Langton Capital – 2019-11-01 – PREMIUM – Equipment costs, dark kitchens, delivery, T Cook etc.:
Equipment costs, dark kitchens, delivery, T Cook etc.:
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A DAY IN THE LIFE:
This is a first, but bits of our grass have lately become infested with mushrooms.
They’ve rather sprung up like something from Stranger Things virtually overnight and, though they look edible, I wouldn’t like to give them a try.
Maybe it’s the damp. Or maybe something ominous is coming to the surface, who knows. Anyway, a little pushed this morning so let’s move on to the news:
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THE HIDDEN COST OF DOING BUSINESS: One of the few certainties with regard to a plan, is that, though it may be better than nothing, it will be wrong. Here we look at a few more (often unplanned) planning hiccups. 1 Nov 2019.
• Operators should budget. But budgets, for better or more often worse, will be wrong.
• They can lead to a false sense of certainty and ‘hedgehog graphs’ (where the jam is always tomorrow) are common.
• Here we look at equipment.
Equipment costs :
• The well-known costs of rent, rates and labour aren’t the only costs proprietors of restaurants face.
• Other hidden costs often loom in the operations of a restaurant, costs which wouldn’t necessarily be presented on a spreadsheet.
• Fitting out a restaurant is costly and involves purchasing a lot of equipment, from grills to ventilation systems.
• These need to be sourced, ordered, fitted, paid for, maintained and, unfortunately, replaced
• These different pieces of equipment will all have their own life cycles and the loss of one piece of equipment could lead to operations being severely disrupted.
• The cost of these disruptions will not be forecast on your typical spreadsheet.
• Stats are often produced saying 60%, 70% or 80% of consumers ‘couldn’t deal with’ an unexpected £500 bill. Add a zero or two and many restaurants may be in the same position
• However, it is necessary to have a robust replacement cycle in place and procedures to follow in case of any unforeseen malfunction and in order to maintain the quality of the product served.
• The average lifespan of commercial kitchen equipment is estimated at around 10 years, however properly maintained equipment can last much longer than 10 years and vice versa.
• Each piece of equipment may need to be maintained and cleaned regularly.
• Cleaning can be time consuming and increases a restaurant’s labour costs, and repairs may require calling in specialists who require a premium fee.
• Whatever the reason behind poor or no service, customers may not be forgiving.
• Furthermore, staff may be required to be trained to use the equipment, once again adding to costs that may not be represented in a spreadsheet overview of the business.
• Where is the downtime in the spreadsheet? What about if staff turnover rises from 75% to 150%? How much more does the operator have to spend on training?
• And the above are not the only risks. Perfectly ‘good’ equipment today can be deemed unacceptable tomorrow – think diesel cars in cities
• A whole new kitchen could be a business-breaker. For an estate of a few dozen outlets, it would be a major issue
• Examples of this could include a ban on charcoal grills in city centre establishments or tighter regulation of oil disposal to protect sewers. Legislation in France has recently begun to swing against open fires, even wood-burning
• Furthermore, new restaurants will have to comply with existing regulations which could present unexpected costs, for example extensive fire safety or ventilation requirements.
• These are examples of costs that won’t necessarily be predicted in a spreadsheet which may focus on margins and product.
What does this mean?
• Businesses, like households, may need a financial buffer
• The financial models may still look OK but cash-flow will be hit if equipment costs are higher than expected
• Secondary financing schemes (leasing, HP etc.) may be necessary. It would be sensible for the operator to at least consider what he/she would do if they came in tomorrow and their oven didn’t switch on
GENERAL NEWS – PUBS & RESTAURANTS:
• The BBPA has welcomed a report by the House of Commons Treasury Select Committee about the Impact of Business Rates on Businesses. David Wilson, Public Affairs Director at the BBPA commented: ‘The Treasury Select Committee is absolutely right to support our call for reform of business rates. The current system is particularly unfair on pubs who pay 2.8 per cent of the entire business rates bill despite accounting for just 0.5 per cent of business turnover’.
• UKHospitality has also commented upon the same report from the House of Commons, with Chief Executive Kate Nicholls commenting: ‘We’re pleased to see the Committee recognising the burden of business rates has grown and the system no longer works. The current system is nowhere near flexible enough and it has directly contributed to the decline of high streets. Hospitality businesses are at a particular disadvantage and have been arguably hammered worse than any other sector’.
