Langton Capital – 2022-06-20 – PREMIUM – Deliveroo departure, Rank profit warning, strikes, trading, inflation etc.:
A DAY IN THE LIFE:
We’ve got a new puppy and I know, idiot, right?
But a dog kind of comes with the territory and we’re looking on this one, like the dogs before her, as something of a project, hopefully a J-curve, where the downward bit is in your face (and on your carpet) and the hoped-for rewards are a little bit further down the line.
Anyway, she’s nine weeks old, has well and truly come out of her shell, is being socialised bit-by-bit and, over the weekend, she learned that, as I was wearing short trousers for the first time in her life, I had legs.
In fact pretty much one at either side of me, she discovered and, as she’s going with whatever comes naturally to her, she’s been biting my legs ever since presumably a) to find out what they taste like and b) to see whether they come off if you shake them hard enough.
All of which is very amusing. At a distance, that is and this has been a voyage of discovery for both of us as I’ve learned that, whilst I’m happy to talk the talk, I’m certainly not above running away from two month old girls.
Anyway, another full week in the offing, so let’s move on to the news.
PUBS & RESTAURANTS:
Cost of living crisis.
Seeing the world as others see it. Tesco updated on Friday. CEO Ken Murphy repeated that ‘the market environment remains incredibly challenging’. He says the firm has a ‘laser focus on value.’ This, at least, should keep a little money in consumers’ pockets and could be helpful for hospitality spend. Every little helps.
• Tesco CEO Ken Murphy says the company is ‘seeing some early indications of changing customer behaviour” as a result of soaring inflation.’ This will likely involve smaller baskets, trading down, a move to own label and a rise in the proportion of purchases made on discounted lines.
Treasury minister Simon Clarke has said that employees should not expect wages to rise as rapidly as prices. This a) may be true, b) will be necessary if inflation is to be killed off before it goes into a spiral and c) will not be good for discretionary spend.
• The Bank of England, where governor Andrew Bailey recently insisted that inflation was transitory, is now expecting inflation to hit 11% in Q3 this year. If nominal wages fall by a lesser amount, then real wages will in effect be falling.
• The BBC commissioned a survey and found that 82% of workers said they thought their wages should increase in line with rising prices. Certainly the rail unions are putting some effort into ensuring that their members’ wages do not fall in real terms. Other unions may follow.
• As commented previously, inflation punishes the weak (non-unionised labour, those on fixed incomes, companies with low or not easily defended margins etc). The flip side is that stronger economic players may do relatively well.
• The TUC says the ‘government has cynically abandoned its commitment to a high-wage economy.’ It adds ‘the only way to give families long-term financial security is to get pay rising across the economy. British workers are suffering the longest wage squeeze in more than 200 hours years. They urgently need more money in their pockets.’ It will be interesting, as always, to see what MPs decide to pay themselves when it comes to their next increase.
• The Telegraph says ‘get ready for a Tsunami of strikes’. The Guardian reports ‘a wave of 1970s-style economic unrest is threatening to spread from the railways across the public services, as unions representing teachers and NHS workers warn of potential industrial action over pay.’
A No Interest Loan Scheme, backed by the Treasury, is to be rolled out after a trial in Manchester.
• There is no such thing as a free lunch and the problem with loans, interest free or otherwise, is that they have to be paid back. This will depress spending. Loans are a means of bringing forward consumption from tomorrow to today.
Trading & near term outlook:
KAM has undertaken a snap poll about consumer intentions during the summer. It says ‘the results…are good news for hospitality’ in that 79% of respondents will ‘definitely visit a restaurant over the Summer (19% maybe)’ and 86% will definitely visit a pub (12% maybe).’
• KAM adds that ‘55% of people we spoke to are ‘definitely’ going to take a holiday in the UK (34% maybe) compared to those planning to holiday abroad which came in at 41% (33% maybe).’
CGA has reported that drink sales were almost back to 2019 levels (they were down just 1% or so) in the week to 11 June. The week includes the Sunday of the Jubilee Bank Holiday(s) weekend, which was not strong. Given what inflation has done over that period, real sales are down and volumes will be materially lower. It says that cider sales were up 6%, beer was flat, spirits were up 5%, soft drinks were down 4% and wine sales were 17% lower.
