Langton Capital – 2021-05-25 – PREMIUM – Restaurant Group, Shaftesbury, roadmap, staffing, inflation etc.:
Restaurant Group, Shaftesbury, roadmap, staffing, inflation etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Having been forced (by teenage daughter not, honestly, by my own inclination) to sit through the Eurovision Song Contest last weekend, I was reminded that Will Ferrell’s film Eurovision Song Contest: The Story of Fire Saga, is almost as much a documentary as it is a comedy.
Because it’s both an enjoyable film in its own right and it’s very much on-point when it comes to satirising the music, the contestants and the contest and the hype and its only rival when it comes to parodying and making good natured fun of the contest is the contest itself.
Anyway, give it a watch. Bit pushed this morning so we’ll move on to the news:
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RESTAURANT GROUP – AGM STATEMENT:
The Restaurant Group has updated on its opening programme and our comments thereon are set out below:
• RTN says ‘in the financial year to date (20 weeks to 16 May 2021), there has been significant disruption affecting the Group’s ability to trade as a result of the various government restrictions imposed on the hospitality sector. For detail & comment see premium email & tweets.
• It says ‘given the unusual trading environment, there are no meaningful “like-for-like sales” comparisons for the financial year to date.’
Delivery & takeaway:
• Re delivery and takeaway performance in the six weeks to 11 April 2021, RTN says ‘the Group had approximately 200 sites trading for delivery and takeaway only across its Wagamama and Leisure businesses prior to the resumption of “outdoor dining” on April 12th.’
• It says ‘the trading performance of those sites was very encouraging with average standalone delivery and takeaway sales in Wagamama and Leisure tracking at approximately 3.0x and 5.5x pre-Covid-19 levels, respectively.’
• This period comprises the five weeks to 16 May 2021. The group says ‘in the five weeks to 16 May, following the easing of restrictions across the UK we have seen a very encouraging recovery in sales’
• RTN says at Wagamama (with c.130 sites open in this period), ‘sites traded at c.85% of comparable 2019 sales levels, representing a c.15% outperformance of the market, reflecting ongoing strong delivery volumes and good trading from outdoor space in many locations.’
• At the group’s pubs, RTN says ‘for the c.75 sites open in this period, sites traded at c.85% of comparable 2019 sales levels, representing a c.15% outperformance of the market, benefitting from significant outdoor space and investments in stretch tents and marquees.’
• In the Leisure units (c110 units), RTN says they ‘traded at c.60% of comparable 2019 sales levels, in line with our expectations, reflecting a continuation of strong delivery volumes and limited number of outdoor covers.’
• Restaurant group adds that the ‘performance of sites in Scotland since resumption of “indoor dining” (3 weeks to 16 May 2021) has been strong.’ The 7 Wagamama sites are 22% ahead of 2019, the leisure sites are 21% ahead (c16 sites)
• We have only a few days’ data here (since 17 May 2021) but RTN says ‘the Group currently has approximately 350 sites open across its Wagamama, Pubs and Leisure businesses, representing 95% of their respective combined estates. The Concessions business currently only has four sites trading, given restrictions regarding international travel.’
• It says it ‘has been very encouraged by the trading performance seen so far in 2021. While the environment for the remainder of the year continues to remain uncertain, the Group is well positioned across its diversified brand portfolio to benefit from the sustained removal of government restrictions.’
• RTN has raised equity twice. Re debt, it says it ‘completed its previously announced refinancing and has £450 million of new debt facilities having drawn down £330 million of the Term Loan Facility on 17 May 2021 and access to a £120 million Super Senior Revolving Credit Facility.’
• Interest cost in the P&L will be around £25m this year.
• RTN says it ‘has in excess of £200m of cash headroom on its debt facilities, providing significant liquidity headroom to protect against a resurgence / new variant of Covid-19 as well as strengthened flexibility to capitalise on selective site expansion in its Wagamama and Pubs businesses.’
• To the extent that it can (or any operator can), RTN has reassured the market that, when allowed, its units have traded well.
• The group has been exceedingly active (CVAs and division closures, two equity raises, debt refunding etc) and it is now positioned relatively well. The pandemic has given RTN the opportunity (and the incentive and need) to push three or four years’ restructuring into one year.
• The equity raise and debt restructuring give the group a) flexibility and b) a war chest.
• RTN has previously said that organic growth is its priority but, with perhaps a third of the UK’s branded restaurants on the market and available at what should be attractive rents, there are expansion opportunities elsewhere.
