Langton Capital – 2020-02-20 – PREMIUM – Confirmatory bias, labour shortages, EZH, cruise ships etc.:
Confirmatory bias, labour shortages, EZH, cruise ships etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I don’t want to spend time throwing things at the TV or circling grammatical errors in newspapers.
And I’m trying to keep my ticks and twitches to a minimum but it’s a struggle as I can’t help wincing at the throw away filler words and phrases you hear on the news these days such as ‘over-exaggeration’ or ‘guesstimate’ or the like.
Because it’s lazy, it shows poor editing and, if MS Word is going to pick on me by underlining half of what I say with squiggly blue or red lines, I’ll be darned if I’m going to let these salaried wordsmiths get away with what would have had my O-level English teacher pitching board rubbers from the front of the class to the back.
I mean ‘milk-chocolate’ is bad enough (literally milky, cocoa milk) but it’s forgivable as the words are in different languages and there’s no such thing as dark chocolate because the lait is missing.
Admittedly, I first wrote ‘more forgivable’ instead of ‘forgivable’ in the paragraph above showing that hypocrisy is still alive and will and living in my house. On to the news:
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MANAGEMENT CONSULTANTS: Do they borrow your watch to tell you what time it is? 20 Feb 2020:
• People suffer from a phenomenon known as Confirmatory Bias. They give more credit to comments that support their pre-existing opinions.
• To a hammer, everything is a nail. Just today, the Centre for Alcohol Studies (below) says a hike in alcohol prices ‘would not impact the poor’. Quangos, often unconsciously, are about expansion, making their topic, well, more topical.
• Further along the thought process, it could be said that some people are too invested in their own conclusion to take advice. This may be the case even when they have paid for it.
• Indeed, it may be ‘efficient’ in terms of their own business model for management consultants or Svengali’s or Rasputin-like advisors to work out what their sponsor wants to hear and then tell it to them
• This is hardly surprising because, as Charlie Munger says, incentives are always more important than you think they are. He says: ‘show me the incentive and I will show you the outcome.’
Setting the scene:
• Advice comes in a lot of shapes and sizes.
• But two types that we’ll comment on today comprise a) advice given (and sometimes taken) in the privacy of the board room re strategy, expansion, disposals etc. – perhaps ‘forward-looking’ and b) advice (or evidence) that what the company is already doing is correct (perhaps ‘confirmatory’)
Confirmatory studies surprisingly common:
• Looking at the second type of ‘advice’ first.
• Observers will never be rewarded for telling a mother that her baby is ugly.
• Perhaps understandably, surveys commissioned by coffee shops, meat-free food suppliers, experiential venue owners or whomever, frequently seem to conclude that there is more room out there for coffee shops, plant-based products and axe-throwing venues
• But is this because 1) that’s the stark truth or 2) because that’s what the body paying for the survey wanted to hear?
• Or is it more nuanced? Has the company undertaking the survey been brutally honest in private, but the recipient has only heard what they wanted to hear?
• Or have only the confirmatory surveys seen the light of day?
• Or is the more cynical answer the correct one. Did the sponsor of the survey get played? Were they effectively shown a mirror and invited to gaze upon themselves in all of their existing reflected glory?
• There are companies out there that quietly and privately decide upon their strategies and then execute them
• These companies, both large and small, either create, gestate and then enact their ideas via incubators or, in the case of smaller companies, they go all in and bet the farm
• Such companies will, over time, be judged by the market on the commerciality of their conclusions
• With larger companies, such as Whitbread with Costa, the successes will be more visible than the failures as the latter could, should and would be quietly buried
• But even large companies are playing a numbers game where one winner can pay for dozens of failed projects
An example in real time:
• Restaurant Group presumably thought the continued expansion of Frankie & Benny’s was a good idea
• And, for some time, it was. And then it wasn’t.
• The jury may be out as to whether this was a problem of service, business model, branding or scale
• And just what circumstance or combination of circumstances drove the decline does matter as the solution will be different depending upon the cause
• Because the first three ‘reasons’ mentioned above can be ‘solved’ by improved practises and only the fourth will be resolved by a massive closure programme
• Of course, in practise, groups will address a number of issues at once.
