JRS, the next steps? New normal, cruise ships, Virgin, Airbnb etc.:

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A DAY IN THE LIFE:

I somehow got copied into an email debating which were the best books to read during periods of enforced idleness yesterday and, despite having somehow missed out on said enforced idleness, I still managed to spend an hour falling into the black hole that is researching what books should go on my ‘to do’ pile, and another hour clambering out of it.

Of course, a few classic books would look better as a Zoom backdrop than the heap of old junk and dangerous tat that I’ve got on the shelves behind my noggin but, and I’ve thought carefully about this, I’d like a couple of rolls of wallpaper depicting tins of beans, powdered milk and toilet rolls as I think that would convey more of the true meaning of what it’s been like to live through current times.

Anyway, on to the news:

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• Sneaking things through you wouldn’t dare in peacetime

• How the JRS could evolve

NOBODY ‘WANTED A PANDEMIC’ BUT, ARE MOVES BEING MADE NOW THAT COMPANIES WOULDN’T DARE MAKE IN PEACETIME? 6 May 2020.

Just a few of the current moves:

• Virgin is quitting Gatwick & sacking staff. BA is laying of labour, ditto Ryanair.

• TUI isn’t paying its winter 2019 bills, Restaurant Group has jettisoned Chiquito and Food & Fuel

• Private equity backers of a number of casual diners are throwing in the towel, a number of companies are issuing new shares and dropping dividend payments.

• Many are cutting salaries, passing bonuses, giving peripheral unit keys back to landlords etc.

And there are common enemies:

• Step forward Business Rates (hated, dead and gone) and landlords (truly on the back foot, friendless etc.)

• If ever Business Rates were going to be scrapped (a.k.a. evolved, overhauled or whatever) then surely now is the time

• And tenants have been complaining about high rents, upward only reviews, three-month payments in advance, high rent deposits etc since Adam was a lad

• Now they (tenants) can truly pile on

• And the National Living Wage (up 6.2% on April Fool’s Day) was a challenge and now looks a bit odd as the government is forcing its payment with the one hand and compensating for it via the furlough with the other

Further moves:

• It’s likely there will be some furlough abuse

• And some tenants, who could pay their rent, will not do so

• Some furloughed staff will be lost in translation

• Contracts (re new sites, capex etc.) could be bent if not broken

HOW THE JRS COULD EVOLVE: Chancellor Rishi Sunak has made clear that this is temporary. But could it change? And, if so, then how? 6 May 2020:

The 100-year plan:

• Pandemics touch one year in every hundred. This is an oversimplification – but the point is valid. Most of the time, we live in a ‘normal’ economy.

• One in which we would like to have restaurants & pubs.

• But ‘market forces’ now would – in the present environment – destroy many if not most hospitality businesses.

• Hence, you have to support them. This accords with the evidence to date, witness the furlough scheme, binned business rates, helicopter money for small units etc.

The options;

• At the extremes, you either allow everything to be destroyed and then to rebuild itself or you try to save everything

• We would suggest that a move 80%, 90% towards the latter would be sensible. That is, some flaky business may be irredeemable, but most are sound, excluding the impact of Covid-19

• The pandemic will not destroy bricks & mortar, nor will it damage fixtures & equipment, brands and nor, over the longer term, will it remove consumer demand

• But, without interference, it will (or it could) destroy equity.

• Meaning that the assets, brands and staff could be left in the hands of carpet baggers – and that is surely inefficient as the ‘best’ people to own and run the assets are predominantly the people who were doing so before Covid-19 struck

• The ‘friction’ would be massive. Job losses, vacant sites, lower VAT, PAYE and property taxes, social unrest etc.

• And it’s not as though there is any moral hazard to be avoided. This was nobody’s fault.

The mechanics.

• We’re against the clock to get the e-mail out here but look at it as a series of questions.

• Do you 1) want restaurants and pubs or 2) not?

• Do you think the friction and upheaval involved with busting everything down just to let it build itself up would be 1) best avoided or 2) great fun? And here, consider what happened when the oligarchs raped the Russian Federation in the 90s.

• Should you 1) get people back to work or 2) finance idleness?

• Do you 1) use a system that already exists (PAYE & furlough scheme) or 2) build something new?

• If you have a string on no1s here, why not say: all staff back to work in Q3, furlough runs at 75% in July and August, 50% in September and October and 25% in November and December?

• And we’ll cross a ‘secondary outbreak’ bridge if or when we get to it.

PUB & RESTAURANT NEWS:

Government and other aid:

• Chancellor Rishi Sunak has said that there will be no ‘cliff-edge’ to the Coronavirus Job Retention Scheme. The scheme, which was backdated to 1 March, was to run for a minimum of three months and 30 June (with its associated staff pay dates, Q3 rental demands etc.) is fast approaching.

