Langton Capital – 2020-03-02 – PREMIUM – Contraction, social media, Stonegate, hard seltzers, Covid-19 etc.:
Contraction, social media, Stonegate, hard seltzers, Covid-19 etc.:
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A DAY IN THE LIFE:
Langton went for a stroll in the hills north of Thornton le Dale at the weekend and, as is so often the case, this involved plenty of sitting down, a modest amount of huffing and puffing, a stop off at a café for a pot of tea and a bun as well as the obligatofry visit to a pub.
So the calories-in pretty much matched the calories-out but there was little harm done and we bumped into a mixed bunch while we were out, ranging from those serious-looking, Lycra-clad power-walkers that the dog likes to chase through to the group of less-than-serious looking joggers who, by the looks of them, were not averse to stopping at a pie shop half way around where they would have been more than capable of eating the whole place out.
And I can certainly identify more with the latter group of wobbly day trippers than I can with the former. Still, aside from the horizontal rain, the mud and the falling branches, it was nice to get out-of-doors.
Anyway, with a week of calmer weather if not financial markets to look forward to, let’s move on to the news.
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THE LACK OF SYMMETRY, EXPANSION VERSUS CONTRACTION: On Friday we commented that it was perhaps ‘easier’ to expand than contract. Here we conclude that piece. 2 Mar 2020.
Expansion feels ‘more natural’:
• Optimistic companies are more ‘at home’ when they are expanding.
• This is human nature and it is perhaps instrumental in allowing or encouraging expanding companies to sign leases, employment contracts and the rest that may be harder to get out of then they are to enter
The main obvious impediments to contraction:
• Leases are typically upward only re rent, they have five year rent reviews that cannot be controlled by the tenant and they do not often have break clauses
• If an operator struggles, they will be hard to exit.
• Somewhat ‘safer’ leases may include a break clause, they may allow agreed downward moves in rent under some circumstances (rare) or they may be linked to turnover
• Even when rents are linked to turnover, as they are at airports, there will usually be a minimum amount payable
• Restaurant Group has suggested that rents, set at the 85% or so of average payments made over recent months or years, may still apply
• Employment contracts, though relatively flexible by European standards, are not symmetrical
• They are easier, on the part of the employer, to get into than they are to get out of
• Employees may have to work for 2yrs before they accrue all of their rights but, after that time, it can be difficult or expensive to ‘downsize’
Other less visible problems:
• Downsizing gives a markedly different signal to employees, suppliers, landlords, customers, the government etc than does expansion
• There isn’t much middle ground
• Contraction may mean that an operator loses the staff it would like to keep and keeps the staff it would like to lose
• It may not be able to attract the same calibre of staff going forward and may, on the margin, have to pay more to get what it can
• Suppliers, who are often treated less badly than landlords and banks in the event of a CVA (for obvious reasons) may wish to continue trading with a contracting company, but they will be less willing to extend credit
• Landlords, particularly if they are disadvantaged via a CVA or other restructuring, should be expected to learn from their experience
• Break clauses may disappear, sites may go to competitors and clauses may be inserted into new contracts such that a CVA gives right of seizure or allows the landlord to take back the keys on other, more attractive sites
• Customers may be confused as to whether this is a ‘good’ or a ‘bad’ brand. They may be less willing to come or they may demand discounts. They may get less-good service from disgruntled staff
• The government (taxes, rates etc.) may be dis-chuffed if they are stung for unpaid rates or whatever. This may only be possible in a CVA. The authorities do not, as a rule, bear a grudge as long as do other market participants
• We believe we are justified in suggesting that contraction can be even more challenging than growth
• Staff & customers may leave, suppliers may demand different terms, there may be a working capital and property agent Colliers is of the opinion that CVAs may just be delaying failure
• It says the 13 of the 23 companies that it has tracked that underwent a CVA subsequently went bust
• We would go a little further and suggest that there may actually be some causality. The CVA alone does not cause the collapse – but it may be partially instrumental in bringing it about.
PUBS & RESTAURANTS:
• KAM Media has spoken about evolving consumer tastes saying that sharing experiences, often online, is ‘now an essential part of a trip to a pub, bar or restaurant.’
• KAM says ‘whilst 1 in 3 of ALL consumers are influenced to choose a particular venue by how ‘photogenic’ the dishes are, this figure sits at over 50% for 18-34 year olds, and 36% for 34-55 year olds. So its only really the 55+ who are bringing this average down – which shows how significant “sharing the experience’ is as a factor for consumers.’