• Pub freeholds may be harder to come by with more potential buyers on the market.
• As we have mentioned previously, RTN may face a number of choices – and it’s better to have choice than no choice. It could a) expand organically, b) buy good outlets at what might look like a full price (as it did with Wagamama) or c) buy less good outlets cheap. Perhaps c) (and maybe only c)) is better avoided.
PUBS & RESTAURANTS:
Roadmap & 21 June:
• Social distancing and all other restrictions are due to be dropped on 21 June. Comments recently, with evidence re outdoor opening and very early indoor reopening now gathered, have been positive.
o We have heard that the vaccines are effective against the Indian variant.
o The Telegraph reports PM Boris Johnson is very likely to go ahead with plans for dropping restrictions on 21 June.
o CEO of the UK Health Security Agency Jenny Harries says plans are ‘looking good’.
o The vaccination programme is on track. Hospital admissions and deaths continue to fall.
• Mr Johnson is likely to speak to the country later this week. The Telegraph even suggests that it knows the wording, saying the PM will say that ‘if things do continue to go well and we don’t see a huge change in the data, and the latest data we are presented with is still positive, things are looking on track.’ We may need booster doses in the autumn but, as UKH CEO Kate Nicholls says, the above reports are “very welcomed if true.” She adds ‘however, we must wait to see the full detail of plans as any restrictions in venue will continue to impact revenue and business viability. A return to unrestricted trading on 21 June is critical and will mean hospitality businesses come off life support and be viable for the first time in almost 16 months.’ She says ‘we urge the Government to confirm reopening dates and these plans at the earliest opportunity, which will boost confidence and allow
• Langton comment: Everything is looking to be on track and, whilst this does open up more room for disappointment as expectations grow, the signs are currently good. And this is just as well as CGA and Fourth report that only around two in five hospitality businesses are currently trading at a profit or expect to do so by the end of June. The survey says that 58% of hospitality leaders believed their business had performed above their expectations since April, and only 8% said it was below. Some 83% of respondents said they felt optimistic about the prospects for their own business over the coming 12 months. CGA says ‘there’s no escaping the fact that Covid-19 has taken a massive toll on hospitality, with thousands of businesses closing for good and many more still in a precarious position. The road to recovery could be long and uneven, and the sector is going to need sustained support
• Foodservice analyst Peter Backman reports that ‘there’s a shortage of staff to work in foodservice’ adding that this (and other issues) could lead to something of a margin squeeze in the coming months. Mr Backman says that his Margin Squeeze chart, which have been produced since 2006, is a measure ‘that attempts to capture the pressures on the financial resources of restaurants and other businesses serving food to consumers away from home.’ It takes into account input costs and output prices. He says ‘there has been an increase in menu prices – and this has led to a positive bounce for the Margin Squeeze. But will these prices stick? How will consumers change their purchase habits? Will they eat out more often? But spend less – in aggregate? Or per meal?’
• Langton comment: We also have two major increases in VAT on the horizon alongside the reimposition of business rates. How these are either absorbed or passed on to consumers will have a material impact on margins and profits. Neither Mr Backman nor Langton have the answers at present. Time will tell but the decisions, and they will be critical, will need to be made by 1 October.
o We would suggest that it’s always attractive to sell less for more (via margin expansion) but would add that this is finite and, if it provokes a backlash, it can be damaging. There are a number of key points to make.
o The price will, ultimately, depend on supply and demand. How many restaurants reopen and when do they do so? And what will demand be like after the wall of money is spent, the Euros have come and gone and we return to something like a (new) normal?
o Drilling down, within the industry, another critical point we would make is that no operator trades in a vacuum. Operators compete against each other and the sector as a whole competes against other leisure sub-sectors and, critically, against the UK’s supermarkets. At the moment, there is no discounting – but that is a measure that we would like to keep a sharp eye on.
o Competitive pressures, particularly from the supermarkets, should and probably will keep a lid on prices but, in the short and medium term, we could expect to see some price inflation. This could be localised, it could depend on conditions in micro-markets and it may remain a fluid situation. Prices may be under pressure in Central London and the West End but may be firmer in suburban markets but, even here, what actually happens will depend on how many units survive, when consumers return to their offices and a host of other factors.
Trading since reopening:
• More comments on indoor trading. Although it is early days and sample sizes may be somewhat misleading, a number of industry service providers are updating on the level of indoor trade last week. Although the Morning Advertiser yesterday had some individual publicans saying how quiet it had been, S4 Labour says ‘in the first full week since operators were able to serve guests indoors since November 2020, hospitality sales were up 9% compared to the same week in 2019. However, these figures paint a picture of mixed fortunes for the industry, with a significant bounce in food sales and the continued collapse in drinks revenue.’
