Rising rates, ROO, Xmas, costs, Adnams, Pret, Tim Horton & more:

A DAY IN THE LIFE:

So, having somehow strung two wins together within the same calendar month, the Mighty Hull City has risen to the dizzy heights of 16th in the league.

And, I think I speak for most supporters when I say we’d gladly leave the season there if we could. However, optimism is bound to creep in and, it we can carry on scoring more goals in each match than we concede, we’ll be in the Premiership next season and the Champions’ League the season after.

Too much to ask? On to the news:

DELIVEROO – Q3 ANALYSTS’ CONFERENCE CALL:

Deliveroo on Friday morning held an analysts’ call for its Q3 update, and our comments thereon are set out below:

Gross Transaction Value (GTV)/Revenue:

• ROO said that GTV per order for Q3 was up by £2 YoY, with 70p of this being currency impact, with the remaining £1.30 increase being driven mainly by food price inflation, rather than consumer fee increases.

• The company said that so far, the increase in the consumer fee does not appear to be “wildly elastic”. The company stated that it had elasticity data for non-inflationary environments, but that it did not have much data for inflationary environments.

• Overall orders were down during Q3 down, worsening sequentially to -5% and then -7% in the last two months of the quarter.

• Average monthly users were flat YoY at 7.3m, the company said that Q3 is normally the slowest quarter for active users on the platform.

• The company defended its Klarna partnership, saying that customers will not pay more than the cost of the order, as no interest is being charged. It claimed there had been a misunderstanding in how this works, after it faced criticism for adding to consumer debt levels.

• Frequency of usage was flat YoY – the company said that the more affluent the area, the higher the level of engagement with the platform.

• UK&I strength has been geographically “pretty uniform”, with Greater London & its commuter belt has seeing strong growth.

• Restaurants that have ramped up prices more aggressively due to inflation are seeing lower conversion rates than restaurants that have taken a more measured approach.

• Going forwards, ROO referenced a difficult and weak consumer environment with some uncertainties heading into Q4, but that the period would also be boosted by the World Cup starting next month.

• The company said Q4 GTV growth should stabilise in the region of 5%, with October showing “no great variance” so far.

Profitability:

• The drivers to profitability are fees up, advertising revenue up and costs being reigned in. The company said it is starting to see benefits through marketing efficiencies

• The company reiterated its guidance on break-even EBITDA by H2 2023 or H1 2024 and 4% EBITDA margin by 2026.

• The company said active riders decreased to 170k in Q3 from 180k in the previous quarter. ROO also stated that it planned to onboard fewer riders going forwards, in a bid to arrest costs.

• The difference between EBITDA and CF is c£90m a year, at break-even EBITDA ROO is still £90m cash negative due to Editions capex and capitalised development for the platform. The company, however, has large cash reserves of £1bn which provides an ample amount of runway.

• ROO is investigating how to make interest on these large cash reserves. It stated that it did not plan to expand the existing £75m share buyback programme, nor pay out a special dividend to investors.

International markets:

• Singapore & Australia have faced tough comparatives due to Q3 2021 involving Covid restrictions. Therefore, current Q3 performance in these areas has been soft.

• France was weak in H1 but the market has since stabilised, ROO said it has been gaining share even through the whole year there.

• The company gained a significant amount of market share in Italy, especially in the affluent Milan region.

• UAE is profitable on an EBITDA basis, even when a proportion of central costs are allocated against the region.

• ROO has announced that it will enter the Qatar market using its established UAE team. It said that Qatar is a structurally profitable market that currently only has one player. It said the level of investment is not significant.

• Netherlands exit came after 6 years in that market. The biggest issue faced was the consumer willingness to pay outside of Amsterdam.

Langton Comment:

• Today’s update has seen a positive reaction from the market, pushing the shares up 5% since open.

• However, since IPO, Deliveroo shares have proved to be a dreadful investment. For the last six months, they have been dull. That has been their best performance to date.