• CGA concedes ‘with inflation now touching double digits, sales are much further behind in real terms.’ It says ‘trading on the Sunday of the Jubilee weekend (5 June) was hit by people choosing to mark the occasion at home or at community events, and sales dipped 14% behind the same day three years ago. However, with the weather improving over the course of the week, sales were ahead by 11% on Tuesday (7 June), and by 5% and 3% on Wednesday and Thursday (8 and 9 June). In line with recent trends, Friday sales were down, by 7%.’
• It says ‘the warm weather made it a good week for cider sales, which were 6% ahead of the same week in 2019. Spirits sales were up by 5%, thanks in part to the popularity of summer cocktails. Beer sales were flat, while soft drinks were down by 4%, and the wine category had another tough week at 17% down.’ CGA’s Jonathan Jones says ‘after an underwhelming Jubilee weekend for the On Premise, it was another sluggish week for drinks sales.’
• He adds ‘signs are growing that the cost-of-living crisis is prompting people to reduce their visits to pubs and bars, especially on Fridays, though they continue to make the most of their occasions. Fingers are crossed for a sustained period of warm weather to tempt people out of their homes and kickstart summer sales.’
Kate Nicholls, CEO of UKH, is reported as saying that there has been a surge in bookings for UK-based holidays in the wake of chaos at airports. She says ‘we are not sure if this was a direct response to the travel chaos and the difficulty in travelling abroad or the cost of living squeeze or people realising how good the UK is after the platinum jubilee.’
• Landal Green Parks UK tells the Guardian ‘we’re anticipating high bookings for summer with breaks being sold last minute, with same day and next day bookings at a record high this year. We’ve seen around 20% of all bookings being for arrivals in the next seven days and nearly 30% for the next 14 days.’ Keeping money in the UK should benefit UK pubs, clubs, bars, cafes & restaurants.
Travel weekly warms to the same theme when it says ‘travel agents say consumers remain nervous about flying this summer amid fears staff shortages and airline cancellations will continue into this summer, with some reporting booking alterations and shifting demand.’
Costs & confidence:
The London Chamber of Commerce and Industry has said that businesses in London may be “overwhelmed” as they are impacted by higher interest rates and energy costs and labour shortages. It has called on the Government to reverse the National Insurance rise of 1.25 percentage points.
• The LCCI says ‘higher taxes, and now higher borrowing costs, risk endangering the UK’s faltering post-COVID recovery.’ It adds ‘in this climate, we must see a reversal to National Insurance rises and ensure there is action in protecting businesses from the two-pronged threat of higher inflation and higher tax. Without clinical precision in policy by the government, this latest interest rate rise will heap further pressure on hard pressed small businesses who are the lifeblood of London’s economy.’
The Caterer reports that the national rail strike next week is leading to a wave of booking cancellations for the hospitality industry. Network Rail said that only around half of Britain’s rail network will be open on strike days on 21, 23 and 25 June with a “very limited” service running on lines open from around 7:30am until 18:30pm.
• The Scottish Licensed Trade Association says it already aware of hotel and restaurant bookings cancellations and says ‘hospitality businesses cannot afford to lose any more trade, particularly as we approach the crucial summer season.’ That view will be echoed by the majority of operators up and down the country.
• Separately, UK Hospitality Scotland says that the planned industrial action on Tuesday 21, Thursday 23 and Saturday 25 June ‘could permanently derail hundreds of beleaguered hospitality businesses desperately trying to recover from the effects of Covid.’ Cotland boss Leon Thompson comments ‘for a devastated hospitality industry beginning its tentative post-pandemic recovery, these strikes couldn’t come at a worse time, and might deliver a fatal financial blow to those businesses already struggling to survive.’
• It says ‘together, three days of strikes will cost the sector £540m across the week, based on a 20% drop in sales where a typical June week sees takings in the UK of £2.75bn.’ UKH Scotland adds ‘fragile consumer confidence will take a further hit; thousands of people able and willing to spend money in hospitality venues across the country will be prevented from doing so; while staff will undoubtedly struggle to even get to work, losing wages as a result.’