• It says ‘food sales were up nearly 30% on the same week in 2019, representing significant demand for out of home dining. While there was pent up demand for eating out, remaining restrictions prohibit vertical and late-night drinking, resulting in the continue decline of drink sales, down 7% on 2019 levels.’ S4 Labour says London was only level with 2019. It says ‘for the first time since hospitality re-opened in April, the majority of sites in the U.K. are trading at above 2019, even if many are only marginally so. Last week, only 19% of sites traded at 90% or less than their 2019 levels. This is in contrast with two weeks ago, when two thirds of operators were trading at below 90% of 2019.’
• Meanwhile Tenzo has said that ‘indoor restaurant reopening sees sales grow 36% on Saturday compared to the same day in 2019.’ Picking a single day may run the risk of giving a misleading impression. On the other hand, operators would clearly like to see an increase rather than a decrease, however short the trading period. Tenzo says Sunday sales were down. It comments ‘Sunday saw a comparatively low minus 2% sales growth on 2019, however this is due to the corresponding Sunday in 2019 (May 26th 2019) being the day before the Spring Bank Holiday. Interestingly, Tenzo says ‘delivery and takeaway accounted for 40% of total sales this week, though this is a drop from the 57% of total sales we were seeing when only outdoor was open.’
• Langton comment: One would expect food sales to pick up as linger time is longer and the risk of getting caught in a downpour is reduced now that indoor trading is allowed. And this has come across to some extent in the figures. However, we could caution against reading too much into short periods of trading. It’s too early to conclude much of anything at all but S4 Labour feels able to say ‘life is coming back to sector and we are buoyed by the green shoots, but we are concerned for our customers who are so heavily impacted by the restrictions.’ It calls for certainty with regard to the lifting of remaining restrictions. Tenzo is even more upbeat, saying ‘the recovery compared to 2019 is far higher than we imagined it would be. It’s been incredible to see the way businesses have adapted and they’ll continue to have to as they juggle pent up demand for eat in as well as the continued
• The Telegraph comments on current trading under the provocative headline ‘As pubs & restaurants throw open their doors, Britons prove too scared to enter.’ It says ‘many consumers remain nervous even as Britain nears end of restrictions, prompting some companies to rethink business models.’
A word on walk-ins:
• Booking a table to sit and have a drink lacks the spontaneity often associated with a visit to the pub. Walk-ins are more the ticket but, in these strange times, some operators are pushing pre-sold space. Are they missing a trick?
• Langton comment: This from a reader regarding an eating out experience on Sunday evening: ‘We tried to get something to eat after going to the cinema at Bluewater yesterday afternoon. We enquired at [three large brands mentioned]. All these said 6 pm they didn’t have any tables free until at least 7.30 pm. I would add that all the restaurants were deserted. [burger joint one] could only offer plant-based food. We ended up in [burger joint two] which was fine, but they couldn’t offer any beer.’
• Having decried small samples as indicative of anything much on a number of occasions, we shouldn’t read too much into the above. But it is similar to our own experience when it came to grabbing a drink in a new-build bar restaurant in King’s Cross last week. Have you booked, we were asked before we were found the corner of a table that we had to ‘give back’ at 6pm.
• The Leisure Park / Cinema experience related above is perhaps even odder as it’s Bluewater, for heaven’s sake, with its dozens of restaurants. And it’s widely known that cinemas are open again and the start and finish times of the screenings will also be publicly available. Surely, it wouldn’t have been too much to expect a number of walk-ins either an hour before or immediately after the main films? And to only have veggie dishes and not to have beer, what’s all that about?
• There will be a bedding in period. The consumer knows that and will be prepared to put up with a certain amount of jerking around. And we know that certain bar restaurant chains have made a virtue of pre-bookings. It nails down revenues, guarantees a minimum spend, etc but, at the end of the day, it’s going to be what the customer wants that matters, and how they want to receive it and not necessarily what the operator finds convenient to give them.
• One can’t help concluding that there will be some massive gaps in the market (for operators giving customers what they want, in a way they want to consume it and at a price they want to pay) as some operators attempt to ‘educate their customers’ and subtly (or not so subtly) change what they give them.