• Deliveroo worked at its finals to persuade investors (and potential new investors) that its path to profitability is a credible one. The shares have been little changed.

• Deliveroo will still rely upon lower costs and higher revenues if it is to achieve profitability. This is uncharted territory.

• It would require customers to pay more for the same goods or restaurants to pay higher margins or for costs to fall. There are problems with each of those solutions.

• The company has significant cash reserves, but any delays to its plan to cash flow profitability could seriously harm investor sentiment.

• Deliveroo does not have the field to itself. Newer competitors will likely target its most profitable markets.

• The company has just withdrawn from the market in The Netherlands after 6 years of operating there.

• The delivery market will need to do something that it does not currently achieve. That is generate returns for all concerned – restaurants, riders and Deliveroo.

• As mentioned earlier, ROO shares represent a continued leap of faith. We continue to believe that, whilst investors may be correct to exhibit this faith, more cautious observers may hesitate before getting involved.

PUBS & RESTAURANTS:

Trading:

CGA has updated on drink sales in the week to 15 October saying that sales ‘beat 2021 again, but inflation scuppers growth.’ It reports that ‘drinks sales in Britain’s On Premise have exceeded last year’s levels for the fourth week in a row’ with total drink sales up 5% on 2021 and up 4% on 2019…

• Inflation for both periods, of course, implies a real decline. Indeed, CGA says ‘with CPI inflation reported this week to be at 10.1%, drinks sales are still well down in real terms.’ It says, nonetheless, that ‘four weeks of growth should raise hopes for decent trading in the run-up to Christmas.’

• Across categories versus 2021, CGA says that wine, soft drinks, beer and cider were up by 5%, 6%, 13% and 14% respectively whilst spirits’ sales were down by 10%. Spirits had been very strong earlier this year and comps from last year will also be tough. This had been put down to a boom in demand for cocktails.

• CGA’s Jonathan Jones comments ‘it’s a tumultuous time for the UK economy and politics, but it’s very encouraging to see that people are still so keen to drink out in pubs, bars and restaurants.’ He days ‘the squeeze on consumers’ discretionary spending continues to tighten, but they will hopefully sustain their enthusiasm as we move towards the first normal Christmas for three years. The football World Cup also gives us confidence that the beer and cider categories can continue their strong recent performance.’

Trading continued:

The latest Deloitte Consumer Confidence Tracker has shown that consumer confidence has fallen to a record low, with households particularly cutting back on leisure spending to save money as the cost of living crisis begins to bite…

• Deloitte shows that consumer confidence fell for a fifth consecutive quarter to its lowest level since 2011 when the survey began. The number, at minus 20, compares with minus 9.7 per cent in the same quarter last year. The report may lead to concerns that, given the negative momentum, Christmas spending may be markedly less healthy than hoped.

Accountant EY has reported that companies produced more profit warnings in Q3 this year than in any other Q3 for 20yrs. It reports 86 profit warnings coming from London-listed companies in the period, up 34% on the previous quarter. EY says that almost half of the warnings came from retailers…

• EY reports ‘the retail sector is facing a challenging winter, while, according to the EY Item Club Autumn Forecast, the UK economy is expected to be in recession until the middle of next year.’ It says retailers should ‘use the breathing space provided by the energy price cap to safeguard their long-term survival.’ EY adds ‘this means reviewing their pricing strategy and considering how and where they can pass price rises on, developing robust cash management plans and inventory visibility to avoid costly write-offs.’

• EY goes on to say ‘Christmas will be a critical period for the travel and leisure sector, particularly hospitality. Winter is also when traditionally tour operators start to see deposits for summer travel coming in, but consumers are increasingly taking a wait and see approach, creating cash flow challenges and making it much harder for businesses to plan.’

• It concludes ‘some companies will struggle to adapt, and some will be vulnerable to failure. But for travel and leisure companies who draw upon their experience, resilience, and agility, and tell a compelling long-term value story, the opportunities are significant.’

