Langton Capital – 2022-03-04 – PREMIUM – RTIs, inflation, services, DPEU, Pernod, cruises & more:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
It’s interesting how speech evolves.
I mean take the words ‘full’ and ‘less’ when they are used as suffixes.
Sometimes they are opposites (or near opposites) as in useless and useful or helpless and helpful.
But at other times they create totally different words, such as pitiful and pitiless.
And sometimes only one is present. Sometimes it’s ‘full’ that can be used – as in spiteful or vengeful or hateful – and at other times it’s the suffix ‘less’ – as in spineless or gutless.
And on occasion neither can be used.
We don’t use the words angerful or angerless and nor to we have a hungerful or hungerless (although, the way that Word didn’t underline hungerful makes me wonder whether I haven’t missed something there).
And other words seem contrived, such as thirstful. You know, words that you could imagine hearing from a Game of Thrones character but not down the pub but, anyway, we’re coming to the end of a long and geopolitically eventful week.
And, guess what? It’s getting light in the morning. At least it is down south. It’ll still be dark when I fall out of bed up north next week, at least until 21 March when it should swing around the other way. On to the news:
INFLATION & HOW TO PASS IT ON…
This is Part II of our comment on inflation. It went out to clients yesterday.
Langton got its bean-counting badge back in the days when inflation, though it was abating, was front of mind as it had peaked in what was then the recent past of the mid-1970s at 25% plus.
It then slid back into single-digits but spiked again at 17% in 1979 before falling to the benign levels that Langton – and all the rest of us – had, until recently, taken for granted.
IN THE REAL WORLD:
Andrew Bailey, safe with his £575,000 salary behind the towers and ramparts of the Bank of England says we should not ask for wage and price increases.
But in the real world, they are necessary. Companies may go bust and consumers may go hungry if they don’t get them.
But passing material price (or wage) rises on is:
c) A skill that had diminished in importance until recently.
d) Is easier for some than for others.
Inflation punishes the weak. Unionised labour will jack up its cost whilst those without representation will fall behind. Those on fixed incomes may do worse, still.
The ‘sweet’ spot is to be a unionised worker in a pinch-point industry at a time when labour is in short supply.
Although maybe a) perverse and b) annoying, it is not c) surprising, therefore, to see Tube workers (basic wage just under £60,000 a year basic for a 36 hour week, plenty of overtime and nearly nine weeks’ paid holiday) going on strike.
Youngsters working in the local sandwich shop (earning just under £10 an hour, maybe £19k a year) are less likely to strike. And, given that their bosses may be struggling financially, they are likely to be sacked if they do.
Those on fixed incomes may be jiggered. Those relying on interest income may find this crawling up from somewhere around ‘pitiful’ to, if they are lucky, maybe something approaching ‘modest’ levels.
This is perhaps even more nuanced.
• Business to business:
o Take a food manufacturer. They may have a few dozen suppliers and a handful of very, very large customers.
o Sure they may have a tail of customers and they may get financially beaten up from time to time but, if they have brands, they may be ‘needed’.
o Or at least ‘wanted’ and, unless the supermarkets wish to secure supply, if commodity price increases are visible, these operators may find price negotiations in the current environment maybe easier than one might imagine.
o We believe such branded operators are not able to put through – and they need to put through – high single digit price increases.
• Business to consumer:
o A pub company may have a handful of meaningful suppliers and hundreds, thousands or even hundreds of thousands of customers.
o A wide customer-base can be a benefit – in that the financial problems of one customer barely register – but it can also be problematic.
o Not least because you don’t know who they are.
o This means that you can’t have a price negotiation. You simply do put your price up or you do not. And the customer votes with his or her feet and wallet.
o This can, counterintuitively, increase risk.
What the above means:
• In non-inflationary times, this is all academic. Now, not so much.
• Price ‘negotiations’ for a B2B company may be brutal but they can be quick. And the outcome on demand is known as a result.
• Price moves in hospitality, with its millions of individually insignificant customers, however, are fraught with risk.
• In the words of Chris Martin and Coldplay: ‘I was just guessing at numbers and figures, pulling the puzzles apart…nobody said it was easy, no one ever said it would be this hard…’
• Feedback welcome.
PUBS & RESTAURANTS:
Inflation & cost increases:
Commenting on inflation & interest rates, the BCC says ‘rising raw material costs, the increase in the energy price cap, the reversal of the hospitality VAT cut and upward pressure on energy and commodity prices from the impact of Russia’s invasion of Ukraine are expected to lift CPI inflation to a peak of 8% in Q2 2022. If realised this would be the highest rate since July 1991.’