Transport minister Grant Shapps has said it is not down to the government to step in to try to settle this week’s train strike. He called the RMT’s request for a meeting with him a ‘stunt’. Opposition parties have accused the government of standing by in the expectation that a strike will offer up political advantages. The first of three strikes is planned for tomorrow.
Deliveroo CFO to leave the company:
Deliveroo has announced that CFO Adam Miller is to step down as a director of the company. He says it ‘has been a privilege to work for Deliveroo. Now is the right time for change, both for me and Deliveroo.’ The company has announced that it has appointed Scilla Grimble as Miller’s replacement. It says ‘Scilla, who is currently Chief Financial Officer at MoneySupermarket.com Group plc, is expected to commence her appointment by no later than June 2023.’
• There could be a gap of nine months between appointments. The co says ‘Deliveroo has appointed David Hancock, currently VP Investor Relations, to serve as interim Chief Financial Officer effective on 17 September 2022 and reporting directly to the CEO, alongside continuing in his current role.’
• It adds ‘as an interim appointment David will not be joining the Board of Deliveroo plc. David has over 20 years’ experience in finance roles and has been VP Investor Relations at Deliveroo since July 2021. Prior to this he was Chief Financial Officer, Digital for The Adecco Group and an Executive Director at Morgan Stanley, and is a chartered management accountant.’
• Chair Claudia Arney says ‘the Board is confident that her [Scilla’s] highly relevant skills and experience will help us to take advantage of the significant opportunities before us and will be invaluable as we continue to build our business.’ She adds ‘the Board thanks Adam for all he has done for Deliveroo during his time here.’
• This announcement may attract some attention. Whilst the finance function will be covered, there will be no board rep until around this time next year. The interim FD will report direct to the CEO.
JD Wetherspoon is investing £2.4m in a new pub at Birmingham New Street station. The pub will be called The London and North Western and is set to open on November 21. CEO John Hutson comments ‘we are looking forward to opening our new pub and believe it will be a great addition to the station.’
D&D London is set to open its first Birmingham restaurant, located at 103 Colmore Row, the city’s tallest office building, in October 2022. The restaurant will offer 360-degree panoramic views across Birmingham, and will comprise an 88-cover restaurant, 24-cover bar and 12-cover private dining room.
Starbucks China CEO Leo Tsoi has reaffirmed that the Seattle-based coffee chain views China as a key market and is targeting 6,000 stores in the country by the end of 2022.
• Starbucks China ended the last financial year with 5,360 stores in China and faces a resurgent Luckin Coffee which in May 2022 posted its first ever quarterly profit with the domestic chain now operating 6,580 sites. The company adds ‘we are highly confident in China. Despite challenges and difficulties, we continue to invest and we continue to grow, there’s a quite a number of investment that we are trying to do. Number one, we resume our new store opening. We committed to open 6,000 stores by the end of 2022.’ Starbucks China says ‘second is our continuation on the investment for the Kunshan innovation park. At the same time we’re also building the intelligence distribution centre to be the help to distribute our products and coffees and to our run in China.’
Whitbread’s Brewers Fayre will open its first new site in 5 years. The 357-cover pub will be located in Milton Keynes and called The Willen Dragon.
• Whitbread says ‘we are excited to be opening our first Brewers Fayre site in five years as we look to grow and develop the brand. As our new flagship pub, the opening marks a fresh and contemporary redesign of Brewers Fayre, updating the much-loved brand for our diners, while still delivering on the great value and quality food and service we are known for.’
The MA reports that Battersea-based Doghouse Distillery’s biggest issues are currently energy and fuel prices, despite a huge uptick in sales since Easter. Founder Brendan Saunders said he had seen an ‘unheard of’ 20-30% increase in the costs of goods that he put down to energy prices. The problem was worsened as the producer was selling to venues which were selling to consumers who were looking to ‘penny pinch’ and avoid price rises due to the cost-of-living crisis.
German drinks firm Krombacher Group has announced plans to take over Heil- und Mineralquellen Germete GmbH, effective 1 August, for an undisclosed fee. Heil- und Mineralquellen Germete GmbH, which was founded a century ago, in 1922, bottles around 200 million litres of mineral water and soft drinks each year.