• But where the emphasis is placed will be important because, as Mr Munger says, decisions drive strategy, strategy needs to be actioned and the incentives put in place to achieve this are critically important
PUBS & RESTAURANTS:
• Access to labour could be a bit of an issue going forward. Restrictions could drive up wages. This may be populist, but it has consequences for business.
• Keeping things very, very simple, the move will 1) make labour on the margin scarcer, 2) push up its price. This will then 3) push up retail prices, 4) lead to some of the extra income coming back through the tills but 5) push some businesses to the wall.
• Creating a high wage, high cost economy is just moving the decimal point on everything to the right. Sterling would take the hit, interest rates rise, etc.
• We suggested in the Premium Email last week that the government may push up the NLW by 6% in each of the next three years in order to hit its £10.50 target one year early. If such a move in 2021 coincides with a labour shortage and higher wages driven by scarcity, it could have a material impact.
• The COO of BII, Steven Alton has commented on the Government’s post-Brexit immigration plan: ‘The news that the government is planning to deny working visas to “low-skilled” workers from outside of the UK comes as a real blow to our industry. People who work in hospitality contribute a huge amount to our economy, and in a time where pubs, bars and restaurants are keeping our high streets and communities alive, we should be supporting them however and wherever we can’.
• The BBPA has commented on the same topic, with Chief Executive, Emma McClarkin stating: ‘The new points-based immigration system will present significant challenges for our sector. Many pubs rely on workers from overseas, so it is hard to see how they will cope with such fundamental changes coming into effect in just ten months’.
• UKHospitality remarked that the new immigration policy could prove to be ‘disastrous’ for the hospitality sector.
• The Food and Drink Federation also responded to the Home Office’s new immigration plans, with Mark Harrison, Policy manager for the federation saying: ‘The food and drink industry is reliant on workers at all skill levels. We have concerns about access to those potential employees who won’t qualify through these ‘skilled’ routes such as bakery assistants, meat processors, and workers essential to the production of huge array of basic foodstuffs such as cheese, pasta, and sausages’.
• Casual Dining Group has disposed of its last remaining four La Tasca Restaurants.
• A report by the Institute of Alcohol Studies has found that increased alcohol duty in the next budget would not impact the less well off.
• Plant-based restaurant brand Neat Burger is planning to open a further five UK sites this year and expand overseas. The Lewis Hamilton-backed restaurant chain will also open its first international site in Los Angeles in Q2.
• The Silican Valley Bank‘s State of the Wine Industry 2020 Report claims US wine consumers are set to enjoy the ‘best wine retail values in 20 years’ due to oversupply and shrinking demand.
• The Gate pub and Experience Glasgow have partnered to launch new practical hospitality course dedicated to making whisky.
• Chancellor Rishi Sunak is being urged to include measures to protect access to physical money as part of the March budget. The Access to Cash Review warned that more than 8 million UK adults would struggle to cope in a cashless society.
• Diageo has received a $5m fine from the US securities regulator after ‘materially misleading’ investors about the demand for its drinks by hiding sales of unwanted stock to distributors.
• Morrisons has announced it plans to sell only free range eggs and will pressure other restaurants to follow suit.
• WH Smith has removed the Daily Telegraph from its outlets in railway stations, following an industry-wide battle over shrinking margins for newspaper retailers.
• The new polymer £20 note has entered into circulation, featuring an image of JMW Turner.
HOLIDAYS & LEISURE TRAVEL:
• Super-budget hotel operator easyHotel plc has announced that it has acquired a freehold site in Madrid for the construction of a new 230-room hotel.
• EZH says it ‘has acquired a freehold site in Madrid, Spain, where it plans to develop a 230-bedroom easyHotel. The new premises will be easyHotel’s second owned hotel in Spain as the business seeks to expand in major European cities.’
