Langton Capital – 2020-04-21 – PREMIUM – Comptoir, working capital, rent-frees, Gov. aid & other:
Comptoir, working capital, rent-frees, Gov. aid & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
We’re still wearing that smug grin that says ‘we cut the grass at the weekend’.
However, it was a close-run thing as the temptation to have a beer, spark up the barbie, have another beer, a third & conclude it’s unsafe to operate machinery was strong and, were it not for the fact that the grass was growing at an almost visible rate, we could easily have succumbed.
Anyway, with our home office on the eastern side of the house and the wind howling in off the North Sea, we found find ourselves shivering yesterday whilst other occupants, our cohabitants occupying the south, west or even north of the building, didn’t know what the fuss was all about.
More of the same today so, without further ado, let’s move on to the news:
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• Negative working capital.
• Other industries & business models
• The crisis in tour operating
• Life on the ‘other side’
NEGATIVE WORKING CAPITAL:
What it is:
• Whilst B2B companies often have to tussle as to who supplies working capital to whom, B2C companies are very often paid by their customer before they have paid for the goods that they have already sold
• Hence, a pub or a restaurant is likely to charge its customers at the moment they consume the product, they may pay for their food, drink, telephone, utility bills and he rest on credit
• They may pay rent, insurance and, to a less meaningful extent their rates, in advance, but they operate, overall with negative working capital
• This means that your suppliers are providing you (as the operator) with interest-free loans
• And each unit that the operator opens will bring more money through the door but, unfortunately, in a lockdown, everything goes into reverse and, like Wile E Coyote dragging a brick behind his head on an elastic band, this can have painful consequences
• We tweeted this a couple of days after the shutdown. ‘Covid ££ side effects #1. Negative working capital in hospitality. Your customers pay you before you pay your suppliers. Only now, that’s in reverse. Some pub companies will be reluctant to pay suppliers till pubs reopen. This may cause some to collapse.’
In the real world:
• Stock suppliers are likely to be unsecured creditors.
• They may have Romalpa clauses in their contracts (retention of title: the goods remain their property until paid for) but, if this comprises a barrel of beer that was drunk a month ago, it is unlikely that they will want it back.
• They will have had a collective sense-of-humour failure when pubs and restaurants shut down and they will have been screaming for their money
• Some will have been paid, others not.
• Thinking forward, this means that reopening costs will potentially have been racking up because suppliers may be unwilling to extend credit
• Some will, but others might not. And the cost of re-stocking, perhaps tens of thousands of pounds for a busy unit, could be added to the cost of cleaning, taking down the shutters, retraining staff etc.
• This may not be the sort of ‘press-the-button-and-hey-presto’ type re-opening that politicians may imagine or hope for
A few examples:
• Restaurant Boisdale has been attempting to raise funds by the sale of bonds, redeemable against future meals. It says ‘the idea is to remember the war spirit and bring everyone together, as well as put a smile on people’s faces.’
• It says the discounted vouchers have sold well so far.
• A number of operators are asking customers to pay in advance for meals to be taking when units reopen. The FT reports JP Morgan as saying that restaurants carried the smallest cash buffers of any small-business sector, with an average of just 16 days of reserves if demand were to grind to a halt.
• TUI is offering a 20% discount for customers who roll their current deposits forward rather than ask for a refund.
• ABTA has written an open letter to customers saying that, whilst it accepts some customers will be very frustrated that they cannot get their money back, a number of travel companies will simply not be able to pay them.
• ABTA says ‘many travel agents and tour operators are unable to provide immediate cash refunds because they have not yet received money back from airlines and hotels around the world that may have temporarily closed.’ This is alleging a pass-the-parcel sort of problem.
• We wrote recently about a ‘have-money, keep-money’ mentality that is arguably normal under extreme duress.
• If anything, these guys are even more exposed.
• We have written extensively on the resistance to cash refunds across tour operators because, in many cases, the deposit money is long gone
• TUI is offering 20% ‘bonuses’ if people take future holidays rather than cash refunds and we write today below that hotels in the US have begun selling ‘bonds’ for trips to be taken later.
