Consumers are perhaps most keen to partake of a drink because, whilst we have clearly been feeding ourselves, a pint of draft ale has been beyond us for some time. CGA says ‘as more normal visiting patterns resume and inside trading returns, we can expect splits of drinks sales to settle back nearer towards pre-lockdown levels, but some important differences in preferences are sure to settle for the long term. Understanding how the pandemic has changed people’s habits, and adapting range and price to suit both enthusiastic and more cautious drinkers, will be vital as operators and suppliers establish the new normal of drinking out.’
• Very true over the medium term. In the short term, we believe that menus, already streamlined, may even be cut back a little further. If consumers continue to favour drink over food, some operators could go to snack menus and, if all goes well, this should provide customers with what they are after and provide wider margins (even before the 5% VAT) for operators into the bargain.
Putting this into context:
• This is a very short time period, the weather has been good, comps are meaningless re 2020 and Easter-distorted re 2019, the consumer has been suffering from cabin fever, the savings ratio has risen etc. And we are only hearing from a minority of operators (or at least a minority of operations) as most units remain closed. CGA’s Karl Chessell says ‘the return of outdoor service is a welcome first step on the road to recovery for England’s hospitality sector, and for pubs in particular. Venues that have been able to open have worked hard to give people the eating and drinking out experiences they have missed for so long, but they remain subject to major operational constraints and the unpredictability of the British Spring weather.’
• CGA says ‘three in four venues in England remain closed, and while some may open over the next few weeks, we will have to wait another four weeks until it is feasible for many hospitality venues to reopen again. Until then, operators deserve support from local authorities to make the most of outdoor trading space—not to mention some sunshine.’ Alix Partners adds ‘while reports of strong consumer demand this week are welcome and while operators are driving sales where possible through use of their outside spaces, the stark reality is that this trading represents a small proportion of normal revenues and most will be making a loss. Many challenges remain during this reopening phase and the months ahead.’
• In no particular order, it is worth saying that:
o Well prepared operators have been rewarded for their efforts with marquees and covered areas very much in demand.
o Freehold owners could / should have broken even at lower levels of turnover than leasehold operators. That said, any contribution towards fixed costs should have been welcomed.
o There are more than just financial reasons for reopening. Staff will be rusty and perhaps nervous. Equipment will need to have the dust blown off. And any open operator stealing share from a shuttered site will be looking to hold on to it.
o Customers may remain loyal to opened sites. Open sites may pick up more forward bookings than those that are shut.
o When it comes to ordering ahead of the indoor reopening on 17 May, suppliers may be more positively inclined to sites that reopened than to those that didn’t.
o There are calls from operators and trade bodies in Wales and Scotland for those country’s governments to open up more rapidly.
PUBS & RESTAURANTS:
Other Covid-19 issues:
• A letter in the Sunday Telegraph from some 38 of the UK’s biggest hospitality firms is urging the prime minister to “stick” with England’s roadmap to reopen the economy. The letter also cautions against the introduction of vaccine “passports”. The letter is signed by, amongst others, the CEOs of Mitchells & Butlers, Fuller’s, Young’s, JD Wetherspoon, Pizza Hut and Alton Towers owner Merlin.
• The Financial Times has reported that staff shortages may be a feature post Covid as many staff have left the country. The FT quotes M&B CEO Phil Urban as saying ‘we have some businesses where we have lost quite a few of the team [and because of furlough] it is not until now that operators have realised that they may not have all the staff come back.’ UKH says the problem of labour shortages “was just emerging.”
• Property owner Hammerson is reported to be cutting rents for some of its retail tenants by 30%. It isn’t clear for how long. There has separately been a move towards more flexible leases and revenue based rental charges.
• Deliveroo’s shares gave up another 5% on Friday to hit a new low of 247p. The shares’ IPO price was 390p having earlier indicated a range of between 390p and 460p. See also comments last week.
