Langton Capital – 2021-05-04 – PREMIUM – Rental debt, inflation, labour sourcing, overseas holidays etc.:
Rental debt, inflation, labour sourcing, overseas holidays etc.:
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A DAY IN THE LIFE:
Six degrees yesterday at 3pm up north with driving rain.
Not what the beer gardens ordered, that’s for sure and, as my various alarms, back up alarms and the like knew that it was Monday but not that it was a Bank Holiday, I was up just in time to see a bunch of ugly, wet-looking clouds appear from the south and blot out the sun and that’s the way it stayed all day.
Anyway, on a different topic, I had to give myself a talking to over the weekend as I’d started to eat an apple, found that it tasted like slightly flavoured, watery mush, and decided that I had to stick with it as I’d paid for it and couldn’t let it go to waste.
But as, unlike Langton, it was horrible, past its sell-by date and easily replaced by a fresher version, I decided that I could let it go to waste so I threw caution to the wind, binned it and had another one.
A small triumph over my Yorkshire genes here but it might not last. On to the news:
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PUBS & RESTAURANTS:
• UKH has called for ‘decisive Government action on rent debt to help safeguard sector recovery and protect up to a million hospitality jobs.’ It has written to the Government ‘urging it to adopt its [UKH’s] proposals to help tackle the £2.5bn rent debt crisis that threatens to wreck the hospitality sector’s recovery and risks further widespread job losses.’ It says the moratorium on eviction has kicked the can down the road but nothing more. It says government action to date ‘has not dealt with the huge amount of commercial rent that is still technically owed and which will be demanded by landlords once that ban expires.’
• UKH suggests a further 6mth extension on protections and ‘the developing of a national-level adjudication process on ‘legacy rent debt’ that should aim to share the pain of closure (with at least 50% of rent debt written off for this period, and at least 25% written off when the sector operated under restrictions).’ It calls ‘for landlords and tenants to come to reasonable repayment terms, led by guidance and further protections if necessary.’ CEO Kate Nicholls said: “The time has come to get this issue sorted. As a starting point, our overriding principle is that businesses and landlords have to share the pain caused by enforced closures and restrictions. With the right outcomes, we can help to protect the hospitality sector in the short-term and accelerate its recovery – contributing to more jobs and reviving high streets and communities.’ She adds ‘we are concerned that the removal
• Langton comment: There are a number of elephants in the room and this is definitely one of them. UKH ‘warns that while some landlords have adopted a collaborative and supportive stance to tenants, there is also a significant swathe of commercial landlords that have rejected this approach and are being heavy handed and aggressive.’
• This is no doubt true. But many commentators have suggested over the years that it’s a good idea to look at issues from the other guy’s point of view from time to time. With that in mind, landlords a) may say that contracts are enforceable and were b) they entered into freely. They may c) point out that tenants could have competed aggressively to secure sites and they are now asking for rent to be written off and d) that tenants would never have shared the economic upside so why should the landlords share the downside. They may e) say that they have their own bills to pay and that f) poo rolls downhill and banks and the government and the taxpayer might ultimately have to support them if they do their bit for tenants.
• It might be an idea to offer landlords some of the economic upside if they play ball in the short term. This can be done (unpopularity alert) via converting some of their debts into equity in their tenants’ business but it could also be achieved via turnover rents. These could, just could, be set at somewhat high levels in order for the landlord to feel that he/she was recovering some of their previously foregone rent.
• On this topic, Virgin Active is in the High Court attempting to reschedule liabilities – including rental liabilities. Landlords are playing hardball. Car park company NCP has said it needs to have its rents cut in order to survive and other companies, including Caffe Nero, Travelodge and many others, have faced objections to proposed amendments to liabilities.
Supply & operating issues:
• Though the weather has let the side down in recent days, reopening has gone relatively well. Attention is now moving on to staffing, beer shortages, supply lines etc.