• The Times reports that three food delivery firms are generating a plastic waste mountain of more than a billion trays, lids and bags every year. Just Eat, Deliveroo and Uber Eats deliver around 200m meals annually. The market has more than doubled in size since 2011 and is worth more than £8bn.
• Analyst Peter Backman observes that ‘some of the most important customers for home delivery are the so-called millennials, who may be concerned about saving the planet.’
• Stonegate Pub Company has updated on its debt financing saying that, now that the CMA has accepted undertakings offered by Stonegate regarding the acquisition of EI Group, Stonegate has ‘entered into an amendment and restatement agreement’ regarding its £1.35bn debt financing ‘in order to reflect the upsize of the senior bridge facilities by £100,000,000.’
• Licensing solicitors Poppleston Allen have reminded clients that ‘following the announcement made by the Welsh Government in November last year, from Monday 2 March 2020 all licensed premises across Wales must comply with the Public Health (Minimum Price for Alcohol) (Wales) Act 2018.’ That is they must charge a price of at least 50p per unit of alcohol.
• CGA points out that the sale of hard seltzers is booming in the US. It says this is ‘shaking up the competitive landscape across the bar and restaurant scene.’ Work conducted by Nielsen CGA suggests ‘the number of consumers drinking hard seltzers at bars and restaurants increased by 73% between the spring and fall of 2019: That’s equivalent to around 7.5 million new drinkers.’
• CGA says ‘while some of the increase reflects the entrance of consumers who recently turned 21, most new hard seltzer drinkers are switching from other alcoholic beverages.’ The sale of hard seltzers now exceeds that of the entire pale ale beer category.
• NRN journal in the US says that, despite rising costs, ‘the foodservice industry has a bright future’ with restaurant sales set to reach $889 billion in 2020, up 4% on last year. NRN says ‘that projected growth is driven by the fact that consumers are more confident in their spending power, driven by a healthy labour market, and are demanding more from the foodservice sector.’
• NRN says that in the US (as in the UK) ‘labour woes are still the biggest industry challenge’. NRN quotes three in 10 operators as saying they currently have job openings that they are struggling to fill.
• BrightHouse, the rent-to-own retailer, is reported to be struggling after a surge in customer compensation claims, per Sky News.
• Constellation Brands has released a statement saying the ongoing coronavirus outbreaks has has ‘no impact to our people, facilities or operations and our business continues to perform very well.’ The firm said sales of Corona Extra remain strong, with dollar sales up 5% in the U.S. per the latest 4-week period ended Feb. 16. There had been chatter that the similarity between the beer brand’s name and that of the coronavirus had led to falling sales.
• Casual Dining Group will trial a new pub format called Big Smoke Brew Co, with the first site to be located at a former Café Rouge site in Coventry.
• BigDish Plc, which is ‘a food technology company that operates a yield management platform for restaurants’, has updated on trading for February saying it added 166 new restaurants in the month with a record week towards the end of the period. BigDish CEO Tom Sumner says ‘I am pleased with the pace of growth in February and to have surpassed the 500 restaurant mark. It is also very pleasing to see that we are starting to gain some traction with restaurant groups and that quality restaurants are joining BigDish. The technology team has been working on some exciting product functionality improvements specifically for restaurant groups and I look forward to being able to update the market in due course.’
• New York City plans to introduce a package of legislation which will regulate food apps. The new regulations will require licensing for third-party delivery apps, cap fees at 10%, and prohibit companies from taking fees on phone calls that don’t result in orders.
• In the US, Dine Brands CEO Steve Joyce has said ‘Like everybody else, we’re experimenting and going to do some things with ghost kitchens, both doing some ourselves but also potentially joining in with some of the folks that do this as their business’. Dine Brands owns the Applebee’s and IHOP chains of restaurants amongst others.
• Tyne Bank Brewery in Newcastle reports turnover of nearly £750,000 in 2019, saying marketing initiative and a vegan festival helped drive growth.
• Feed It Back, an online reputation specialist for hospitality operators, has added a new Brand and Marketing course to the Feed It Back Academy.
• Larry’s, a restaurant in Peckham, is set to open in March. Larry’s is an independent venture by Nicholas Balfe, Mark Gurney and Matt Bushnell.
• Scotch Corner Designer Village, a new shopping park in North Yorkshire, is set to open in autumn 2021. The outlet will be home to premium, high-street, and independent brands, and will create up to 1,000 new jobs.