• Langton comment: There may be other forces at play as well but we see the main issue with Deliveroo as the need for the company to prove that its business model is capable of generating a profit. Because, with new geographies, Deliveroo Plus (subscriptions), Deliveroo Editions and Deliveroo Signature, there’s quite a bit of pivoting going on without an obvious proof of concept. There is a big difference between making a model profitable and simply making a loss-making model bigger.
• Owners of ASDA and Euro Garages, the Issa brothers, have bought fast food chain, Leon, which has over 70 restaurants across the UK and Europe. Leon, which has been on the go since 2004, owns and operates some 42 restaurants with the remainder operated by franchisees. Leon boss John Vincent is quoted saying ‘in some ways this is a sad day for me. We have tried hard, done some good things, made a healthy amount of mistakes, and built a business that quite a few people are kind enough to say that they love.’ The Mail on Sunday has said that the chain could be ‘worth’ up to £100m though there is no confirmation as to the transaction value.
• In addition, The Sunday Telegraph reports that the Issa brothers have bought around £140m of loans made to Caffe Nero from Swiss private equity firm Partners Group via investment bank Morgan Stanley. It says that the brothers remain interested in taking control of the company. City AM says Partners Group wished to exit the debt. It quotes a City AM spokesperson as saying ‘we have had a successful winter and spring trading and are generating positive cash flow and are ahead of forecast for the last five months.’ The company says ‘we are forecasting no covenant issues in our projections over the next 12 months and we look forward to an even brighter future post May 17 when we open up our cafes fully to the public.’
• Langton comment: The Issa brothers, who earlier this year bought ASDA, are clearly on a mission. They had earlier been reported as having shown an interest in Caffe Nero. Though that did not progress at the time, it would appear as though interest has reignited. Regarding expanding in the hospitality space, timing will be key. Over the medium term, it is likely that hospitality will be an area of growth in the UK but, in the very short term, there are substantial problems to overcome. There are some large bets being placed, not least by the Issa brothers. Whether they (and others such as Boparan, which bought Carluccio) are early or not remains to be seen.
• Hawthorn Leisure, which may float on the London Stock Exchange, is looking to significantly expand its estate. CEO Mark Davies says ‘we are 700 or so pubs today, we would like to get to 1,000 pubs at some point soon and we can probably get there quite quickly. Longer term, we could at least double the size of the platform from there or possibly go even further.’ He adds ‘we will be patient, opportunistic where we can be but we are ambitious and dynamic and the management team can do deals. That’s how we built Hawthorn to what it is today so all of that is recognised.’
• C&C Group has this morning announced that its subsidiary, Matthew Clark Bibendum Ltd, became aware on Friday ‘that it was the subject of a cyber-security incident, which has impacted both Matthew Clark and Bibendum.’ The company says ‘MCB responded quickly, enacting its cyber-security response plan and shutting down all of its IT systems. A leading forensic information technology firm and legal counsel have been engaged to assist MCB investigate the incident and restore its IT systems as quickly and as safely as possible. The issue has not affected the IT systems of the wider C&C Group, which continue to operate as normal.’
• C&C says ‘due to the ongoing COVID-19 restrictions, MCB is operating at reduced volumes and, in order to minimise the impact of the incident on its operations, is temporarily supporting customers and suppliers manually, while IT systems are being restored.’ It adds ‘MCB is in the process of informing its customers and suppliers of the incident and the actions the Company is taking and has notified the relevant authorities, including the Information Commissioner’s Office.’
• On the heels of Deliveroo, Soho House, Music Magpie and Hawthorn Leisure, another company that may list its shares. This is either a sign that demand for leisure shares is healthy or that the current owners want to get out (or both).
• The Telegraph reports that Yo! Sushi ‘is exploring a stock market listing as it invests in a major expansion into supermarkets and the US and seeks to navigate a post-Covid recovery.’ The company was purchased by Mayfair Equity Partners for £81m in 2015. The Telegraph reports the ‘company paid $100m (£72m) for Canadian sushi brand Bento Box in 2017 before merging with American rival Snowfox in 2019, giving the combined group an enterprise value of $400m.’ It says ‘the company has been shifting its focus in recent years to selling pre-packaged sushi and opening kiosks in supermarkets such as Sainsbury’s and Tesco. This month it secured a deal with WH Smith to start selling its Food To Go range in some of the retailer’s hospital and travel locations.’
