Fever Tree (cautious update), DPP (buoyant), Vue, inflation, labour etc.:

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A DAY IN THE LIFE:

As we’re a bit worn out by the heat, TGIF. And wandering amidst the crowds of Westminster to check out a few watering holes didn’t help with our time-keeping this morning either. Beautiful pubs over there, by the way, and quite busy. Have a great weekend and on to the news:

PUBS & RESTAURANTS:

Inflation:

CGA and Prestige have updated on inflation in the foodservice sector, saying that it ‘topped 10% for the fourth successive month in May.’ The report suggests that ‘all 10 of the Index’s food and drink categories recorded both year-on-year and quarter-on-quarter inflation in the month. The Oils & Fats (+3.7%), Dairy and Fruit categories are seeing the highest rates of year-on-year increases…’

• Brexit, Ukraine, Covid. The report adds that the key factors driving inflation are Russia’s invasion of Ukraine and the mounting costs of energy and supply.’ It adds that food service companies are ‘facing increased wage bills, with UK job vacancies reaching 1.3 million in May, while various micro supply and demand issues continue to affect prices in many areas.’

• The report ‘predicts there is little chance that inflation will fall below 7% until at least the second quarter of 2023—and may yet rise further over the remaining months of 2022.’ Prestige Purchasing CEO Shaun Allen said: “High levels of inflation are clearly around for the long haul. Our analysis shows that the delta between operators with average versus good market pricing is now over 9%, which is about 3 percentage points of gross margin. Operators would be well advised to invest in skills and resource to manage this volatile environment.’

• CGA adds ‘inflation now hasn’t been below double digits since January, and the relentless pressure on prices is squeezing businesses across the food and drink sector. With the war in Ukraine and consumers’ cost-of-living crisis mounting, we must expect challenges to get worse before they get better.’

• Bloomberg ran a piece this morning saying that, in the US as well as in the UK. ‘Team Transient’ was in retreat. Certainly (at least we hope) fuel price rises should drop out in due course – but the energy price cap has a couple more spins in it yet – and the same should be true for some foodstuffs, but, if the pressure moves from commodities to wages and other costs, inflation could be with us for some time to come yet.

Labour shortages:

The latest Future Shock report by UKH and CGA suggests that recovery in hospitality is being ‘stymied by labour shortages, rising costs, and a drop in consumer confidence’. It says that sales (though certainly not volumes) are back to 2019 levels but adds ‘15% of roles remain vacant, costs are spiralling and consumer spending is being impacted by cost of living challenges…’

• Margins are under sustained pressure as, though sales are back to 2019 levels, some of this comes from low-margin delivery and costs have risen by perhaps 15% plus, energy costs by much more, over the three year period.

• The report says sales are ‘buoyed by takeaway and delivery sales which are up 107% in May 2022 compared to May 2019, and there’s been a 1% net increase in the number of licensed premises in the UK between December 2021 and March 2022. However, these are rare bright spots indeed, for an industry battling to survive an onslaught of challenges.’

• The report adds that ‘45% of businesses have reduced trading hours and a third have had to close for a least a day. This is despite 77% of operators increasing pay to retain and attract staff, resulting in an 11% increase in average pay levels for hospitality staff over the last year.’

• These will be average figures and some operators will be much more adversely impacted than others. Lower margin players could be vulnerable as cranking up pay might wipe out profits.

• The report adds that cost factors hitting operators will also be giving consumers a reason to pause for thought when they consider spending. We have commented previously that, in the short term at least, big ticket spending reductions could take much of the strain though, it has to be admitted, that is a hope rather than a guarantee.

• UKH’s Kate Nicholls calls for help saying that, with ‘positive action from Government, such as root and branch reform of business rates, a system that disproportionally taxes hospitality, the sector will be able to drive investment in local economies, [hospitality will be able to] create jobs and play a full part in the UK’s economic recovery.’