• Staffing. The Guardian runs a major piece saying that ‘the hospitality industry is facing a staffing crisis as restaurants and pubs say that up to a quarter of those employed before the Covid-19 pandemic will not return.’ It says M&B has lost 9,000 of its 39,000 staff and D&D needs to recruit 400 staff to plug gaps. Pizza Express is looking for 1,000 staff and many other operators are in the same boat. Chefs are in short supply and wage inflation could result. The Guardian point to Peter Borg-Neal, the chairman of pub owner Oakman Inns’ comment that the real scale of the problem would not be revealed until the furlough system ends in September and it becomes clear how many workers would never return.
• Beer shortages. The government and the weather forecasters have not been able to offer any certainty to the trade and the trade has been reluctant to commit to beer orders. Beer production is a chemical process and lags are inevitable. Shortages have developed. Suppliers, unsurprisingly, have favoured larger customers or those who have been prepared to place firm orders. Vertically integrated beer & pub companies have been in a relatively secure position.
• Lynx Purchasing says that ‘hospitality businesses should factor flexibility into their menu planning to deal with rising food and drink prices over the coming months.’ It says ‘as the sector reopens after the long winter lockdown, a number of factors are combining to create a “perfect storm” in inflation terms.’ Lynx says ‘suppliers are having to make educated guesses about levels of demand from their hospitality customers.’ It says that menu flexibility and engineering could mitigate some price pressures.
• Langton comment: Inflation is a double-edged sword. If you have pricing power, and you can put up your retail prices, it can widen margins. If you are a price-taker, then rising costs do the exact opposite. Just now, it appears as though prices to the customer are sharply higher in hospitality. Consumers may accept this for the moment but their money is finite. As more units reopen, prices may edge down. This could coincide with the tapering upwards of VAT on food.
• More generally, a number of indicators are flashing red when it comes to inflationary pressures. Government debt will need to be serviced & ultimately repaid. QE will slow & at some point go into reverse meaning that interest rates may have to rise. And labour shortages, inflationary price increases pushed through by operators, increased demand by both customers and operators for scarce resources etc. may also put upward pressure on prices generally.
• The general feel is that prices are going up. At the micro level, Lynx points to cost pressures in meat and poultry and in dairy could drive up prices. Fish, however, could be plentiful as failed export stock may be sold into the UK. Fruit & veg will need to be picked and packed (or imported) and price pressures could result. Globally traded products will be influenced by global factors but also by the Sterling exchange rate. The pound is holding up at the moment. Lynx says ‘our key advice is to work with trusted suppliers, and it may be that operators need to strike a balance between the established wholesale suppliers, who have worked hard to put secure arrangements in pace to ensure availability, and their more local suppliers.’
Other covid news:
• Social distancing: PM Boris Johnson has said there is a “good chance” that the one-metre plus social distancing rule in England will be scrapped on 21 June. He went on to say that, while some foreign travel may restart after May 17 “we have got to be sensible.”
• Lost sales: UKH and CGA’s latest quarterly tracker suggests that the Covid-19 pandemic has cost the hospitality sector more than £80bn in lost sales from April 2020 to March 2021. UKH says ‘it has been a catastrophic year for the sector and we are by no means out of the woods yet. Hospitality’s ability to reopen will remain massively hampered until the Government delivers on its commitment to dropping Covid restrictions and measures on Monday 21 June. Even then, with so many companies facing rent debts and business rates bills, after more than a year with little trading, many companies – and thousands more jobs – will be in jeopardy unless further support is forthcoming, particularly on tackling the rent debt crisis that threatens our recovery.’
• Legal actions: The High Court has ruled against a case brought by Hugh Osmond and Sacha Lord calling for a faster reopening for indoor dining in England. Sacha Lord says ‘while this fight has always been an uphill battle… we are pleased that the case has shone a light on the hospitality sector and the unfair and unequal guidance within the recovery roadmap.’ He adds ‘despite the outcome, we will continue to hold the government to account and demand evidence-based decisions, rather than those drafted without detailed analysis or based on bias or whim.’
• The Night Time Industries Association Scotland is to begin a legal action against the Scottish Government to challenge the validity of all legal restrictions currently being imposed on hospitality and the night time economy. It says ‘Scottish Government support has been wholly inadequate to compensate for operating losses and a majority of businesses have now incurred unsustainable debt as a result.’