In other industries:
• The insurance industry sits on deposits (a.k.a. insurance premiums) for years. In the event of an earthquake, flood, or bush fire, it pays out.
• At least hopefully it does but, if the insurance industry spent its incoming premiums on executive pay, perks, dividends and the high life in general, there would be something of an outcry.
• Similarly the pensions industry etc.
• Fair to say hospitality is a different type of industry but, as we are seeing, Black Swans do exist and the industry is, in many regards, undercapitalised.
• Some private equity models specialise in working capital management in order to strip out capital, reduce the ‘cost’ of their investment and therefore maximise returns
• This will be a painful business model in the current environment
LIFE ON THE OTHER SIDE:
Re-opening costs & administration:
• The costs and time involved in reopening shuttered units will be significant.
• The co-founder and CEO of London coffee and restaurant business Grind David Abramovich says that the period post the lifting of restrictions could be a very one for the hospitality industry.
Lack of revenue, lack of aid?
• Government aid may be stopped before customer footfall returns to normal
• It’s hard to see tourist numbers returning to previous levels for many months
• Abramovich says ‘our models just don’t work without significant footfall. Most restaurant businesses can’t survive a 10% drop in customer numbers let alone a 50% drop. There’s no point reopening if you’re just going to lose money.’
• Abramovich points to the ‘added pressure of the cash intensity required to get re-opened.’
• He says ‘there’s stock to buy and who knows what’s going to happen with credit in the supply chain. It’s cash intensive to re-open and potentially fund periods of losses when trade is going to be a fraction of what it was before lockdown.’
• He concludes ‘this is the scary bit for me – it’s even scarier than where we are today.’
• There is no conclusion, of course, but it is entirely possible that the government feels that it needs to ‘privatise the problem whilst socialising the solution’.
PUB & RESTAURANT NEWS:
• Comptoir Group has reported full year numbers to 31 December 2019 saying that revenue fell by 2.7% to £33.4m with an IFRS loss of after tax of £0.67m (versus a loss of £0.76m in 2018). The loss per share is 0.54p vs a loss of 0.62p in the prior year.
• Comptoir CEO Chaker Hanna says ‘despite the challenging economic climate, I am pleased to report that trading for the full year has been in line with Board expectations.’ He goes on to say ‘a strong balance sheet and further growth in our cash position will stand us in good stead to endure the challenges we are all now facing from the COVID-19 virus. The directors believe that the business is well positioned to deliver again once we emerge from the other side of this crisis.’
• Comptoir updates on the Covid-19 situation saying that ‘the outlook for the UK and global economy has become increasingly uncertain’ and it confirms that its restaurants are all closed. Comptoir says it is cutting costs & minimising cash outflow. Re the outlook, the company says ‘we find ourselves in a period of unprecedented uncertainty with the impact from the low consumer confidence previously seen across the sector now very much taking second place to the more immediate unchartered territory coming from the societal impact of COVID-19.’ It concludes ‘despite this and up until the direct impact on trading from COVID-19 in early March, the Board is pleased to announce that the Group has once again demonstrated its resilience to deliver during a continued challenging and uncertain trading environment.’
• The government’s Coronavirus Jobs Retention Scheme portal opened yesterday whereby employers can now go online to claim cash grants worth up to 80% of wages, capped at £2,500 a month per worker. The BBPA’s CEO Emma McClarkin comments ‘to hear that the COVID-19 Job Retention Scheme portal is now live for employers to use is a welcome step…for our sector.’
• The BBPA continues to push for further support for the UK pub industry after the cabinet minister Michael Gove warned that pubs would be ‘among the last’ to see restrictions placed upon them lifted. The BBPA says ‘if pubs are going to be the last to re-open, then it’s only right the Government gives extra support to them to help ensure their survival. We are clear that unless the Government gives specific support to pubs now, thousands of them in communities across the UK could be lost for good. And with them hundreds of thousands of jobs too.’
• Apart from their central role as a part of the fabric of British society, pubs provide a social service for many and are major contributors to the Exchequer.
• London Union MD Jonathan Downey has organised an appeal to government to organise a nine-month rent holiday to help restaurateurs and bar owners to survive the coronavirus crisis. Downey says ‘the idea is fairly simple and won’t cost the taxpayer a thing.’ He adds nobody in the hospitality industry ‘expects to get back to anything like normal until mid-2021 at the earliest.’