• CGA’s latest Hospitality at Home Tracker reports that April’s delivery and takeaway sales are up fourfold on pre-Covid levels. The tracker says that ‘combined delivery and takeaway sales were 345% higher than in April 2019, when the sector was fully open for eating out. Sales grew by 11% from March 2021, despite the reopening of restaurants, pubs and bars for outside service in England from mid-April. Month-on-month growth in takeaway sales was notably higher than in deliveries.’ CGA says ‘the figures from the Tracker suggest that deliveries, takeaways and at-home meal kits, which have all soared in popularity during the lockdowns of the last 14 months, are likely to remain a major part of consumers’ habits well beyond the full reopening of hospitality.’ It says ‘surging delivery and takeaway sales have been a major side-effect of COVID-19 lockdowns and a lifeline for many operators in
• Langton comment: CGA says ‘as restaurants, pubs and bars reopen, the way consumers balance ordering in and eating out will be a major dynamic in sales and marketing strategies and a significant factor in profit margins.’ This is certainly true but it is not yet certain just how much, if any, of the delivery sales will settle back to pre-Covid levels. The sample size is relatively small, just 18 operators (list at the end of this para) and some of the operators have increased delivery sales from a low base. Interestingly, CGA points to takeaway as a faster area of growth than delivery, a comment that suggests that consumers are perhaps more willing to leave their houses to pick up the food that they want. The partners in the Tracker are: Azzurri Group, BrewDog, Burger King UK, Byron, Drake & Morgan, Gaucho Grill, Giggling Squid, Nando’s, Peach Pub Company, PizzaExpress, Pizza Hut
• Meanwhile in the US, Restaurant Dive comments on the growth of Loco Co-op which, as its name suggests, is a co-operative delivery vehicle set up and owned by a number of restaurant companies. The business is not huge, it operates in only a handful of cities, but the idea that restaurants should keep as much of the value chain for themselves is perhaps an appealing one. The company is expanding via the franchise model and says ‘we go into these communities, we help organize a true cooperative amongst restaurant owners in the community, and then we provide them with the training to run their own delivery service.’
• This market has grown during lockdown. Whether it be chilled pizza dough or cocktail mixes with instructions, demand has been elevated. Barclaycard reports that spending on digital and subscription services increased by 39.4% in 2020.’ This includes the obvious (Netflix, Spotify etc) but also food products such as those mentioned above. Pragma Consulting says ‘businesses operating within the food and drink industry have witnessed a sharp rise in the number of users signing up to a subscription services. 37% of all subscribers now subscribe to some sort of food service.’ It cites Pret A Manger’s £20 a month offer (up to five drinks a day) along with recipe boxes and meal kits from restaurants during lockdown.
Company and other news:
• Shaftesbury has reported H1 numbers saying it is seeing ‘encouraging increase in demand for space and lettings.’ It says ‘footfall and spending [are] now starting to return.’ The group says it is ‘well-positioned for gradual recovery and sustainable growth.’ CEO Brian Bickell says ‘after more than a year of unprecedented disruption, a revival in the West End’s broad-based economy is now underway. Since the start of re-opening on 12 April, we are seeing an encouraging increase in demand for space and lettings and a return of footfall and spending across our locations. Forecasts point to a sharp rebound in the UK economy but there remains the risk that the recovery could encounter delays and setbacks in the period ahead.’
• Bickell adds ‘we expect occupier demand to improve further as businesses seek to locate in our lively, holistically-curated villages. Importantly, the inherent flexibility in our portfolio, and our culture of innovation, will ensure we can continue to adapt our buildings to meet the fast-changing expectations of our occupiers. Growing footfall, prosperity and occupier demand will improve our cash income and earnings and stabilise investment yields.’
• Shaftesbury says that its net property income is down 42.6% to £26.5m (31.3.20: £46.2m) due ‘to occupier support, reduced rent collections and increased vacancy.’ It says it has seen a 19.4% like-for-like decrease in rental income. This will be of interest to operators as it may give some steer as to what the ‘new normal’ levels of rent may look like. Shaftesbury reports a H1 loss of £338.5m (31.3.20: £287.6m loss). It says this decrease is primarily due to £342.6m of revaluation deficits. The group is reporting an interim dividend of 2.4p per share.
• Diageo has pledged £4.5m ‘to provide infrastructure and equipment to support India’s COVID-19 response. It says ‘through this initiative, we will help Indian Government Hospitals in 21 districts to set up Pressure Swing Adsorption (PSA) Oxygen Plants to create long-term oxygen capacity’ and adds ‘at a time when the country is facing an unprecedented humanitarian crisis, we want to support the Government’s efforts and stand by the citizens of India.’