• Landlord assistance: Major landlord Grosvenor Britain & Ireland has announced its first investment in a new tenant, JKS Restaurants, with a loan to support the launch of the business’ latest concept. Grosvenor says it ‘partners with over 500 retailers and food and beverage operators in Mayfair and Belgravia’ and has previously stated that it ‘would selectively invest in tenants with new business ideas, and diversification strategies.’ The landlord says ‘in helping businesses grow post pandemic, Grosvenor is taking an innovative and confident view on the success of Central London at a time when the market is at its most uncertain and access to traditional financing is interrupted.’ It says it ‘approaches each investment opportunity on a case-by-case basis but has the ability to offer a range of partnerships from debt to equity.’ CEO James Raynor says ‘right now operators wanting to
• Gigs. Some 6,000 partygoers in Liverpool were able to take part in the UK’s first restriction-free gig over the weekend.
• Tied leases. The BBPA has reported that Leased & Tenanted pubs received £27,000 each on average in support from operators over the Covid pandemic. It says ‘pub operators have received a fraction of this support from commercial landlords, with many receiving no rent waiver or even discount at all.’ The support ‘comes in the form of reduced or waived rent, as well as other support such as help with re-opening costs, refunds for spoilt beer and staff PPE. Just in terms of reduced rent and charges waived, this equates to around 85% of average annual rent.’
• Langton comment: The tenanted pub companies have provided significant support for their licensees. This has not been the case elsewhere. Publicans who were keen to go for Market Rent Only deals (with no beer tie) may have got what they wished for at the time but they may have been short of support during the Covid pandemic. The fluid boundary between paternalism and a patronising approach from the property owners may have irritated them but there are some advantages to having the property owner and the tenant on the same page economically. A free market rental situation is perhaps more adversarial.
• The BBPA says the ‘contrast between leased and tenanted pub support and commercial landlord support highlights the benefits of the unique leased and tenanted model, which sees entrepreneurs work in partnership with pub operators to run their own pub businesses.’ CEO Emma McClarkin says ‘the last year has shown just how important the leased and tenanted model is in ensuring Britain’s unique pubs survive and thrive. Without it, thousands of pubs wouldn’t be in the position they are today to reopen and recover.’
• No shows. CGA reports that no-shows have blighted an otherwise busy reopening for operators. It says up to one in seven customers who has made a booking is failing to show up. CGA says ‘one in seven (14%) consumers have not fulfilled their bookings. While some cancelled their reservations ahead of time, around one in 12 (8%) admits to being a no-show after failing to tell their venue they would not be visiting.’ The situation could be an ongoing problem. CGA says ‘bookings are going to be at the core of operations for a long time to come. Venues may need to consider and communicate new policies around their reservation terms, and make it as easy as possible for people to cancel so they can reallocate valuable space.’
• KAM Media reports that ‘there is a huge appetite from consumers for bringing hospitality brands into their own homes.’
• UK Inbound has stressed the importance of inbound tourists in driving city centre recoveries.
Company & other news:
• Domino’s Pizza Group plc has confirmed that the transaction to sell Domino’s Sweden completed on 2 May 2021.
• German meal-kit delivery company HelloFresh reported today that its active customer base grew by 74% in the first quarter, as the trend of cooking at home persisted
even as lockdowns across markets such as United States, Australia and Britain are being eased. The group has confirmed its 2021 forecasts, which were upgraded in April, of currency-adjusted sales growth of between 35% and 45% and adjusted EBITDA margin in a range of 10% to 12%.
• Nightcap, the newly listed bar company that owns the London Cocktail Club estate, has announced it has agreed to acquire the Adventure Bar Group. The company reports ‘upon completion of the Acquisition, Nightcap will become the operator of an additional nine bars. The bars being acquired are seven established themed bars located in popular London locations, a large outdoor bar, food and entertainment venue in Birmingham, a bar site opening in Birmingham on 17 May 2021 and a 50% interest in a central London roof-top bar. Nightcap ‘announces that it is currently seeking to raise approximately £4 million (before expenses) by way of a proposed placing.’