• CGA’s Karl Chessell adds ‘while underlying demand is high, inflationary pressures are now squeezing consumers’ spending and hurting both profit margins and investment plans. Severe shortages of staff will continue, and business confidence – which was solid at the start of the year – has been impacted. These challenges are largely out of hospitality’s hands and while the sector received solid support during the pandemic from the Government, which rightly recognised its importance to the UK economy, it deserves more help now.’

The BCC also comments on labour shortages post Brexit and the Great Retirement saying ‘construction; production and manufacturing; logistics; and hospitality facing greatest difficulties recruiting staff (all 78% or higher), but all sectors have significant issues…’

• The BCC calls for easier access to overseas labour via ‘urgent reform of the Shortage Occupations List.’ The BCC says ‘businesses remain under huge pressure to fill jobs, but record levels of recruitment difficulty are showing no signs of improvement. Solutions are urgently needed, so that firms can keep their doors open throughout these tough times.’

• It adds ‘the SOL is not currently fit for purpose and should be more flexible, so it supports firms experiencing a national recruitment crisis. Recruitment difficulties have been at record highs for a year.’ It says ‘there are 1.3 million unfilled jobs in our economy and now fewer people in the workforce than before the pandemic. This is holding back productivity and growth, and employers are at their wits’ end. It is putting livelihoods at risk and damaging the economy.’

The Propensity to spend

Data from Rightmove shows that average private rents in Britain have hit record highs and are up by as much as 20% in some areas such as Manchester. This will be taking money from people with a high propensity to spend and delivering it to richer individuals or corporations.

• The average rent in London is now said to be £2,257. That’s a month, not a year. And it’s from after-tax income meaning that an individual or a couple need to earmark the top £40,000 of their income to pay rent. The average salary in the UK is around £30,000. The maths here becomes a little tricky. Rightmove says that seaside towns – Weymouth in Dorset, Torquay in Devon and Margate in Kent – saw rents rise by 19.1%, 18% and 16.9% respectively.

High Streets:

The Local Data Company has commented on voids and the state of the UK’s high streets saying ‘the key message is that there is still difficulty ahead. With the rising cost of living, supply chain issues and staff shortages (which have also affected retail), there are numerous elements to tackle, although there are some positive shoots…’

• The LDC says ‘as a result of retail parks having reviewed their retail mix over the course of the last two and a half years, the number of retail park leisure units in GB rose from 2,528 in May 2019 to 3,014 in May 2022, a growth of 19%.’ It says ‘international fast food operators such as Taco Bell, Five Guys, Wendy’s and Tim Hortons have all expanded their presence in the UK to make the most of continuing growth in this sector.’

• It cautions that ‘the casual dining sector in particular must remain mindful of lessons from the past to avoid the oversaturation and resulting closures seen in 2019.’ It says ‘compared to retail, leisure spend is expected to be more resilient this year, with consumers more likely to spend on experiences and social outings than clothing or big-ticket items. The cost of living crisis and disruptions at airports are likely to boost staycations despite international travel now largely unrestricted. Inbound tourism is also set to bounce back with full attendance at events including the Platinum Jubilee, Commonwealth Games, Wimbledon, Glastonbury and the British Grand Prix providing a sizeable boost to leisure.’

• The LDC quotes Ryan de Oliveira, co-founder of speciality coffee shop The Attendant, who commented that ‘the lack of stability in the industry has made it difficult to plan ahead. Rising costs and inflation are being passed onto the consumer in the form of higher prices, and this is unlikely to change in the near future. Although the hospitality industry is one of the UK’s largest employers, many leisure operators feel that government initiatives have been insufficient to support recovery and address recruitment issues compounded by Brexit. The VAT increase from 12.5% to 20% has also come into effect for the hospitality sector, putting further strain on businesses at a time where many still need to recover. According to Ryan de Oliveira, the focus remains on being as lean as possible.’

Other news:

Peckwater Brands has commissioned a survey that suggests 64% of hospitality business leaders questioned felt that they had been abandoned by the government.