• Heineken says it will be carbon neutral in its own production by 2030 and its full value chain by 2040.
• Rosa’s Thai Café plans to open up to six new restaurants over the next year.
• Former Carlsberg Marston’s Brewing Company head of HORECA Matt Kelly has developed and launched a new retail concept that is centred around a drive through Craft Beer Growler filling station for market towns. Matt reports that the first location for the Filling Station is the market town of St Ives in Cambridgeshire and it will primarily support local breweries from across the surrounding county. Matt reports ‘the business offers a draught tap wall of 10 frequently changed brews from the fantastic breweries across Cambridgeshire and neighbouring counties, mixed with the best of the UK brewing scene.’
• Crazy golf concept, Pop Golf, will open this May at BOXPARK Wembley.
HOTELS & LEISURE TRAVEL:
• Plenty of horror stories about delays at Heathrow. A lot will depend on whether this is the new normal, or not. Hopefully not. One contributor writes that the attitude towards passengers is ‘you flew, this is your fault’ from staff. We tweeted on Friday ‘travel but don’t travel. But travel. Clear? Gov. is maybe opening the door whilst holding it shut. Vaccine passports, 6hr queues, quarantine & traffic lights stuck at red could allow illusion of freedom without granting any. Power kick or sensible? Or both?’
• Research produced for IATA suggests that Covid testing could increase that cost of travel by as much as 160%. As a part of a holiday (including accommodation, car hire etc), it will be a smaller but still material increase. The study points out that, for a family of four flying into and out of Spain, some 16 tests could be demanded. A survey undertaken by Great Rail Journeys has suggested that its customers believe the cost of Covid tests to travel abroad should be under £50.
• Some puzzlement as to why Boris Johnson is bigging up lockdown & de-emphasising the vaccination programme
• AIDA cruises is to offer new cruises in Greece from May 23.
• Disney Cruise Line is set to put its UK sailings this summer on sale on April 30.
• STR reports that ‘nearly half of all U.S. hotel markets performed at “recovery” or “peak” levels during the week of April 10.
• Eurostar is reported to have signed a deal with its lenders to refinance debt
• MusicMagpie has confirmed its intention to float.
FINANCE & MARKETS:
• Writing in the Daily Telegraph, economist Roger Bootle says that the UK economy’s recovery is likely to bring with it a return of inflation. At the moment, forecasts are modest. Bootle is suggesting the rate could rise above 2% later this year. A rise in inflation could be associated with a rise in interest rates.
• Sterling stronger at $1.3854 and €1.1582. Oil lower at $66.67. UK 10yr gilt yield up 5bps at 0.77%. World markets broadly better on Friday but London set to open around 3pts lower.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-pages of the Saturday papers were dominated by the final preparations for the funeral of Prince Philip, with many carrying a previously unseen photo of the Queen and her husband in 2003 relaxing on a hill in Scotland, although the main headline in the FT was about the continuing Greensill scandal (“Cameron pitched Greensill to Berlin official as probe deepened”) and the FT also had a banner headline to flag up a big feature on “How sleazy is British politics?”. The Guardian went with the headline “Green light for pregnant women to have Covid jab”.
• Saturday’s Press and News (2): In terms of Retail and other stories, the main Business headlines were about the news that that the FTSE 100 index got through the 7,000 level on Friday, to hit a 14-month high, but there was also plenty of coverage of the news that Ocado has invested in the autonomous vehicle software company Oxbotica: the Guardian headline was “Could robots take over from Ocado delivery drivers?”, whilst the Times said that “Ocado wants its robots to walk into your kitchen”. In other news, the Daily Mail, the Telegraph and the Times all flagged that Asda has lost another top executive, the CFO Rob McWilliam. And the FT and the Guardian both highlighted that the Co-op has announced big bonuses for its Directors, despite refusing to hand back its Business Rates relief.