• Nightcap says the ‘acquisition provides Nightcap with new customer offerings and significant brand roll out opportunities.’ Re current trading, it says ‘five of The London Cocktail Club bars which have access to outside seating areas reopened on 12 April 2021 and, in line with other UK bar operators, these bars have since traded well and in line with management’s expectations.’ It adds ‘the remaining five London Cocktail Club bars are scheduled to reopen on 17 May 2021 and the Board is encouraged by the level of bookings received for the post-17 May 2021 period. Nightcap is currently in negotiations in respect of opening a number of additional London Cocktail Club sites.’ It says ‘as at 30 April 2021, the Group had unaudited cash balances of approximately £3.5 million and had total borrowings of approximately £1.3 million.’
• CEO Sarah Willingham says ‘I am delighted to announce the acquisition of Adventure Bar Group, so soon after our IPO and initial acquisition of The London Cocktail Club. Tom and Toby have built an enviable portfolio of amazing brands and venues which have delighted their customers for years. Bringing Adventure Bar Group into the Nightcap family was a logical step for them in pursuit of their ambition to realise the full potential of their brands. I am truly looking forward to working with them to realise that ambition. The further expansion of Adventure Bar Group will take place during a time where the opportunity to acquire first class property at attractive rates is unmatched by anything I have seen during my 25 years in hospitality.’
• Restaurant Dive in the US reports that a number of operators Stateside have looked closely at ‘ghost kitchens’ but have decided not to progress with them. It quotes Modern Restaurant Concepts as saying ‘driving awareness without having an actual physical location in a trade area just proved to be more challenging than we expected, and actual staffing and operations in a small format again proved to be more challenging than we were expecting.’
• Starbucks is reported set to hire 400 staff as demand recovers. See also staff shortages story above.
• The Zero Carbon Forum, the non-profit organisation leading the hospitality industry to net zero, has its new advisory board. Members include Andy Hornby of The Restaurant Group, Colin Hill of Nando’s, Emma McClarkin of the BBPA and Kate Nicholls of UKH.
• London-based digital restaurant platform Taster has raised $37m in new funding
• Asahi has bought NZ coffee company Allpress. The company sells more than 1,500 tonnes of coffee beans annually worldwide
• Keurig Dr Pepper has reported Q1 numbers showing an 11% increase in revenues. The company has raised revenue guidance for the year as a whole to growth of between 4% to 6% (was 3% to 4%).
HOTELS & LEISURE TRAVEL:
• A cross-party group of MPs has suggested that holidays abroad should be discouraged even when they are legalised. The MPs are concerned about the importation of a new strain of Covid. Their report says ‘the UK government should discourage all international leisure travel to prevent the importation of new variants into the UK, in order to reduce the risk of a third wave and further lockdowns.’
• STR has suggested that the UK will be the country that will lead the recovery of the hospitality sector in Europe.
• The CDC has confirmed that the US cruise industry could restart in mid-July
• In the UK, Disney has confirmed that adult customers for its Disney Cruise Line’s Magic at Sea UK itineraries must be fully vaccinated against Covid-19
• Destination Analyst in the US has reported that 87% of American travellers are expecting to take trips between Memorial Day and Labour Day (between 31 May and 6 September).
• The New York Times has reported that Europe could soon welcome fully-vaccinated US visitors.
• William Hill’s betting shop empire is reported to be up for sale
• Yahoo and AOL have been sold by Verizon to a US private equity firm
FINANCE & MARKETS:
• The Eurozone economy fell back into recession in Q1 this year when it shrank in size by 0.6%.
• The Nationwide reported on Friday that house prices rose by 2.1% in April, their largest monthly increase since 2004. Prices are up 7.1%, year on year.