HOLIDAYS & LEISURE TRAVEL:
• Moneysupermarket, GoCompare, and Compare the Market all told FT Money they had seen huge increases in customers purchasing travel insurance policies online due to the ongoing coronavirus outbreak.
• The International Hospitality Investment Forum has been pushed back to May over coronavirus concerns.
• Meanwhile, ProWein in Dusseldorf and Vinitaly in Verona, two of the biggest wine trade shows, are set to go ahead in March and April despite the ongoing coronavirus outbreak. The Geneva Car Show, which had been slated to go ahead, has been cancelled.
• The US hotel industry reports occupancy up 0.8% yoy in January 2020, with RevPAR up 2.2% and ADR up by 1.4%.
• The Hong Kong hotel industry has seen performance drop due to ongoing coronavirus outbreak, with Sun Hung Kai Properties seeing hotel operating profits drop 75.1% to $25.3 million and a large drop in RevPAR.
• Safestay has updated on its pipeline saying it can confirm that it has completed the acquisition of the Bratislava and Warsaw Hostels from Dreamgroup Management E.C.P. Ltd for a total consideration of €2.7 million.
• Safestay says ‘however, the proposed acquisition of the third hostel of the Dream portfolio, which is located in Prague, will not proceed. The vendor has been unable to satisfy certain conditions of the acquisition agreement. There is no cost to the Company, which continues to trade from its existing Prague location.’
• The group of 160 British tourists under quarantine in Tenerife are being allowed to return to the UK from today if they test negative for coronavirus.
• European hotel transaction volume reached €27.1bn in 2019, according to HVS. The largest amount of capital was poured into the UK with some €5.3 billion (£4.4 billion) – 23% of total volumes, a 15% decrease on the previous year.
• Plans for Britain’s new sovereign satellite navigation system have been delayed for at least six months. The decision to pursue the new sat nav system came after the UK was shut out of the EU’s £10bn Galileo programme because of Brexit.
• Moody’s has reported that Disney’s announcement that Bob Chapek is to take over as CEO effective immediately is credit positive. It says the move ‘removes succession uncertainty and is credit positive because it largely eliminates the risk of disruption to Disney’s strategic plans and financial policy.’ Chapek has been with the company for 27 years. Most recently, he served as chairman of Disney Parks, Experiences and Products.
FINANCE & ECONOMICS:
• The Swiss government is to lower its economic growth forecast because of the coronavirus outbreak. Factory activity in China fell at a record rate in February as its PMI fell to 35.7 from 50.0 in January. Italy is said to be suffering economically.
• Coronavirus fears drove the UK markets to their worst week since 2008. Today in the Far East, shares are higher on hopes that stimuluses from a number of governments will help to mitigate the worst of the economic impact of the virus.
• Sterling lower at $1.2828 and €1.1611. Oil up at $51.44. UK 10yr gilt yield 4bps lower at 0.45%. World markets lower on Friday but Far East up in Monday trade.
• Brexit & politics:
o Bloomberg Economics has said that the cost of Brexit disruption to the UK economy already exceeds the net contributions the UK has made into the body over the last 47yrs.
o Bloomberg says the UK economy is £130bn behind where it would have been had there been no Brexit vote now and with be £200bn lower by the end of the year.
o UK government threatens to walk away from talks in June if sufficient progress has not been made.
o UK ministers are today to set out what they want to achieve in a US trade deal. Sky says Boris Johnson has been warned he faces a “big choice” between following EU or US standards.
START THE DAY WITH A SONG:
Thursday’s song was no More Heroes by The Stranglers. Today, who sang?
‘Why don’t you tell me who’s on the phone?
Why don’t you ask him what’s going wrong?’