• The BCC says ‘the impact of the invasion and rising raw material costs are also projected to keep UK inflation higher for longer. CPI inflation is now expected to fall back to the Bank of England’s 2% target in Q4 2024, over a year later than the previous forecast of Q2 2023.’
• Looking at interest rates, the BCC says they ‘are projected to double over the course of this year, from 0.5% to 1%.’ Effectively from diddly squat to two times diddly squat. The rise could, however, catch out consumers and / or businesses that had been living to the max of their income. Given how long interest rates have been at their currently very low levels, this could be a large number of people.
• The BCC says ‘with the current inflationary spike mostly driven by global factors, higher interest rates are expected to do little to curb further increases in inflation.’ Thanks for that. See further comments on inflation and growth in Finance & Markets below.
Service sector growth:
Whilst backward looking, the Markit PMI is about the best measure we have as a macro-indicator of service sector growth. The numbers that came out yesterday cover February, which seems like a long time ago. The flash numbers for March will be out in the middle of the month. Markit says ‘growth in the UK service sector accelerated sharply in February as the Omicron wave of the COVID-19 pandemic subsided.’
• It says ‘rates of expansion in both business activity and new orders accelerated sharply, supporting stronger job creation. Inflationary pressures also intensified, however. A range of inputs were up in cost, and the passing on of higher prices to customers led to the sharpest pace of charge inflation on record.’ The headline seasonally adjusted Services PMI ‘rose sharply to 60.5 in February from 54.1 in January, signalling a steep rise in output that was the fastest since June last year.’ Estimates were for around this level and up to 60.8.
• Markit says ‘output price inflation hits fresh record.’ It says ‘input costs increased substantially in February, with the rate of inflation the second-fastest in more than a quarter of a century of data collection, second only to that seen in November last year. Respondents highlighted a range of inputs as having increased in cost, with salaries, fuel and utilities most widely mentioned.’
• Markit says ‘food and other material costs were also reportedly higher amid supply shortages. Service providers often passed through higher input costs to their customers by way of increased charges. As a result, the rate of output price inflation hit a fresh record high for the second month running in February, with around one-third of respondents raising their selling prices during the month.’
• Markit comments ‘the ebbing of the Omicron wave of the COVID-19 pandemic contributed to a rebound in growth in the UK service sector in February, with rates of expansion in activity and new business up sharply.’ It says ‘inflationary pressures remained acute, however, with selling prices rising at a fresh record pace for the second month running.’
• It adds ‘this pass-through of costs to customers will very likely prompt the Bank of England to hike interest rates again at the next MPC meeting in March.’ Yes, true, but, as much of the inflation coming through at the moment is caused by commodity price rises rather than excess demand, this may be successful in annoying people and in making them feel poorer, but less successful in actually combatting inflation.
The British Chambers of Commerce also comments on consumer spending saying ‘consumer spending is forecast to grow at 4.4% in 2022, down from its previous forecast of 6.9%.’
• The BCC says this ‘downgrade reflects the historic squeeze on real household incomes from high inflation. Inflation is projected to outpace wage growth until Q2 2024, maintaining the squeeze on household finances. Weakening consumer confidence is expected to limit households’ willingness to support spending by running down savings built-up during Covid.’
Pavement licenses. UK Hospitality has said that it ‘believes making pavement licences permanent will help the Covid-ravaged hospitality sector make a faster post-pandemic recovery.’
• It says that ‘outdoor drinking and dining areas have become hugely popular over the past two years, in some cases ensuring the survival of those hospitality business unable to serve customers indoors due to coronavirus restrictions.’ It adds that ‘the temporary scheme – introduced last April and due to end this September – should become permanent, and would be ‘low-cost, low-admin’’.
• CEO Kate Nicholls comments ‘pavement licences have been a really positive success story, and in many cases have enabled businesses to remain open, when otherwise they would have had to close or restrict their opening hours, threatening thousands of jobs.’ She says ‘as well as businesses, outdoor spaces have also brought benefits to those town and city centres previously without al fresco drinking and dining opportunities, enabling them to begin the process of levelling up, and start to enjoy the sort of outdoor experiences available elsewhere.’
• Chucking in a buzz phrase there may or may not help. Ms Nicholls goes on to say that ‘by helping local economies recover – and recover faster – this will undoubtedly contribute to the long-term levelling up of the regions. The fact that the scheme has been embraced enthusiastically by a number of local authorities is hugely encouraging in itself.’
Leisure property transactions. Fleurets has said that demand for leisure properties is now exceeding supply.