• Punch has ‘teamed up with Big Smoke to invest and launch a collection of craft beer and food pubs across the South East of England.’
• Loch Fyne is reported to have received approval for its CVA. Propel reports owner Greene King as saying ‘Loch Fyne has been severely impacted by the Covid-19 pandemic and the resulting social restrictions. Following advice from an insolvency practitioner, a CVA was proposed to creditors, which has now been approved and will enable us to hand back to landlords a number of sites that are already closed and no longer needed within the Greene King estate.’
• Wine delivery platform Drop Wine has launched a franchise scheme that it says will enable it to undertake a nationwide rollout
• The South African wine harvest this year is very good down to cool temperatures, plenty of rain and a late harvest.
• Only A Pavement Away and chef Tom Aikens, are calling on businesses to sponsor this year’s Cook and Dine. Now in its second year, Cook & Dine aims to ‘bring everyone who works in the hospitality industry together, no matter their background, experience or seniority and raise funds to help support people facing homelessness find and forge new careers in hospitality.’
HOTELS & LEISURE TRAVEL:
• Spain. Holidays are not illegal but are being discouraged. Spain is open to Brits but UK advice is not to travel. Business minister Anne-Marie Trevelyan told Sky News ‘the Prime Minister has been clear that, for now, amber means ‘please don’t go unless there is an urgent family reason and so on’ because we are still trying to slowly move through our road map to being able to open up on June 21 and we want to do that in a steady and careful way.’
• Visit Britain reports that UK tourism could recover only slowly. It says that spending by holidaymakers in this country in 2021 may be just half the level of 2019.
• Accor has increased the size of its UK ibis hotel network by around a third after the opening of nine sites with AGO Hotels.
• STR reports that airfares and hotel rates are showing signs of moving higher in the US. It says domestic fares are up 9% since April 1 and international flights are up 17%. It reports ‘fares and hotel rates are still largely below 2019 levels because business and most international travel is largely absent.’ It says ‘that will keep a lid on prices going forward.’
• Destination Analyst in the US reports that it has seen ‘positive movement towards recovery’ in the US travel market but it cautions ‘the travel experience is not yet near normal.’
• Snap has paid $500m to buy Wave Optics, which supplies parts for AR glasses.
FINANCE & MARKETS:
• The Nationwide has reported that the surge in house prices that has accompanied Covid could prevent a generation of younger people from ever owning their own home.
• The UK (and indeed global) unemployment signals are remarkably benign. But there’s no such thing as a free lunch and, even though Langton’s economics is rusty and was never too good to begin with, we know that actions cause equal and opposite reactions. We have swapped Unemployment payments for Furlough costs (effectively a debt for debt swap) and have exchanged a lower-than-might-be-expected rate of joblessness for, almost certainly, inflation.
• We are in the middle of the noise, at the moment, and it’s tough to see the bigger picture – even when it will look perhaps relatively obvious in the future. We may, at any moment, be told that things are ‘different this time’, that this is ‘a new paradigm’, that debt’s cheap and it will never cost much again, etc. And that’s when we should consider worrying a bit because, here’s the thing; things are never different this time, there is no such thing as a new paradigm and debt, at times in the last 20yrs or so,, has cost a multiple of what it does today to service.
• The Bank of England’s Andy Haldane says the UK must avoid an inflation spike “like the plague”.
• Sterling mixed at $1.4178 and €1.1595. Oil price higher at $68.65. UK 10yr gilt yield down 2bps at 0.81%. World markets better & London set to open up around 18pts.
RETAIL WITH NICK BUBB:
Today’s News: The much-rumoured IPO of the Online furniture business Made.com has been confirmed today and the press is likely to have fun mocking the company’s view in its intention to float announcement that it is “the leading digitally native lifestyle brand in home” (!). Given the expected valuation of over £1bn, it is interesting to note that net sales were only £247m in calendar 2020, but the business is growing quickly and aims to have gross sales of over £1.2bn by the end of 2025. The Mothercare pre-close update for y/e March flags that the group now anticipates reporting a small EBITDA profit for the financial year, against previous guidance of a small loss, and sets out a medium-term target of £15m operating profit from its new, asset-light franchise model.
This Week’s News: The latest monthly Kantar grocery figures come out at 8am today. Tomorrow brings the much-awaited M&S finals and the British Land finals, whilst we get the Pets at Home finals on Thursday.