• Saturday’s Press and News (3): The Times went to town on the recent news that the Czech tycoon Daniel Kretinsky has built up a c10% stake in Sainsbury (partly by buying some of the Qatari stake) and may have already made a c£40m profit on his share dealing (“Czech Sphinx is putting cat among the pigeons again”). The Times looked at Kretinsky’s other big moves, including stakes in Royal Mail and other European supermarkets and speculated that he may be trying to encourage industry consolidation. The Business editorial in the Times went further and predicted that one of Tesco, Sainsbury or Morrisons will receive a takeover bid by the end of the year. The news out on Friday morning that the Online retailer of second-hand phones, CD’s and other gadgets MusicMagpie (which operates as Decluttr in the US) is floating on the stockmarket on Thursday for £208m was picked up by the Daily Mail and
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were obviously dominated by the funeral of Prince Philip, mostly focusing on the fact that the Queen sat alone in the ceremony in Windsor, although the Observer ran with “Act now on sleaze crisis or lose red wall votes, Johnson warned” as its main story and the Sunday Times also flagged more damaging revelations about the Greensill lobbying scandal involving David Cameron (“Cameron sought access to NHS data at height of first wave”).
• Sunday’s Press and News (2): In terms of Retail stories, the IPO flop of Deliveroo is still causing ructions and the main Business story in the Mail on Sunday was that an independent research firm, The Analyst, has predicted that the share price could fall by another 40%…whilst the Business Leader column in the Observer focused on the debate about worker’s rights at Deliveroo, noting that in the analysts call on Thursday the boss Will Shu was unable to explain why riders can bring in substitutes to handle deliveries…The Mail on Sunday also flagged that the new owners of Asda, the Issa brothers, have snapped up the restaurant chain Leon, whilst the Sunday Telegraph noted that the Issa brothers are also closing in on the acquisition of the Café Nero chain. The Sunday Telegraph also flagged that the Yo! Sushi chain is looking at an IPO and took the fashion model photo opportunity
• Sunday’s Press and News (3): One of the main Business stories in the Sunday Times was that Nike is cracking down on store staff who help re-sellers flip designer trainers for profit…and followed that up with a feature headlined “Gen Z craze that spells trouble for fast fashion”, noting that “twentysomethings are buying and selling millions of pounds worth of “pre-loved” clothes on the Depop website” (and other second-hand clothing websites like The Nu Wardrobe, StockX and Vinted). The Sunday Times also highlighted the poor treatment of a Bangladeshi clothing supplier by the bankrupt Peacocks chain, whilst its “Inside the City” investment column looked at the recently floated Dr Martens and said the shares are an Avoid (“Dr Martens rocked too hard before its float”). Finally, the “Prufrock” gossip column in the Sunday Times noted that the former John Lewis boss Paula Nickolds is
• Sunday’s Press and News (4): In terms of all the Economics comment columns in the Sunday papers, we would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“Pluses and minuses of the return to business as usual”), in which he highlighted that “The shift to Online retailing has seen an improvement in productivity”. And we would also give the usual shout-out to the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“No Prime Minister – vaccines, not lockdown, are what is killing Covid”), in which he noted that “Britain is actually now quite close to the herd immunity we all dreamed of a year ago”. And the veteran Economics correspondent of the Observer, William Keegan, argued in his column that, despite the eruption of corruption and sleaze in the Government, “Johnson will not stumble until Labour tackles him on
Today’s News: The week has kicked off quietly again, with no major retail company news, although the Online gift retailer Studio Retail (which has a market cap of c£250m) has announced the result of its strategic review, which is basically to carry on as before and try and get group revenue up to £1bn (after a bumper final quarter, with sales up 88%) and sell the Findel Education business at last (to the private e
uity firm Endless, for £30m in cash).