• The takeover of Greene King by CKA has now completed. The former has seen its shares delisted.
• New York City Council is putting pressure on food delivery companies such as Grub Hub to ease their terms for struggling small restaurant businesses. New York fees scale between 10% and 30%.
• McDonald’s has opened its first ‘dark kitchen’ in the UK, in Hounslow, London. The site is not attached to a restaurant and will be used for food preparation and subsequent delivery only. Property Week reports McDonald’s as saying that the move is ‘part of a wider trial to test different restaurant formats’. The company says the kitchen will ‘ensure that restaurants in the surrounding area can provide the service and convenience that our customers expect, ensuring that McDelivery customers have a great experience’.
• Uber founder Travis Kalanick bought 100 dark kitchens in March with a view to renting out the spaces to fast-food companies. Property Week reports that Deliveroo has 16 dark kitchens operating across the UK.
• Tesco says it will remove a billion pieces of plastic packaging from products in its UK stores by the end of 2020. The company will introduce paper bags for fruit & bakery product, remove plastic trays from ready meals and cut down on secondary lids and wrappers on clothing and greeting cards.
• Deliveroo reports that orders for vegan dishes have risen by 330% over the last two years. It says that the number of vegan operators on its sites has risen by 168% in the last year alone.
• Rockfish, the South West Seafood restaurant group run by Mitch Tonks, has seen revenues rise to £7.95m during 2019 up from £6.9m in 2018. The group’s EBITDA fell from £0.6m in 2018 to £0.5m in 2019. Mitch Tonks commented: ‘2018/19 was a real turning point for our business. We saw some tremendous like-for-like sales, opened one restaurant but also paused to consider what was going on in the wider industry and economy and focused on strengthening our senior team and building the pipeline for the future’.
• Molson Coors has announced a restructuring and rebranding following Q3 losses of $402m.
• M&S and Spar have both announced all their own-brand wines will become vegan within the next three years.
• The Old Spot Pub Company acquires the Crown & Treaty in Uxbridge, taking its portfolio of pubs to 10, with the Ei Managed Investments joint venture planning to open two more for early 2020.
• Denny’s Corp. expects to complete its refranchising programme by the end of 2019, with 56 company-owned restaurants sold in Q3. Denny’s had 1,706 restaurants as at the end of Q3 (Sept. 25).
• Amazon invests $600m into Indian subsidiaries as it battles with Walmart-owned Flipkart for Indian market share.
HOLIDAYS & LEISURE TRAVEL:
• Chinese conglomerate Fosun is believed to be close to purchasing Thomas Cook’s brand and its intellectual property assets. It still remains unclear how much Fosun will pay for these assets.
• MGM Resorts International has reported strong Q3 results bucking the the US hotel industry trend for weaker-than-expected trade. The group saw revenue increase 9% with EBITDA up 14% to $814m.
• STR has reported US hotel data for the week ending 26 October, with occupancy declining 0.2% to 70.5%, ADR increasing 0.2% to $135 and RevPAR remaining flat at $95.15.
• Jet2.com is introducing summer flights to Innsbruck from Birmingham and Manchester for the first time.
• Tui adds 135 former Thomas Cook hotels to its offering for bookings next year, with 19 in Turkey, 16 in Greece, six in the Balearic Islands, 22 in the Canary Islands & 13 in Mexico. Tui has added an extra two million seats on flights to those destinations.
• Park Plaza hotels reports LfL revenue up 6% in the nine months to 30 September 2019, with total revenue of £276.3m, occupancy at 80.6% and RevPAR of £102. Boris Ivesha, president and CEO of PPHE, said ‘we benefited from the recent completion of several major repositioning projects and maturing properties across our portfolio and strong trading in the United Kingdom.’
• The beleaguered Goals Soccer Centres is being bought by rival Soccerworld, the value of the trade is believed to be £27m.
• EU regulators are investigating Facebook’s online marketplace with regards to online classified ads. Classified ads competitors have complained that Facebook has used its market power to give it an unfair competitive advantage.
FINANCE & ECONOMICS:
• The UK’s trade deficit with the rest of the world rose to its highest level in 8yrs last year as the service sector weakened. The trade deficit reached £37.7bn or 1.8% of GDP. The BCC says this ‘leaves the UK more exposed to sudden shifts in the economic conditions, including a disorderly departure from the EU’.