RETAIL WITH NICK BUBB:
• Saturday’s Press and News (1): Despite the late rally on Wall Street on Friday afternoon, the FT front page headline was “Investors nurse big losses as virus fuels worst week since 2008 crisis”, as global stockmarkets continued to slump, whilst the Times and Daily Mail led with the emergency laws being rushed in to deal with a significant coronavirus outbreak in the UK and the Telegraph went with the distinctly alarmist “Outbreak could leave one in ten in hospital”…On a more sensible note, the Economics Editor of the Times wrote a useful column headlined “It’s not coronavirus we should fear but the sense of panic that it causes”. On a different note, the Guardian had a timely feature article about the Lush beauty chain and the various crises hitting its business around the world, just when the ethical approach of the founder Mark Constantine had looked to be bearing fruit (“Crisis hits
• Saturday’s Press and News (2): In terms of Retail news, the Times and the Telegraph flagged the announcement on Friday from Waitrose that it is installing more Online grocery picking and delivery operations into 24 more of its stores ahead of the break with Ocado in September (Digital Director Ben Stimson said “September offers the single biggest growth opportunity for our business and we’re investing heavily to achieve it). Talking of Ocado/M&S, the Mail highlighted that Ocado Chairman Stuart Rose dumped £1.7m worth of shares last week and M&S was its “Popular Share” of the week, noting the shares are languishing near 30-year lows. The Mail also noted that the new Chairman of JLP, Sharon White, “will lay bare the dire state of the department store chain” with the results next week, with the JLP Bonus under threat. The Times also had a feature article about the pivotal role
• Sunday’s Press and News (1): The Sunday papers went big on the problems of the John Lewis Partnership, ahead of next week’s final results and our profit forecasts were widely quoted. A front page Sunday Times Business story was that the new JLP Chairman Sharon White is preparing to launch a major strategic review of the business, with the results likely to bring huge property asset write-downs at John Lewis. The Sunday Times separately flagged that although the future of the JLP Bonus is still in doubt (notwithstanding our forecast of a 2% Bonus, costing £30m) the JLP FD Patrick Lewis said on the Letters page of Friday’s in-house “Gazette” magazine that “if the Board believes it can sensibly allocate a Bonus, there will be a strong desire to do so”. The Mail on Sunday feature article on John Lewis flagged that the “Never Knowingly Undersold” price pledge is under threat, whilst the
• Sunday’s Press and News (2): The Observer didn’t look directly at the problems of the John Lewis Partnership, but it did have a big feature on the benefits of employee ownership (illustrated by a photo of John Lewis Oxford Street employees receiving the news of an 11% JLP Bonus in 2015). And the Mail on Sunday had a feature interview with the infamous Gerald Ratner (of Ratners the Jewellers fame), in which he noted that although John Lewis will be the last man on the High Street, stores offering “pilates and prosecco” won’t work. In other news, the Sunday Telegraph flagged that the secretive Issa brothers behind the huge (and private equity backed) Euro Garages petrol forecourt chain are weighing up a bid for Asda. The Sunday Telegraph also highlighted that there are doubts about the financial health of the Temperley fashion brand and it also had a big feature on the involvement of
• Sunday’s Press and News (3): The Sunday Times flagged that the struggling Debenhams, on top of seeking Business Rates reductions from local authorities, is also asking for more rent reductions from landlords…The Sunday Times also flagged that the discount chain Poundstretcher is weighing up restructuring options, the rental chain Brighthouse is on the brink of collapse and Kingfisher and Morrisons are under threat of ejection from the FTSE 100 index in Wednesday’s quarterly review. The Sunday Times also highlighted that the big property industry conference MIPIM in Cannes has been postponed from early March to June because of the coronavirus protection measures in France. Finally, the Sunday Times Business section also had a thoughtful column by its Economics correspondent David Smith about the coronavirus crisis, noting that there is some reason to be worried but no need to
Today’s Press and News: The front page headline in the FT today is “Italy unveils E3.6bn stimulus as world tallies cost of coronavirus” and with the Nikkei index in Japan closing 1% up overnight, on hopes of global interest rate cuts by central banks, the UK stockmarket is expected to open usefully up this morning. In terms of Retail news, there are plenty of previews of the John Lewis Partnership results and Bonus, with the Guardian quoting our view that it is a tough call between 0% and 2% for the Bonus. The Times has a feature on the new Amazon Go hi-tech store in Seattle and it also flags that JD Sports is expected to hit back had this week with its submission on why the CMA is wrong to try to block its takeover of Footasylum.
News Flow This Week: There is plenty of UK company news scheduled for this week, as we move into March, kicking off tomorrow with the Travis Perkins finals (and an update on the Wickes DIY demerger), the Greggs finals and the latest monthly Kantar/Nielsen grocery sales figures. Wednesday evening brings the latest quarterly FTSE index review (with Kingfisher and Morrisons both said to be at risk of ejection from the FTSE 100 index). Thursday is then “D-Day” for the embattled Intu Properties (in the form of their finals and news on the rescue rights issue) and the John Lewis Partnership (in the form of their finals and Bonus announcement).