Christmas.

Lynx Purchasing says that menu planning this Christmas will be essential as costs are rising rapidly. It points to avian flu as potentially causing problems. ONS reported inflation is running at 10.1% and Lynx’s measure of food price inflation for food eaten out of the home is around 10.4%. Lynx says ‘from the turkey dinner right through to the cheeseboard, the price of many seasonal products is high as the peak trading season approaches. In addition, core menu items such as dairy, canned tomatoes and cooking oil, which are part of a wide range of recipes, are seeing continued increases and price volatility…’

• It adds ‘the reality is that consumers are seriously feeling the pinch, and will think carefully about discretionary spend this year. The earlier operators can plan menus and update suppliers on their expected ordering levels for the peak Christmas and New year trading period, the better.’

• Lynx says ‘that’s going to be a challenge, because although we know many consumers will be cutting back on spending, it’s not clear just how much that will affect hospitality spend this Christmas.’ Lynx says that operators should avoid’lazy or disorganised purchasing’ and says they should get ahead of any potential problems with delivery or cost.

• Lynx says ‘this year, it will be more important than ever to plan a range of menu options at different price points. Clearly, not every group of customers will be confident to book a full Christmas dinner with all the trimmings. By also offering choices such as a two-course Christmas special or a buffet menu operators will be able to appeal to a range of customer budgets.’

British retailers and hospitality groups are beginning to warn that the failure to secure staff ahead of Christmas could mean that trading over the period fails to achieve its potential.

Costs & the consumer:

Inflation gets real. First sausage rolls and now Tesco has raised the price for a Tesco meal deal from £3.50 to £3.90, Clubcard members will see the price go from £3 to £3.40. Food inflation is running at an annual rate of 14.5%….

• On a more positive note, Tesco has separately announced that it is looking for 15,000 people to fill temporary jobs, mostly at its larger stores, over Christmas. The company says ‘we know times are tough out there at the moment, so this is a good opportunity for anyone looking to boost their income over the festive period or who needs to find a stepping stone back into the world of work.’

Former Bank of England governor Lord Melvyn King told the Laura Kuenssberg programme yesterday that the UK faces a “more difficult” era of austerity than the one after the 2008 financial crisis…

• Lord King says people will face “significantly higher taxes” to fund public spending. New chancellor Jeremy Hunt has already said ‘this government will take the difficult decisions necessary to ensure there is trust and confidence in our national finances. That means decisions of eye-watering difficulty.’

• He has already reversed most of what outgoing PM Liz Truss and her short-lived chancellor Kwasi Kwarteng did, and this doesn’t go nearly far enough, begging the question just what were the latter two thinking?

• Lord King told Kuenssberg ‘public expenditure isn’t going down, if anything it will go up therefore taxes will have to rise to fill the gap which is there at present.’ He says ‘what we need is a government that will actually tell us honestly there is a reduction in our national standard of living because we’ve decided to help Ukraine and confront Russia and that means that all of us are going to have to share the burden, we can’t just put all of it on our children and grandchildren.’ Lord King doesn’t mention Brexit which, as the rest of Europe is also helping Ukraine and confronting Russia, is the differentiating factor when it comes to the UK.

• King says ‘the challenge is if we want European levels of welfare payments and public spending, you cannot finance that with American levels of tax rates, so we may need to confront the need to have significantly higher taxes on the average person. There isn’t enough money there among the rich to get it back.’

Politics:

Hard to ignore as politics is impacting the real world. JD Wetherspoon chairman Tim Martin comments that the next PM will be scrutinised closely by the bond market…

• He mentions that markets fell and yields rose at the very mention of Boris Johnson’s name. He goes on to suggest a lack of competence when he says ‘the market, unlike the Lord, as Warren Buffett once said, does not forgive those who know not what they do’.

Writing in the Sunday Times, Matthew Syed suggests that the most constructive thing the Tory Party could do for both itself and the country, is call a General Election. He says it is perhaps the single least likely outcome of the current impasse.