• Sunak told ITV news ‘to anyone anxious about this I want to reassure them that there will be no cliff-edge to the furlough scheme. I’m working, as we speak, to figure out the most effective way to wind down the scheme and to ease people back into work in a measured way.’

• It’s our opinion that the CJRS will need to morph into a wage-support scheme for staff that have returned to work. The furlough scheme has the benefits that 1) it is relatively simple and 2) it exists already. It could, probably, be evolved into some sort of negative payment to (i.e. receipt from) the HMRC.

• This a) could not last forever and b) makes a mockery of the NLW increase as the government would be putting wage costs up with one hand, raising taxes and then subsequently subsidising those wages with the other. But this is politics. See premium email.

• Sunak says the scheme was and is intended to be temporary. He says ‘I am working as we speak to figure out the most effective way to wind down the scheme and ease people back into work in a measured way.’ He says ‘we are potentially spending as much on the furlough scheme as we do on the NHS – clearly that is not a sustainable situation, which is why as soon as the time is right we want to get people back to work again and get our economy fired up again.’

• The Caterer reports that the Raise The Bar campaign is warning that we are already counting down the 8wks left before the next rental payments are due. Raise The Bar says that the £10k and £25k payments to businesses should be made available to operators with larger premises.

• Some feedback has suggested that the vast majority, some have said 90%, of landlords expect to be paid in full for Q3 rents (admittedly some monthly rather than 3 monthly totals) on 24 June.

• Accountant Hacker Young has cautioned that errors made on furlough scheme applications now could have to be paid back later.

• Some councils are reported to be considering rebating the cost of their late night levies. That would appear to make some sense.

The new normal:

• The Metro has polled a number of restaurant operators & found a resistance to opening if social distancing measures are deemed to be too draconian. A lot will depend on what the choice is. If remaining supported by the furlough scheme is an option, some may take it.

• Various operators have said ‘Social Distancing in a restaurant is impossible and implausible’ and this is true. For a pit-stop such as in a grab and go restaurant, there may be fewer issues. Again, we are aware that supply (‘we don’t want to open’) is only half of the story. What if the customers just don’t want to come?

• The BBPA has produced new guidelines to support the industry in deciding how best to approach the safe retrieval of containers from pub cellars. The BBPA estimates that some 1.9 million containers of beer are currently left in pub cellars, following the rapid closure due to the COVID-19 lockdown. These, in some instances, will be bubbling away nicely.

• On a practical note, it is easier to drop a barrel of fresh beer into a cellar than it is to lift a potentially explosive barrel of gone-off beer out of it. On the way down, you need gravity and a mattress. On the way up?

• The BCC says that most businesses could reopen if they were given 3wks’ notice. It says that ‘businesses’ ability to restart quickly varies by company size and by sector.’ The hospitality industry would need to restock and re-staff. Its pace of opening would depend on how quickly its supply chain could move. Some supply companies have been in some distress as a result of the lockdown.

• The German state of Bavaria has said that its beer gardens will reopen on 18 May.

Company news:

• Fuller’s announces that its Red Lion in Ealing has opened its doors to the local neighbourhood in a temporary new role as a community store.

• Sky reports that Byron’s owner, Three Hills Capital, has ‘has begun to sound out potential bidders for the burger business.’ See premium email for our take on what is and isn’t ‘for sale’ at the moment.

• Smaller companies The British Honey Company and Divine Gin have pivoted away from the production of spirits to hand sanitisers. Sales are strong.

• Starbucks says it will have 85% of its company stores open in the US by the end of this week. Three will be modifications to operations and hours.

• Adelie Foods, which is one of the largest suppliers of food to coffee shops and supermarkets in the UK, is reported to be in rescue takeover talks.

• Campari has reported a 5.3% drop in sales in Q1.

• Wendy’s in the US has been running short of meat.

• Bloomin Brands, which owns the Outback Steakhouse and other casual-dining brands in the US, said yesterday that it is reopening its restaurants for diners as state and local coronavirus restrictions are removed.

• The number of companies announcing that they will be delaying the publication of their H1 or full year numbers is rising. This is in line with FCA and FRC guidance.

• Premier Foods announces that it will delay its figures from 14 May to some time before the end of June. It adds that its guidance remains unchanged and says that its trading profit is ‘expected to be at the top end of market expectations. The Group expects to comfortably beat its Net debt/EBITDA target of 3.0x at 28 March 2020. As previously indicated, trading in the first few weeks of FY20/21 continues to be ahead of average patterns of demand.’