• Sterling mixed at $1.3873 and €1.1525. Oil lower at $67.46. UK 10yr gilt yield down 1bp at 0.84%. World markets mixed, London set to open little changed on last Friday’s levels.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-pages of the Saturday papers were pretty mixed: the Guardian went with the allegations against the actor Noel Clarke (“TV shows cancelled as harassment claims grow”), but the Daily Mail went with the launch of its campaign for a Covid memorial in St Paul’s Cathedral (“Help us to remember the loved ones we lost”), the Times said “Hugs friends in a fortnight” and the Telegraph also flagged that “Holidays get the green light from May 17th”. The FT’s main headline was “Eurozone in double-dip recession”, but it also flagged that many English pubs have been running out of beer since re-opening…and that the Carphone Warehouse founder Charles Dunstone has quit as Chair of the Royal Museums Greenwich in protest at “cultural cleansing” by the Government…
• Saturday’s Press and News (2): In terms of Retailing and other stories, there wasn’t much to report, although the Telegraph had a striking photo of the huge queue of shoppers waiting to get into the Primark in Londonderry, after the re-opening of non-essential shops in Northern Ireland on Friday. The outlook for the pet market was a theme, however, with the Times highlighting the bullish update from the vet group CVS and the FT flagging that US petcare stocks have outperformed the tech-focused Nasdaq index over the last year, although the stockmarket is divided over whether stocks like Pets At Home will still do well post-pandemic, notwithstanding the support from homeworking and the new interest in pets from “millennials”. The Times also highlighted the view of the veteran M&S Chairman Archie Norman that Boardrooms need “younger faces”. The market report in the Times noted that
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were also very mixed: the Observer ran with “Two pandemics: as we ease up. Virus sweeps the planet’s poor”, the Sunday Times flagged “NHS draws up vaccine plan for schoolchildren”, the Sunday Telegraph noted “Billions for Scotland as PM bids to save Union” and the Mail on Sunday went with the road-map out of lockdown: “Three giant steps back to normal life”.
• Sunday’s Press and News (2): In terms of Retail stories, there was nothing particularly noteworthy, although the Sunday Times flagged that the administrators of Arcadia have kicked off the sale of the Top Shop Oxford Circus site for £420m. The Sunday Times also began a detailed feature on the vast fees made by accountants like Deloitte out of the collapse of many retailers and hospitality chains (“Money men who always win in the retail crisis”) with a look at the empty units visible in the re-opened Trafford Centre in Manchester. The Sunday Times also noted that the Online furniture retailer Loaf has put itself up for sale with a valuation of c£70m. The Sunday Telegraph flagged that Ocado is facing another investor revolt over excessive executive pay at its upcoming AGM and it had a big feature on the staff shortages emerging in restaurants and pubs as they re-open, although it
• Sunday’s Press and News (3): 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 (“There’s no silver economic bullet, but every little helps”), in which he looked at ways in which to boost the UK’s infrastructure and productivity. And we would also give the usual shout-out to the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“We are perilously close to another inflationary age, but no one cares”), in which he noted that “All over the shop, from shipping rates, to computer chips, steel varnishes, paint and polymers, prices have been surging”.
• Monday’s Press: Most of the Bank Holiday papers had front page photos of the pitch invasion that led to the postponement of the Man Utd vs Liverpool game, as well as reviews of the slightly underwhelming finale of the TV police thriller “Line of Duty”. In terms of Business stories, the warning by Warren Buffett at the Berkshire Hathaway AGM against the irrational nature of the US craze for investing in SPAC’s was widely noted. As for Retail news, the Telegraph and the Guardian picked up the story about Top Shop Oxford Circus being for sale, whilst the Telegraph flagged that WH Smith is considering using Dixons’ airport stores for its InMotion gadget chain and the Guardian noted that Sports Direct is in talks with EU tax authorities over the settlement of the VAT bill from its controversial Barlin Delivery company structure.
Today’s News: The last we heard from Frasers Group (aka the Sports Direct empire of #MadMike) it was moaning about the impact of the pandemic/lockdown on property values, but, out of the blue, it has announced today that it intends to start a £60m share buyback during the close season period up to the final results in July. There is no explanation for why it feels able to use its cash for this purpose and, needless to say, there is no update on how trading finished up in y/e April. Come to think of it, the company has said nothing about its performance since the interims in December…
This Week’s News: After the Bank Holiday yesterday, this week/May has kicked off quietly, but tomorrow brings the Boohoo finals and the latest monthly Nielsen grocery sales figures. On Thursday we then get the much-awaited Next Q1 update, the Trainline finals, the Superdry pre-close, the Howden AGM and the Zalando Q1 results (in Germany), together with the latest MPC meeting news and the Local Elections