Nothing to see here, nothing to do with Brexit. The UK had five Prime Ministers in the 37yrs before the Brexit vote. It will shortly have had another five in the 6yrs since. (Counting David Cameron in both the pre- and post-period).

The Sunday Times is calling for less narcissism, more competence. The Express says Boris is Back. Both physically, in that he is back from his holiday taken during term time and maybe wishfully thinking metaphorically as PM.

Other news:

Responding to the Digital, Culture, Media and Sport Committee’s ‘Promoting Britain Abroad’ report, UKH CEO Kate Nicholls comments that the ‘committee is absolutely right to highlight the enormous value tourism offers to the UK economy, and hospitality is at the heart of that offering.’ She says ‘every part of the UK has something to offer tourists and we have a fantastic reputation as a country, but we should not rest on our laurels and we need to be globally competitive…’

• Ms Nicholls says ‘VAT remains much higher in the UK compared to our European counterparts. We would encourage the government to look at the cost benefits of lowering the rate of VAT and the introduction of tax-free shopping to redress this imbalance.’

• She adds ‘the committee’s recommendation to introduce a temporary recovery visa…would go a long way to helping recruitment challenges and would support the sector’s ability to provide fantastic service to all its customers. We would strongly urge the government to consider its introduction as part of a pro-growth review of immigration policy.’

• Ms Nicholls concludes ‘the impression the UK can leave on visitors, in particular school visits, should not be underestimated and we also absolutely support the committee’s recommendation to allow single visas as part of educational visits.’

Provenance: KAM comments on provenance saying that some ‘47% of consumers want to see more locally sourced items on menus – and 34% of operators are already offering more locally sourced options than last year…’

• KAM says ‘Gen Z are even more keen than the average consumer to want to not only eat/drink local produce’ and it adds that ‘menus are the primary source of information that customers look at when researching where to eat.’ KAM adds ‘locally sourced can become an opportunity to upsell. Consumers understand that ‘local = quality’.

• It says that ‘58% of consumers we spoke to said that seeing locally produced items on a menu would influence which pub/bar/restaurant they go to- in fact, the presence of ‘local’ produce as part of an offering has more sway than calories in the decision-making process.’

US consumer experience. Revenue Management Solutions in the US has found that menu price increases of more than 10% to 13% have a negative impact on traffic…

• It is likely that every percentage point has an impact but, in many things, there is a ‘tipping point’ at which consumers notice and begin to take avoiding action. National Restaurant News interprets the data and says ‘we all know inflation has been a relentless beast. We know low-income consumers are getting hit particularly hard.’ It says ‘food-away-from-home inflation is up 8.5% this year, so on average, restaurants fall below that [10% to 13%] threshold.’ It adds that’s not to say that consumers are thrilled to face price rises, however.

COMPANY NEWS:

Tim’s China has opened its 500th Tim Horton’s in China, reporting revenue up 70% YoY to $56m over the last six months. Tims China, which launched its first store in 2019 in Shanghai, began trading on New York’s Nasdaq in September 2022.

The Inn Collection Group is refurbishing 3 iconic Lake District Inns: The Wateredge Inn, The Waterhead Inn and The Angel Inn. 

Pret A Manger has opened its first store in Kuwait via Kuwaiti franchise partner One PM. Pret plans to double the size of its global store count by 2026.

Wendy’s in the US is promoting its $3 breakfast menu.

Adnam’s has announced that director Michael Heald has purchased 3,000 shares in the company at £89 each.

The Telegraph reports on an interview with Julian Metcalfe, founder of Pret and Itsu saying that food prices are ‘only just beginning to go up.’ He says ‘some have suddenly almost doubled.’ Metcalfe adds ‘restaurant prices are going through the roof. Who is going to buy a panna cotta for 25 quid? Nobody.’

• Mr Metcalfe suggests that the government should consider reducing VAT for hospitality to 10%, it should help with staffing and change the rates system.