• It says ‘with stock levels down 40% from pre-pandemic levels, the number of available leisure property opportunities is at an all-time low. Yet demand for leisure businesses remains very strong across the majority of tenures, locations, styles and sizes.’ However, Fleurets says ‘there are early signs this is starting to change, as cost inflation and the loss of government support start to have an effect on profitability and more vendors consider it is time to sell. This might accelerate further when the moratorium preventing landlords from evicting tenants for non-payment of rent ends at the end of the month.’
The BBPA reports that hospitality businesses are reporting increases of 150%+ on pre-pandemic energy bills, with an average above 100%, equivalent to an £800m additional cost to the sector. Cost increases on this scale risk wiping out already narrow margins publicans receive and could have a knock-on effect on pricing.
• The BBPA says that, in addition, ‘hospitality businesses across the UK are being refused energy contracts from suppliers, placing them under additional financial burden as they look to recover from the pandemic.’ Some are asking for deposits. The BBPA says that cost increases of 150% plus could put businesses under. CEO Emma McClarkin says ‘struggling publicans that have managed to keep their heads above water throughout the pandemic now face a further financial hurdle that threatens the viability of their businesses and the ability for the sector to recover.’
• She adds ‘the pub and brewing sector is at a pivotal point in its recovery and the erosion of margins is impossible to sustain. We are urging the energy regulator, the providers and the Government to work with us and take a more pragmatic approach with regards to the provision of energy to the hospitality sector.’
Analysts say Russian vodka is bearing the brunt of boycotts following the Russian invasion of Ukraine. The US government put sanctions on state-run liquor stores to stop selling Russian-made vodka, and many private establishments then began doing the same.
COMPANY & OTHER NEWS:
DP Eurasia has updated further as to ‘how the situation in Ukraine could affect its Russian operations.’ It says ‘at this stage, due to the pace of the evolving geopolitical crisis, it is still too early to quantify any possible ramifications for the Group’s Russian business or on its full year 2022 results.’
• The company says ‘a further update will be provided at the time of the Company’s 2021 Preliminary Results, when the Group may have greater visibility on the impact on its Russian operations.’ It says ‘DP Eurasia continues to perform ahead of pre-Covid levels and remains focused on factors that can successfully mitigate the negative headwinds, including pricing to offset inflationary pressures in its core markets.’ The co will announce its Preliminary Results for the year ended 31 December 2021 on Tuesday 5 April 2022.
Pernod Ricard will acquire a majority stake in Château Sainte Marguerite, with the transaction due to be completed in the coming months. The move comes as the drinks giant looks to focus on growing its premium wine division.
Korean hot dog chain, Myungrang Hot Dog, is set to open its first European site in London in a 2,172 sq ft site within Islington’s Angel Central. Launched in Korea in 2016 by Sangwoo Kim, the chain has opened 730 stores internationally.
Steve Trowbridge has been appointed as RedCat Pub Company’s new CFO, replacing Sharon Badelek. Trowbridge was CFO at AIM-listed Arena Events Group plc and has both private equity and public company experience.
Drinks Business reports that Nirvana, a low-alcohol brewery, saw 2021 exports increase by 550% as global demand for no and low products intensified. Nirvana Brewery projects 100% growth in 2022. The UK NoLo drinks sector is now worth an estimated £143 million, according to research firm Kantar.
LDC has made a minority investment in Shaken Udder, an Essex-based milkshake brand.
LEISURE TRAVEL & HOTELS:
A poll by Holiday Extras has found that only 12% of respondents knew that most travel restrictions had been cut. Some 26% said they didn’t know what the rules were, 25% thought the pre-departure tests were still needed and 10% thought the red list was still in use.
• Holiday Extras says ‘quite understandably after two years of constant disruptive changes to the travel rules, most UK holidaymakers haven’t yet realised that overseas travel is pretty much back to normal now.’ It adds ‘the government spent two years advertising the travel restrictions – it should fall to them, not our beleaguered industry, to let people know the restrictions have gone. With a handful of exceptions for countries that are still closed, mostly in Asia-Pacific, you can go on holiday right now almost as easily as you could before the pandemic. It’s important people don’t waste time and money navigating travel rules that have come to an end, or put off much-needed breaks because it’s still not clear enough that the old restrictions are gone.’
Princess Cruises has become the latest major cruise line to stop calls into St Petersburg this summer.
Sky News reports that Australian bank Macquarie is set to buy Roadchef, the motorway services provider, from Antin Infrastructure Partners for around £900m. Sky says ‘the transaction will be one of the largest in the sector for years and will underline investors’ appetite to buy such businesses at a time when motorway services areas are attempting to exploit the accelerating transition to electric vehicles.’