Pricing and the potential downturn in demand. Interestingly, Loungers’ chairman Alex Reilley, in his ‘Looking ahead’ section of the company’s results, says that ‘we have experience of dealing with a seismic economic shock before, having traded successfully through the 2008 financial crisis…’

• He says that, prior to that downturn, ‘the economy was buoyant and consumer spending was elastic, which was exploited by the sector, and specifically by casual dining operators who confidently increased their prices.’ He adds ‘we took the view then that we should minimise any price increases and hold on to our value for money credentials. We resisted making short-term gains in exchange for being fully prepared should a recession happen. Ultimately this approach paid dividends, and when recession hit in the autumn of 2008 we didn’t need to alter our proposition or change our pricing as the consumer recognised that we already offered great value for money.’

• Mr Reilley says ‘by contrast, many of our peers found they had driven price increases too strongly and resorted to discounting in a desperate attempt to drive volume, which ultimately ended up undermining their offer for years afterwards.’

• Coming out the other side, Mr Reilley says ‘as our peers retrenched we expanded, taking advantage of an uncompetitive landscape for new sites and attracting talent to a business that was recognised to be winning. In September 2008 we had nine sites and by the end of 2011 we had 20 sites, with a further nine new sites planned for 2012.’

Michael Kill, CEO of the NTIA, comments on the announcement from Government that it will be extending the off-sales easement for a further year in recognition of challenges within the sector, saying ‘the extension of the off-sales easement from the Government today has come at a key moment within the recovery of the sector, as we move into the summer season.’

• Mr Kill says ‘this is without a doubt a step forward, but we must also ask Government to consider other areas of deregulation and easement which would support a broader range of businesses within the night time economy and hospitality sectors.’ He adds ‘we continue to work with Government and key stakeholders to develop these opportunities and further financial reliefs as we transition to new PM and cabinet with a fresh outlook on the situation.’

Just Eat has announced a £1m financial support package for small, independent restaurant partners.

Train drivers (Aslef) are to strike on 30 July (a Saturday) and guards (RMT) are striking on 27 July (a Wednesday). The RMT added later yesterday that its members would also walk out on 18 and 20 August. This will be negative for operators who, normally, service commuters.

The government, which is currently not really functioning, is under pressure to prove that Levelling Up is not just another slogan as the Centre for Cities has found that the real rate of inflation is higher in poorer areas (where more disposable income is spent of food and fuel) than in wealthier, southern towns.

• The Centre for Cities reports that the real rate of inflation in Burnley, Blackpool and Blackburn was 11.8%, 11.0% and 11.0% respectively whilst in Cambridge and London it was 8.8%. It says poorer housing tends to have less good insulation. It says families living in the North, Midlands and Wales could be £340 a year worse off than those living in the South as a result of increased fuel use.

COMPANY NEWS:

Fever-Tree updates on H1 trading saying that revenues were up by 14% at £160.9m. It goes on to caution on profits due to rising costs (see below). The company says it ‘delivered a solid first half revenue performance as the On-Trade showed promising signs of recovery and as a result the Group is maintaining its revenue guidance range of £355 million to £365 million for the full year.’ The company goes on to comment on costs, margins and profits…

• The company adds that ‘the impact of logistics and cost headwinds prevalent across the industry have significantly worsened in recent months, and we now anticipate gross margins of c.37% and an EBITDA margin of c.14% for the first half. We expect this to continue to impact the business during the second half, resulting in a revised EBITDA guidance of between £37.5 million and £45 million for the full year.’

• Fever Tree says ‘consumer demand remains strong and we are focused on driving a number of initiatives to prioritise availability whilst also mitigating the on-going impact of the current logistics and cost headwinds.’

• The company says in the ‘last eight weeks we have seen rapid shifts in the operational and cost backdrop. As a result, our outlook has materially changed with regards to three specific areas.’ The company mentions labour shortages, glass availability and overall costs. it says ‘the result of this exceptionally challenging environment, alongside some limited sales mix and FX hedging impacts, is that we expect a further 400bps to 600bps of margin dilution and as such expect gross margin in a range of 33% to 35%.’