• The company says ‘the site has excellent transport links including being only 10 minutes’ walk to Atocha, Madrid’s main high-speed rail station, and less than 200m from the nearest metro.’ EZH adds the hotel ‘is expected to open in the 2021/22 financial year. The total forecast cost of acquisition and construction is expected to be in the region of €28m.’
• EZH interim CEO Scott Christie says: ‘our new investment in Spain marks the latest step in our strategy to expand our owned hotel network across centrally located, high quality sites in major European cities. Madrid is an iconic destination with numerous attractions for both tourist and business travellers, and we are confident our super budget offering will resonate with visitors keen to experience Spain’s capital.’ Mr Christie adds ‘the Group continues to make good progress towards securing sites in its target destinations and we look forward to announcing further developments in due course.’
• Cruise lines acknowledged bookings for Asia had been hit due to the coronavirus outbreak but said demand had switched elsewhere. A leading industry analyst reported ‘no overall impact’ on UK outbound bookings but confirmed ‘Bookings are down for Asia.
• Taking a step back, having the second largest outbreak of Covid-19 anywhere on the planet on a cruise ship, cannot be a positive.
• Uber has closed down a customer support office in LA, causing the loss of around 80 jobs, and outsourcing the operation to the Philippines.
• Abta has added its voice to those from the F&B industry above and stated that the Government’s decision to not offer visas to low-skilled workers from the EU in a post-Brexit Britain is ‘very damaging’.
• Qantas has warned that severe financial implications are likely due to the outbreak of the Coronavirus reducing demand for travel in Asia.
FINANCE & ECONOMICS:
• The ONS has reported that the rate of CPI in the UK rose to 1.8% in the year to January, up from 1.3% in December. Whilst still low (and below the Bank of England’s target of 2.0%), the rate is the highest in several months. The ONS says ‘the rise in inflation is largely the result of higher prices at the pump and airfares falling by less than a year ago.’
• The Land Registry has reported that house prices rose most rapidly in the Yorkshire & Humber region in the year to December. Yorkshire & Humber prices were +3.9%, they were +1.6% in London and +2.2% in the UK as a whole.
• Sterling lower at $1.2912 and €1.1957. Oil higher at $59.39. UK 10yr gilt yield down 1bp at 0.61%. World markets higher yesterday with Far East mixed in Thursday trade.
• Michael Bloomberg, aged 78, has said he will sell the company that bears his name if he is elected President of the USA.
START THE DAY WITH A SONG:
Yesterday’s song was Belfast Child by Simple Minds. Today who sang:
Rows of houses, all bearing down on me,
I can feel their blue hands touching me
All these things into position
All these things we’ll one day swallow whole
RETAIL WITH NICK BUBB:
• Laura Ashley: Ahead of today’s interims, the embattled Laura Ashley announced yesterday that it had sorted out its funding issues with Wells Fargo Bank, so the main question with the results was on how big the loss was going to be. And thanks to some decent cost control, the underlying loss was only just under £4m, versus break-even pre-exceptionals in the previous first half to the end of December, despite the 10% slump in LFL sales (remember that the sales split is 80/20 between Furnishings and Fashion). And the Malaysian parent remains defiantly optimistic about the future: the Chairman Andrew Khoo says “I remain extremely positive about the future of this great business and have unwavering confidence that we will be able to achieve our objectives of making Laura Ashley a brand that resonates with today’s customer”.
• Planet ONS Watch: In “the real world”, as per the BRC-KPMG figures for January (the 5 weeks to Feb 1st), underlying Retail Sales were pretty flat last month, notwithstanding the implausible BDO High Street Sales Tracker figures, but we will find out at 9.30am this morning what “seasonally adjusted” life was like on the High Street on that bizarre parallel world, the Planet ONS (aka the Office of National Statistics in Newport), via their official Retail Sales figures…Now, City economists (who still, unaccountably, treat the dubious ONS figures as the gospel truth) generally expect a decent rise of 0.7% in month-on-month seasonally adjusted sales volumes, but our friends at Capital Economics have pencilled in a rise of as much as 1.5% (to give year-on-year volume growth of 1.4%), for what it’s worth. We will be ignoring these silly month-on-month sales volume figures…and focusing, as