HOLIDAYS & LEISURE TRAVEL:
STR reports that rising interest rates in the US threaten to dampen capex numbers across the hotel industry.
Tui has warned that services at Gatwick will be ‘significantly affected’ by next week’s national rail strike. Gatwick is recommending customers use alternative travel to and from the airport on these dates and allow extra time for journeys.
Heathrow’s schedules have been ‘trimmed’ due to a baggage handling failure on Friday at Terminal 2. The problem was reportedly solved yesterday evening. Heathrow says ‘the technical issues affecting baggage systems have led to us making the decision to request airlines operating in Terminals 2 and 3 to consolidate their schedules on Monday 20 June.’ It adds ‘this will enable us to minimise ongoing impact and we ask that all passengers check with their airlines for the latest information.’
Per Hotstats, European luxury hotels are back to producing profit at the almost same rate as 2019, with March 2022 GOPPAR of €66 only €4 off its March 2019 number. In London, March 2022 GOPPAR was €131, the highest level it’s been since the pandemic.
Supercity Aparthotels has gained planning permission for a 55-room aparthotel on Edinburgh’s Forth Street and Broughton Street Lane.
Rank Group profit warning. Trading bounce-back is ‘considerably weaker than expected.’
The group has updated on its expectations for the full year ending 30 June 2022, saying ‘as noted in the trading update of 21 April 2022, the Group had witnessed softer performance in our UK venues throughout Q3 and had entered Q4 with visit numbers down across our Grosvenor casinos.’
• It says ‘we have seen some improvement in Grosvenor’s performance post April, but it has been considerably weaker than expected, principally due to a slower than expected return of higher spending overseas customers to our London casinos, continued softness in visitor numbers across the UK and a lower-than-average casino win margin in the quarter to date.’
• Rank adds ‘the performance of our other business segments has been broadly in line with management’s expectations’ but it says that ‘as a result of the recent performance in Grosvenor venues and continued inflationary cost pressures across the Group, subject to normal casino win margins between now and the year end, we expect like-for-like underlying operating profit to be approximately £40m for the year ending 30 June 2022, lower than the previously guided range of £47m – £55m.’
Elon Musk, in a meeting with Twitter employees, hinted at potential job cuts if his $44bn takeover bid for the social media company is successful. Mr Musk has previously warned that he may quit the deal if he is not given data about fake accounts.
FINANCE & MARKETS:
Economists are suggesting that base bank rates in the UK, currently 1.25%, could go as high as 3%.
Made UK has called on the Treasury to provide more support.
Rightmove has suggested that the growth in house price inflation in the UK could moderate from its current double-digit rate to around 5% by the end of the year. This will represent a reduction in real terms.
Sterling weaker at $1.2237 and €1.1626. Oil lower at $113.16. UK 10yr gilt yield down 2bps at 2.50%. World markets mixed on Friday. London set to open down around 5pts as at 6.30am.
Another relatively quiet week on the numbers front this week. Rank Group updates on full year trading today. Thereafter, Coca Cola HBC hosts its AGM on Tuesday and Chapeldown does the same on Wednesday. Naked Wines announces full year numbers on Thursday and Carnival Cruises reports Q2 numbers on Friday.
A bit more lively on the economics front. UK CPI and RPI numbers come out on Wednesday with Public Sector Borrowing numbers on Thursday. Friday should see Flash PMI numbers as well as the widely-followed GfK Consumer Confidence numbers.
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): The front-page headlines on Saturday were dominated by the cost-of-living crisis. The Times led with comments by a Treasury minister saying employers must be very careful about giving staff big pay rises because they could fuel a 1970s-style inflationary spiral, while the Telegraph led with remarks from the same Treasury minister, saying he warned against “giving in” to strikers’ pay demands amid fears it would fuel inflation. On the other hand, school building projects, swimming pools and libraries have been earmarked for emergency funding cuts by hard-pressed local authorities, the Guardian reported, while the Financial Times highlighted that global stocks have suffered one of their worst weeks since the pandemic-driven crash of March 2020 (“Rate rises send global stocks diving”).