• Fever Tree says ‘we are focused on mitigating these cost impacts whilst also prioritising continuity of supply. Demand remains strong across our key regions, and we are confident that a number of significant cost impacts, including our exposure to sea freight, will be transitory in nature. As such, we will continue to invest in the business to drive the long-term opportunity through marketing expenditure, people and innovation, and expect operational expenditure of c.22.5% of revenue, resulting in an EBITDA range of c.£37.5 million – c.£45 million for FY22.’

• CEO Tim Warrillow says ‘whilst we are seeing positive top line performance and expect to deliver good revenue growth for the full year, the challenging logistical and cost headwinds we highlighted previously have significantly worsened in recent months and we now expect them to notably impact our full year margins.’ He adds ‘despite the current challenges of the volatile logistical and cost environment, we continue to make good progress across our regions. The strong and growing consumer demand for the brand, our exciting pipeline of innovation, and the growing interest in long-mixed drinks, gives us more confidence than ever in the long-term opportunity.’

DP Poland has updated on trading for the month of June 2022 and first 10 days of July 2022 with Chief Executive Officer, Piotr Dzierżek, saying ‘I am delighted to see the strong sales performance achieved in the first half of 2022 continuing which is a consequence of our hard work in prior months and investment in customer acquisition.’ The company says LfL system sales were up by 23.5% in June 2022 compared to June 2021 with dine-in sales up by 55.8% LFL compared to June 2021 and 21.3% compared to June 2019…’

• The company adds that delivery ‘LFL System Sales have continued to grow by 9.6% LFL despite a resurgence of dine-in sales following the relaxation of COVID-19 restrictions.’ It adds that total sales were up by 20.5% in June 2022 compared to June 2021.

• DPP adds that ‘LFL System Sales for 10 days of July 2022 increased by 32.9% compared to July 2021’ and says that it has ‘cash at bank of £0.8m as at 30 June 2022 (as at 31 December 2021: £1.8m); the decrease in cash balance results from CAPEX for two new stores openings, purchase of 6 new ovens, 30 new fuel scooters, 50 e-bikes and covering working capital needs.’

• Re the future, DPP says it believes ‘that the current store count can be multiplied via organic as well as acquisitive growth. After the time of consolidation and post completion of the integration of Dominium, the company has opened in June two new stores: in Szczecin and in Siedlce. The latter is a showcase of a potential that is available to DPP in the second and third tier Polish cities.’

• DPP adds that its acquisition of Domino’s Croatia should ‘complete ahead of the previously announced longstop date of 29 July 2022, and will make further announcements as appropriate.’

Amazon reports it is to create more than 4,000 jobs in the UK this year.

JD Wetherspoon has announced that 763 of its pubs across the UK are now selling a pint of beer for £1.49…

• JDW says that ‘the pubs are serving Ruddles Best (in some pubs Greene King IPA is being served) for the value-for-money price.’ Tim Martin says ‘our pubs have always offered a great choice of real ale at excellent prices.’ He adds ‘at a time when prices are increasing on almost everything, we are delighted to be able to buck the trend.’ Mr Martin adds ‘the last time a pint of beer averaged less than £1.50 was in 1992, which makes our beer unbeatable value.’

Sapient Corporate Finance has announced that it advised a consortium led by affiliates of Cerberus Capital Management on the acquisition of a portfolio of freehold pubs owned by SA Brain, the Welsh brewer and pub company.

• Sapient says ‘the portfolio comprises 95 high-quality, well-invested pubs and an accommodation business with over 200 bedrooms. The pubs are let on institutional leases to Marston’s, a leading operator of pubs and hotels across the UK.’ It adds ‘the transaction required the use of creative financing and structuring and reflects a great outcome for all parties.’

Oakman Inns is to open the 1.2 acre grounds of its Akeman Inn near Aylesbury to its Buckinghamshire neighbours and the local community. The grounds feature kitchen gardens and ‘a new woodland margin, and apple and damson orchards.’

Crêpeaffaire has appointed João Noronha Lopes as Non-Executive Chairman.