• Downey suggests that ‘leases are extended by nine months so that those payments aren’t lost, just postponed to the back-end.’
During & after the lockdown.
• Vagabond Wines founder Stephen Finch has told Drinks Business that the coronavirus pandemic is a “9/11 moment” for the hospitality sector. Mr Finch says ‘we have close to zero revenue coming in during the lockdown, but we have managed to obtain concessions from landlords and support from the government.’ He says ‘social distancing will be the new norm for a while, so we will have a drastically reduced patronage.’
• The co-founder of coffee & restaurant business Grind has warned that post-lockdown restrictions could be very troublesome for pubs, clubs, cafes and restaurants. See Premium email.
• The number of British companies that ceasing trading in March rose sharply according to research undertaken by the University of Warwick and Aston University. The study suggests there was a 70% jump in dissolutions this March compared with the same month a year ago.
• Sky reports that bakery chain Le Pain Quotidien ‘is close to collapse as it races to find buyer for its UK operations, putting 500 more high street jobs at risk.’ The operator has 25 sites in the UK. It is reported to have set a deadline of tomorrow for offers. The FT says ‘restructuring experts Alvarez & Marsal are running an emergency sale of the 26-site café business with the deadline for bids on Wednesday, according to people with knowledge of the process.’
• Premier Foods yesterday reported a spike in sales in March and sustained higher levels of revenues running into April.
• GfK has reported that sales of kitchen appliances have risen in the UK suggesting a move towards home-cooking. Premier Foods said that, whilst the +10% sales levels of March have not been sustained, sales are still above normal levels as more people are cooking at home.
• GfK says ‘in the week 29 March to 4 April, purchases of deep fryers showed a sizzling 76.4% growth in value compared to the same week last year, while hot beverage makers steamed in at 65.4%.’ It says ‘sandwich makers, waffle makers and grills served up 62.1% value growth, and food preparation products mixed in at 61.5% overall, driven by stirring leaps in purchases of food stand mixers (218.6%), hand mixers (105.3%) and food processors (43.7%) used mainly for home baking.’
• GfK says ‘looking across these home cooking appliances, the average price is showing an upward trajectory since lock-down started. It seems we are using the money saved from not dining out to invest in premium cooking equipment and smarter models. For brands and retailers in the small domestic goods sector, this is the time to be promoting your higher-end products, as a ‘treat yourself’ purchase and a way to eat more healthily, as well as entertaining yourself, during lock-down.’
• Industry analyst Peter Backman has commented in his Weekly Briefing that ‘Covid-19 is testing the delivery model – and the news from the Competition and Markets Authority (CMA) is: “The ongoing lockdown in the UK has resulted in the closure of a large number of the key restaurants available through Deliveroo, and a significant decline in revenues.’
• Backman says that the news that Deliveroo could have failed if Amazon were not allowed to invest ‘has not come as a surprise to those watching the delivery market. But it will still unsettle many people who have seen delivery as the future of the restaurant on the high street.’ See also Premium Email.
Working capital issues:
• See Premium Email for more detail.
• The FT reports that London restaurant group Boisdale has launched vouchers with a ‘war bonds’ theme ‘in order to raise precious cash to keep the business running during the coronavirus shutdown. See Premium Email for comments on negative working capital.
• Jonathan Downey’s move for a 9mth rental holiday is aimed, partly, at addressing working capital issues.
• Boisdale is attempting to sell bonds, redeemable against future meals.
• A number of other operators have asked loyal customers to pay for meals in advance.
US & overseas:
• The National Restaurant Association in the US has called upon the Federal Government to put together a $240 billion federal recovery fund for the restaurant industry. It says ‘the industry is on track to lose about $80 billion in revenue by the end of April with industry-wide losses pegged at $240 billion through the end of 2020. Those losses assume a gradual reopening of the economy in June.’
• The NRA says ‘the restaurant industry has been the hardest hit by the coronavirus mandates – suffering more sales and job losses than any other industry in the country.’