ForwardKeys data shows that Russia’s invasion of Ukraine triggered a massive number of flight cancellations to Russia. Cancellations outweighed bookings from Germany by 773%, France 472%, India 285%, the UK 254% and Italy 152%.
The Russian outbound travel market also collapsed along with domestic flight bookings. Cyprus saw the highest cancellation rate by prospective Russian visitors in the first three days of the invasion, followed by Egypt.
Canadian carrier WestJet is to take over rival Sunwing Airlines and its tour operating arm Sunwing Vacations, with the deal set to complete by the end of the year. Sunwing’s current shareholders will become equity holders in the WestJet Group.
STR reports that US hotels saw room rates in the week to 26 Feb up by 13.1% on the same week in 2019. Revenue per available room was up 7.7%.
Netflix will acquire Finland’s Next Games, a developer of mobile games, for a total value of €65m.
• Next Games is listed on the public markets in Helsinki, and the deal is being done as an all-cash share purchase at €2.10 in case per share. The free-to-play mobile games publisher already has developed titles related to some of Netflix’s biggest draws, such as “Stranger Things” and “The Walking Dead”.
Fitbit is recalling 1.7m of its Ionic smartwatches after reports of the battery overheating and burning some users. The company, which was acquired by Google in 2021, had sold about 1m of the model in the US and nearly 700,000 internationally.
Entain has said it will repay £44m in furlough cash.
FINANCE & MARKETS:
Markit reported its composite PMI for the UK economy yesterday saying that it rose ‘sharply to 59.9 in February from 54.2 in January.’
• It says this is due to the fact that the ‘easing of the Omicron wave of the COVID-19 pandemic unleashed faster growth across both the manufacturing and services sectors.’ The index is backward looking and the impact of the Russian invasion of Ukraine will be seen later this month when the flash numbers for March are released.
Markit comments on inflation saying that ‘inflationary pressures remained acute, however, with both input costs and output charges increasing at sharper rates than in January. In fact, selling prices rose at the steepest pace in the series history, mainly due to a record increase in the service sector.’
The BCC has cut its estimate for UK GDP this year to 3.6% from 4.2%.
• It says ‘the downgrade largely reflects a deteriorating outlook for consumer spending and a weaker than expected rebound in business investment.’ It is forecasting 1.3% in 2023 and 1.2% in 2024 ‘amid the limit on activity from the cost-of-living squeeze, weak business investment and sluggish export growth.’ Given that recessions have sometimes followed oil price shocks in the past, this may be somewhat optimistic.
Re UK exports, the BCC says they ‘are forecast to remain 13.7% (£25.5 billion) lower than their pre-pandemic level by the end of the forecast period in Q4 2024. This reflects the impact of post-Brexit trade friction and a weakening global outlook on demand for UK goods and services.’
• The BCC says ‘the UK economy is forecast to run out of steam in the coming months as the suffocating effect of rising inflation, supply chain disruption and higher taxes weaken key drivers of UK output, including consumer spending and business investment.’ It says ‘our latest outlook suggests a legacy of Covid, and Brexit, is an increasingly unbalanced economy with a growing reliance on household spending to drive growth.’
The World Bank has told the BBC that the Ukraine invasion will cut global economic growth. Both Ukraine and Russia are major food producers and disruption to supplies could increase global problems with inflation.
Sterling mixed at $1.3336 and €1.209. Oil price lower at $111. UK 10yr gilt yield up 6bps at 1,32%. World markets lower yesterday and London set to open maybe 54pts lower on continued Ukraine fears.
RETAIL WITH NICK BUBB:
• Today’s News: Over in the US the big supermarket chain Kroger (Ocado’s main tech client) blew away expectations with its Q4 results yesterday and impressed Wall Street with upbeat guidance for 2022, partly thanks to its strong Online sales, driving the shares up by nearly 12%. Back in the UK, the embattled shopping centre landlord Hammerson has reported its finals today, boasting that it is “Rebuilding a strong business” and that “We are already seeing the tangible results from our strategy with strong occupier leasing demand, reduced vacancies, improved collections, a lower cost base and clear path to value creation from our land bank”, even though NAV per share fell from 82p a year ago to 64p (despite a steady performance from its Value Retail outlets business). Meanwhile, the shut-down of Russian exposure continues, with Boohoo flagging that it “is deeply concerned about the tragic
• Next Week’s News: The BRC-KPMG Retail Sales survey for February is out first thing on Tuesday, followed by the Greggs finals, the Made.com finals and the monthly Nielsen grocery sales figures. Thursday then brings the Boohoo Q4/pre-close update and the John Lewis Partnership finals.