HOLIDAYS & LEISURE TRAVEL:

Alan Bowen, advisor to the Association of Atol Companies, has claimed that government U-turns on tax cuts, the removal of the energy price guarantee from April and a warning of ‘eye-watering’ spending cuts will damage demand for travel…

• Bowen said ‘Another budget on October 31 is not going to help. We’re in a whirlwind. The peaks market is going to be thin. People will say ‘Unless I know what my mortgage and energy bills will be, I’m not going to commit to spending’’. He adds ‘certain markets will have money to spend. But the average family is going to find life difficult. Package operators already see people asking, ‘How much is this going to cost?’’

Gatwick will operate flights to 172 destinations over this coming half-term break, 87% of the number it served in the same holiday period in 2019.

The Hoxton will open its fourth London hotel in Shepherd’s Bush this December, followed by 6 more openings across key European cities by early 2024.

A HVS study has found that hotel franchising gives operators support and confidence in tough times…

• Charles Carpentier, an associate with HVS London, said ‘Large brands have been major instigators in negotiating with industry associations and local governments to provide support to their franchisees and this has persuaded many independent hoteliers to consider franchising, or existing franchisors to switch brands’.

Travel Weekly reports that travel agents have remained optimistic about the peak January sales period but expect companies to be ‘smarter’ with their marketing spend. Independent Travel Experts said its members would be “ready to hit the ground running and adapt as the market requires” in January.

Spain has removed its last covid restrictions for UK travellers to the country.

OTHER LEISURE:

Twitter has briefed its staff that there are no plans for mass redundancies despite Elon Musk declaring that he will make 75% of Twitter’s current workforce redundant when the $44bn takeover is completed.

FINANCE & MARKETS:

The ONS on Friday updated on government borrowing saying that net borrowing was £20bn in September, around £3bn ahead of forecasts. Debt interest cost taxpayers £7.7bn for the month of September alone. Government spending rose by £5.8bn to £79.3bn in the month.

The ONS on Friday reported that retail sales volumes fell more than expected by 1.4% last month.

Outgoing PM Liz Truss is reported to have ignored the advice of supportive economists ahead of her ill-fated mini-Budget last month.

Ratings agency Moody’s has cut its outlook on the UK economy to “negative” from stable due to political turmoil and high inflation. Moody’s says that there are ‘risks to the UK’s debt affordability’.

• Moody’s says ‘the government’s initial inability to deliver a credible policy response to address investor concerns around this unfunded stimulus further weakened the UK’s policy credibility, which is unlikely to be fully restored by the subsequent decision to reverse most of the tax cuts.’

Sterling up on Boris Johnson’s withdrawal from the race to become PM at $1.1332 and €1.151. Oil up at $93.03 and the UK 10yr gilt yield up 12bps at 4.06%. Shares broadly higher on Friday & London set to open up some 4pts as at 6.30am.

RETAIL WITH NICK BUBB:

• Saturday’s Press and News (1): The front-page headlines of Saturday’s papers were dominated by the in-fighting involved in the latest Tory party leadership contest and the speculation about the possible return of the disgraced Boris Johnson as PM…The Daily Telegraph flagged that “Sunak races to secure majority of Tory MPs”, whilst the Daily Mail asked, improbably, “Could Boris and Rishi now unite to save Tories?”. The Guardian simply said “Tory tribes go to war”, but the FT led with “Investors and MPs alarmed by idea of Johnson’s return to No 10” and the Times noted the warning of former Tory leader William Hague that “Johnson “will prove fatal””.