• Eater magazine in the US quotes California Governor Gavin as saying that restaurants may not immediately go back to ‘normal’ once the lockdown is lifted, he says ‘you may be having dinner with a waiter wearing gloves, maybe a face mask, a dinner where the menu is disposable, where the tables, half of the tables in that restaurant no longer appear, where your temperature is checked before you walk into the establishment.’
• MEP Eric Andrieu has warned that up to a billion litres of European wine may need to be destroyed due to a lack of storage after the closure of bars, restaurants and shops across the continent alongside a fall in exports.
• Campari Group announced last week that it has entered negotiations to acquire a majority share of Champagne Lallier.
• US operator of the Olive Garden, Longhorn Steakhouse and other marques, has reported Q1 LfL sales down by 44.7%. Q2 will have begun below those levels.
Other pub & restaurant news:
• Glasgow operator G1 has announced that it has donated television sets, aerial splitters and aerial extensions to a local community council in order to help ease the strain on family units during the coronavirus crisis.
• The Department for Environment, Food and Rural Affairs is calling on people who have been furloughed to consider picking vegetables and fruit in the UK’s fields.
HOLIDAYS & LEISURE TRAVEL:
• ABTA CEO Mark Tanzer has written an open letter to the public saying that he has sympathy for customers who want a refund and are having to wait for their money. He says ‘many travel companies are unable to provide immediate cash refunds.’ This is likely true & is a consequence of many travel operators using customer deposits to fund their working capital. Tanzer says ‘it’s in nobody’s interests for normally healthy travel businesses to go under.’
• ABTA says ‘despite our pleas for support, the UK Government has so far failed to act. For this reason, to provide some order to the chaos brought about by the current crisis, ABTA has developed temporary guidelines for dealing with refunds for its Members and their customers, where Members are financially unable to provide an immediate cash refund.’
• The travel industry is reported to be asking for a £4bn government lifeline. However Travel Weekly quotes some close to the discussions as saying that such a report was ‘ludicrous’.
• Hotels in the US have begun selling ‘bonds’ for trips to be taken later. See comments in Premium Email on negative working capital.
• The US hotel industry hit a record in terms of the construction of new rooms in March reports STR.
• The collapse of Thomas Cook cost £350m in ATOL payments.
• Elegant Resorts has said that demand for travel is ‘slowly returning’. This sounds somewhat aspirational.
• Sir Richard Branson has said Virgin Atlantic will only survive if it gets financial support from the British government. Sir Richard has said he will put up his private island in the Caribbean as collateral.
• Virgin Australia is reportedly poised to go into administration.
• CNN reports that the US airline industry is seeking $50bn in federal aid.
• The Guardian reports that MansionBet accepted a gambler’s redundancy pay-out as proof that he could afford to place thousands of pounds in bets. It says it ‘rewarded him with VIP perks for doing so’.
FINANCE & ECONOMICS:
• Property agent Knight Frank says that more than half a million UK home transactions may be abandoned this year as a result of the coronavirus outbreak.
• Sterling lower at $1.2401 and €1.1445. Oil lower at $25.45. UK 10yr gilt yield up 3bps at 0.33%. World markets. UK up yesterday but everyone else lower. Far East down in Tuesday trade.
• Accountant Grant Thornton is to cut the pay and hours of a number of its UK employees. It’s likely that the firm’s corporate restructuring business will still be very busy.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
• Today’s Market: After the 2.4% fall on Wall Street last night, on the back of the collapse in the US oil price, the FTSE 100 index is expected to open well down this morning (according to the Proactive private investor website), with Asian markets also weak overnight (the Nikkei is down by 2.0%)…The spread-betting firms expect the FTSE 100 to open c90 points down (-1.6%) at around the 5725 mark.
• Today’s News: The food conglomerate ABF interims today are dominated by the grim situation at its flagship Primark business: in the first half Primark made a chunky £441m operating profit, but with all the stores closed and no Online business to compensate…the second half will be a different story, although ABF has declined to estimate how big the loss will be. Despite criticism of its brutal treatment of suppliers, CEO George Weston says that Primark management’s response to mitigate the cash outflows was “swift and proportionate…There has also been a financing and operational update from Joules, but there is no news yet on the DFS placing.