• Saturday’s Press and News (2): In terms of Retail stories, the Tesco trading update on Friday got plenty of coverage, although each paper had its own spin on things: the Guardian went big on “Shoppers buying less and choosing own-brand items, says Tesco chief”, whilst the Daily Mail flagged that “£5m Tesco boss defends pay as food prices soar”, the Telegraph highlighted that “Fuel price surge will continue, says Tesco”, the Times noted that “Soaring cost of living hits sales at Tesco” and the FT said that “Tesco shoppers adapt as cost crunch bites”. The Guardian also had a feature on how independent petrol stations deny profiteering (“I’m only making 2p or 3p a litre”). The Telegraph had an interesting Business comment column about the levelling-up situation, headlined “London’s frothed-up economy is about to get blown over”. The Daily Mail had a snippet about the investor rebellion at
• Sunday’s Press and News (1): On Sunday, many of the front pages focused on the impending walk-out by 40,000 rail workers in strikes next week. The Observer said that a wave of “1970s-style economic unrest is threatening to spread from the railways across the public sector”, as unions representing teachers and NHS workers warn of potential industrial action over pay. The Sunday Telegraph flagged that the UK’s biggest trade unions have been accused by the Business Secretary of bribing workers to go on strike, whilst the Mail on Sunday claimed that the Labour leader Keir Starmer does support the rail strikes, despite saying earlier this month that “nobody wants the strikes”. Boris Johnson penned a column for the Sunday Times, urging Western leaders to steel themselves for a long war in Ukraine, and that message was their front-page headline.
• Sunday’s Press and News (2): On Sunday, in terms of Retail news, the Sunday Times flagged that the chances of the Issa brothers (who own Asda) making a last-minute bid to top the Reliance/Apollo bid for Boots have been much reduced by the fall-out in the corporate bond market, whilst the Mail on Sunday highlighted, coincidentally, that traders are selling off Asda debt on the cheap, as fears grow on the ability of the company to repay £4bn in loans. The Sunday Times also flagged that the biggest shareholders in the Motor dealer Pendragon are objecting to the level of Director’s pay, ahead of the upcoming AGM. The “Stocks to Watch” column in the Mail on Sunday noted that investors in THG may have a different idea about what an acceptable takeover bid level is, given that the shares have tumbled to a low of 74p…and it also flagged that the JD Sports final results were meant to be
• Sunday’s Press and News (3): In terms of Economics comments, we give our usual shout-out to the column by the Sunday Times Economics correspondent David Smith, headlined “The UK’s “no mates” economy is down, but not quite out”, in which he noted that “A technical recession, if there is one, will be small beer”. We also enjoyed the columns by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“Get ready for a tsunami of industrial action, as railwaymen go for broke”) and by Economics correspondent Philip Inman in the Observer (“We face a global crisis. And no one knows what to do”).
• Today’s News: The ABF/Primark Q3 trading update (for the 12 weeks to 28 May) is accompanied by the news that Primark is to trial a “Click and Collect” service on an expanded kids range in up to 25 stores in the north-west at Christmas. As for the strong trading recovery post-Covid, Primark sales in the quarter were a hefty 81% ahead of last year and 4% higher than 3 years ago (9% down LFL). Elsewhere, Frasers has announced, on the back of a £35m close season share buyback announcement, that it will be making a trading update on July 21st, with the finals pushed back to September.
• BDO High Street Sales Tracker: Although we have to make our usual caveats (that the weekly BDO High Street Sales Tracker for medium-sized Non-Food chains is statistically flawed and is skewed to the recovery sector of Fashion), the latest survey, for what it’s worth, again shows relatively weak momentum, given the recovery from the extended Jubilee holiday in the week before. In the w/e June 12th Total BDO LFL sales (including some Homewares and Lifestyle retailers, as well as the Fashion retailers) were “only” up by 7.6% on the year before (with Store sales up by c9% and with Online sales up by c3%), whilst Fashion sales alone were up by 7.1% LFL.
• This Week’s News: The delayed JD Sports finals must be out soon…but there is still plenty going on this week. Tomorrow, we get the monthly Kantar grocery sales figures and the Pendragon AGM. The Kingfisher AGM Is on Wednesday and then the Naked Wines finals and the Card Factory AGM are on Thursday. Friday first thing then brings the monthly GFK Consumer Confidence index and the ONS Retail Sales figures for May.