• The next Governor of the Bank of England will not be announced until after the upcoming General Election.
• Sterling up at $1.2958 and €1.1607. Oil down at $59.64. UK 10yr gilt yield down 6bps at 0.62%. World markets mixed, mostly lower.
• Brexit, politics etc.:
o The dead in a ditch date has passed. Having been told by the PM incorrectly that the UK would leave the EU yesterday, business has stockpiled for the second time in 6mths.
o Donald Trump has urged the UK to elect a Boris Johnson / Nigel Farage coalition. He says that Jeremy Corbyn would be bad for Britain.
o Donald Trump has said that Boris Johnson’s proposed EU withdrawal bill might make a trade deal with the US impossible.
o Channel Four’s Despatches says that NHS drug procurement is being discussed with American suppliers. The programme suggests that, if the US got its way and was able to raise the prices paid by the NHS to US levels, it would cost the British taxpayer £500m per week.
o US trade negotiators are said to be insisting that chlorinated chicken and other agricultural products that have been illegal in the EU for decades should be allowed into the UK post Brexit.
o The IFS has said that a Corbyn-led Labour Government would be less bad for the economy than would be a no-deal Brexit
o Mike Ashley has denied that he is a ‘bad boss’. Labour leader Jeremy Corbyn named Mr Ashley as a person currently exploiting a corrupt system
o The IEA suggests that the voting age should be reduced to 16yrs.
START THE DAY WITH A SONG:
Yesterday’s song was Beetlebum by Blur. Today who sang:
And count the time in quarter tones to ten,
Please don’t confront me with my failures
I had not forgotten them
RETAIL WITH NICK BUBB:
• Lookers: This has been a terrible year for the once well-regarded Manchester-based car dealer Lookers and there have been rumours in the market that the group had missed out on the recent stabilisation in the industry, but few could have expected the scale of today’s profit warning or that the highly experienced CEO Andy Bruce would be forced to fall on his sword…Lookers say that “trading over recent weeks, since mid-September, has been much more challenging than expected” and that as a result the Board now expects to report underlying profit before tax for the full year of only about £20m…In a challenging first half, profits fell from £40m to £29m, so this means that Lookers expect to report a small loss in the second half, with poor sales of new cars the key problem (September is the usually very profitable plate-change month in the new car business).
• BDO High Street Sales Tracker: We noted on Wednesday that the John Lewis sales figures for last week dipped, as the Fashion Sale promotion came to an end and today’s BDO High Street Sales Tracker for medium-sized Non-Food chains (which has been reporting surprisingly good progress in recent months, possibly by over-weighting Online sales) is also weak, with footfall said to be hit by the bad weather…In w/e Sunday Oct 27th, BDO Fashion sales were down by 1.6% LFL (down 7.4% excluding Online). And total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as Fashion) were down by 2.5% last week (down 6.5% in Store sales and up by 11.5% in Online sales).
• Trade Press: Retail Week magazine has not been published this week, but Drapers magazine is out today and in her column, the Editor looks at the problems of Mothercare in the UK and thunders that “Mothercare has to shakeup its whole approach”. In terms of News stories, Drapers highlight the launch of a new Beauty store chain by Harrods, as well as the fact that Topshop’s new Fashion Director, Gillian Ridley Whittle, has a lot to do as she returns to a “fundamentally different” market after four years working in Australia. In terms of Features, Drapers look at the dangers of using provocative imagery to sell fashion product to young shoppers (after Missguided and Boohoo ads were banned for being “socially irresponsible”), as well as the success of Boohoo’s fast-growing subsidiary Nasty Gal and the transformation of the footwear brand Joseph Cheaney & Sons. The main highlight,
• News Flow Next Week: As we move on into November, there is plenty going on in the Retail sector next week to distract us from all the Election campaigning…First thing on Tuesday we get the BRC-KPMG Retail Sales survey for October, closely followed by the ABF (Primark) finals. Wednesday brings the Marks & Spencer interims and the Intu Properties Q3 update. Then a busy Thursday brings the Sainsbury interims, the Halfords interims, the Inchcape Q3 update, the Superdry pre-close, the Howden update and The Works’ pre-close update.