HOLIDAYS & LEISURE TRAVEL:

Capacity reductions:

In response to Heathrow’s capacity restrictions, British Airways has written to travel agents to say it will cancel “a small number” of additional flights. Carrier Emirates, meanwhile, has rejected demands for cuts saying such a suggestion is ‘unreasonable and unacceptable’.

Hotel Hub says that European corporate hotel bookings are now higher than they were pre-pandemic.

Meanwhile Cycas Hospitality has reported that ‘energy costs are at an insane level. Every piece of equipment in hotels is consuming energy.’ It asks ‘does every room need to have a minibar and does it need to be on the whole time?’ it says ‘occupancy is holding. Rate growth is very strong. But the pain [from] cost pressures is everywhere.’

OTHER LEISURE:

The Times reports ‘the Canadian investors behind Vue International will see their investments wiped out as the cinema chain undergoes a £1 billion financial restructuring.’ It says ‘Omers and Alberta Investment Management Corporation will cede control of the company to its lenders under a debt-for-equity swap that will convert £465 million of debt into equity. The planned financial restructuring would give the company an additional £75 million of liquidity to recapitalise it and allow it to return to the growth trail.’

FINANCE & MARKETS:

The IMF has said that the economic outlook in Europe is deteriorating. The European Commission believes that inflation could rise to 7.6% in 2022 as a whole (up from an expected average rate of 6.1% in May).

The IMF believes the Eurozone will grow by 2.6% this year and by 1.4% next. It had earlier predicted 2.7% and 2.3%.

China’s economy shrank by 2.6% in Q2.

Sterling weaker at $1.183 and €1.179. Oil price down a fraction at $99.96. UK10yr gilt yield up 2bps at 2.09%. World markets lower yesterday but London set to open up by around 22pts as at 6.30am.

FORTHCOMING NEWS:

DP Poland hosts its AGM today.

Next week, Tortilla updates on trading on Monday and Loungers hosts investor presentations on Tuesday. Premier Foods updates on Q1 on Wednesday and Fulham Shore reports full year numbers on Thursday. DPEU will update on H1 trading, also on Thursday.

Big week next week for economic releases. We have Unemployment and Average Earnings numbers on Tuesday then Inflation numbers on Wednesday. Thursday sees the ONS admit to how much the government is Borrowing on behalf of taxpayers and on Friday we have a triple whammy of Retail Sales numbers, the GfK Consumer Confidence Index and Flash PMIs for July.

RETAIL WITH NICK BUBB:

• Today’s News: The Burberry Q1 trading update (for the 13 weeks to July 2nd) is badly marred by the impact of the recent lockdowns in China (LFL store sales were up 16% ex-China, but only 1% up including China), but the company says that “While the current macro-economic environment creates some near-term uncertainty, our performance in China has been encouraging since our stores reopened in June and we are actively managing the headwind from inflation”.

• Today’s Press: According to the invaluable Guardian morning email briefing, the front page of the Guardian leads with the headline “Jail water firm bosses over pollution, says watchdog”, whilst the Daily Mirror sounds a “Red hot alert” as it warns that “A&E docs fear 40C surge”. The Tory leadership contest rages on other fronts: “Knives out for Penny! ‘Not up to job’ say rivals” screams the Daily Express and the Daily Mail says that critics have put “Mordaunt under the microscope”. The Times has “Boost for Truss in bitter struggle with Mordaunt”, while the Telegraph says “Frost urges Badenoch to stand down for Truss”. “Tory rivals turn on Mordaunt as favourite faces TV trial” is headline in the i, while the Metro goes with “Penny’s in heaven”, saying she has edged ahead of Liz Truss. The Financial Times’ splash is very much a Financial Times splash: “Morgan Stanley and JPMorgan
results set grim tone for Wall St”.

• Next Week’s News: A busier week kicks off on Tuesday with the In the Style finals and the latest Kantar grocery sales figures. Thursday then brings the Frasers trading update, the Howden interims, the Ocado interims and the Dunelm Q4 update. On Friday we get the latest monthly GFK Consumer Confidence index and the ONS Retail Sales figures for June, plus the JD Sports AGM.