• Saturday’s Press and News (2): In terms of Retail stories, the weaker than expected ONS Retail Sales figures for September got plenty of  coverage, eg with the FT flagging that “Falling retail sales fuel fears of recession on horizon” and the Times highlighting that “Struggling retail sales fall below pre-Covid levels”, whilst the Daily Mail stockmarket report led with the negative impact of the figures on sector sentiment on Friday (“Retailers feel pinch as shoppers cut spending”). The Times’ stockmarket report led with the Adidas profit warning, which hit JD Sports on Friday (“Retail sector runs on empty as unsold stock piles up at Adidas”). The main Business story in the Telegraph was about the problems of Matalan (“Battle for Matalan as High Street sales drop”), with the Times also noting that Matalan’s lenders are poised to take control of the embattled business. There was
also a gloomy Business editorial in the Telegraph, headlined “High Street faces fight for survival this winter”. The Times also picked up on the warning from Wickes about higher energy costs (“Wickes expects energy costs to soar in economic storm”) and the Deliveroo Q3 results (“Rising prices apply brake at Deliveroo”).

• Sunday’s Press and News (1): On Sunday, the front-page headlines were focused on the controversial bid by the disgraced Boris Johnson to return as Tory party leader: the Sunday Telegraph flagged that “Sunak and Johnson urged to strike deal”, whilst the Mail on Sunday repeated the question of its sister paper on Saturday: “Will Boris and Rishi thrash out unity deal?”. The Sunday Times, however, noted that “Tory right spurns Johnson as Sunak support surges”, whilst the Observer highlighted that “Top Tories say Johnson return “would risk the party’s death””.

• Sunday’s Press and News (2): On Sunday, in terms of Retail news, the lead Business story in the Sunday Telegraph was the scoop that Frasers has picked up a stake in the struggling ASOS, whilst the Sunday Times revealed that the private equity owner of Morrisons has broken its promise not to sell off store freeholds and has put five of them up for sale, for c£150m, to raise cash. The Mail on Sunday highlighted that M&S want to “turbocharge” Ocado, by making more of the M&S range available Online. The Mail on Sunday also noted the City view that Next will “survive the storm heading for High Streets” and that the fears about Moonpig may be overdone. The Observer had a profile of the CEO of The Body Shop, David Boynton (“The head of the cosmetics chain is facing falling sales and takeover rumours but is still convinced High Street shopping has a future”), whilst the Sunday
Telegraph had a feature on the outlook for Burberry (”Could Burberry be a foreign takeover target?”).

• Sunday’s Press and News (3): In terms of Economics comments in the Sunday papers, we give our usual shout-out to the column by the Sunday Times Economics correspondent, David Smith (“Markets are calmer, but our economic prospects darker”), in which he flagged that, given the U-turn on the energy price cap, “Hunt has dealt with one set of uncertainties but created another”. We also enjoyed the columns by the veteran City commentator, Hamish Macrae, in the Mail on Sunday (headlined “UK facing a slog to rebuild trust”); by the veteran City commentator, Jeremy Warner, in the Sunday Telegraph (headlined “After Brexit, there is no one Britain can blame for this mess but itself”)  and by the Economics correspondent of the Observer, Philip Inman (headlined “Brexit isn’t working and Labour must say so to voters”).

Today’s News: There is no confirmation so far of the Sunday Telegraph story that Frasers has picked up a stake in the struggling ASOS, but the company has announced that it has edged up its stake in Hugo Boss to 32.8% (mostly via the sale of put options) and the statement, unusually, goes on to trumpet the thinking behind the “strategic investments” that it makes and noting that the recent acquisitions of Studio Retail and Missguided “are examples of its drive to expand and acquire businesses and brands that can strengthen Frasers Group, and the connection to our consumers”. In other news, Friday saw the takeover of Ted Baker by Authentic Brands take effect and today the Motor dealer Pendragon has announced that the Hedin Group has been given a “put up or shut up” extension by the Takeover Panel to make a firm offer, with due diligence still taking place. 

This Week’s News: As skool half-term begins, today will be dominated by the MP voting in the latest Tory party leadership contest. Tomorrow brings the THG Q3 update, followed on Wednesday by the Virgin Wines finals. Thursday then brings The Works’ AGM and the Inchcape Q3 update, plus the Apple Q4 results and the Amazon Q3 results out in the US.