Other news:

• The IHS Markit PMI for the services industry in the UK came in at 13.4, down from 34.5 in March. The number, which is slightly above the flash reading produced during the month, is the lowest since the survey began nearly 25yrs ago.

• The Indian government has lifted a 40-day ban on the sale of alcohol in order to help tax revenues. Spirits producers could benefit.

• Sector mixed yesterday. Major moves on the upside, Compass, Intercon & Playtech, all up 4%. Falling shares include C&C, Hollywood Bowl, Marston’s & Young’s, all down 5% and Hotel Chocolat some 9% lower.

• Wireless Social reports that retail footfall is still tracking down some 80% on pre-Covid levels. It sees little evidence of curfew breaking shoppers venturing out to the shops.

HOLIDAYS & LEISURE TRAVEL:

• Airline body IATA has recommended the wearing of face masks on planes, but it says that airlines should not be forced to leave middle seats unoccupied. Consumer demand could be a sticking point.

• Norwegian Air is to raise equity at a 79% discount to the latest traded price of its existing shares.

• Virgin Holidays is to rebrand and close 15% of its retail estate this year.

• Virgin Atlantic is to cut up to a third of its workforce reports Sky.

• Marriott International reports that it has accessed additional capital.

• Norwegian Cruise Line Holdings has cautioned that there is ‘substantial doubt’ about its ability to continue as a going concern. This is a conversation that a lot of companies will be having with their auditors.

• Norwegian says the ‘suspension of cruise voyages and decline in advanced bookings’ alongside the need to repay debt obligations when they fall due, is causing concern. Well it would, wouldn’t it?

• Norwegian spells it out, saying ‘the company does not have sufficient liquidity to meet its obligations over the next twelve months, assuming no additional financing or other proactive measures.’

• It says ‘there can be no assurance, however, that the company will be able to complete any such financing transaction, raise sufficient additional capital, finalize additional amortization deferrals or that revenues will increase rapidly enough to offset operating losses that will provide with sufficient liquidity to satisfy its obligations over the next twelve months, or maintain minimum levels of liquidity as required by certain of our debt agreements.’

• NCL is reported to be attempting to raise some $2 billion in new financing in an effort to survive the current situation. The funds will come, if they can be successfully raised, in the form of shares and bonds. The company has suspended operations until at least the end of June and is facing calls from some customers for refunds. See our various comments on the perils (at least once in a blue moon) of operating with negative working capital.

• Airbnb is to cut 25% of its staff & scale back on new initiatives. CEO Brian Chesky said ‘while we know Airbnb’s business will fully recover, the changes it will undergo are not temporary or short-lived.’ The company is seeing a rise in bookings in a number of European countries. Chesky tells the FT ‘the recovery is better than what we had forecast even two weeks ago. Is it a temporary recovery? Is it a permanent recovery? Nobody knows.’

• Easy Jet has put 2021 flights on sale. The airline has waived fees for changing existing flight bookings to any next year.

• Wyndham Hotels & Resorts has reported Q1 numbers saying that net income was actually up by 5% at $22m. It says ‘we have taken the difficult but prudent measures to reduce our costs and bolster our liquidity while providing support and relief for our franchisees to help them weather this downturn.’

• Wyndham says ‘nearly 5,900 of our 6,300 hotels in the U.S. remain open, and with nearly 90% of those properties located outside of major cities in drive-to destinations that cater to a leisure customer base, we believe that our asset-light business is well positioned for a quick recovery when travel demand returns.’

OTHER LEISURE:

• Vue Cinemas has told the BBC that it hopes to reopen in mid-July. See our comments on the need for demand as well as supply above.

• Facebook is expanding its services as a result of increased usage during lockdown.

• Flutter has announced the completion of its merger with The Stars Group.

• CVC and Blackstone are reported to be in talks to invest I the Italian football league.

• Walt Disney has reported a $1.4bn charge to its Q1 profits as a result of closed parks, shelved movie releases and reduced advertising. The company says ‘we are seeing encouraging signs of gradual return to some semblance of normalcy in China.’ It adds ‘while it’s too early to predict when we’ll be able to begin resuming all of our operations, we are evaluating a number of different scenarios to ensure a cautious, sensible and deliberate approach to the eventual reopening of our parks.’

• The FT reports that video games companies are seeing increased levels of demand.

FINANCE & ECONOMICS:

• The IHS Markit PMI for the services industry in the UK came in at 13.4, down from 34.5 in March. The number, which is slightly above the flash reading produced during the month, is the lowest since the survey began nearly 25yrs ago.

• Markit says ‘reduced volumes of activity in April were of course overwhelmingly attributed to either business closures, shutdowns among clients or shrinking sales due to a slump in non-essential spending.’

• The Composite PMI for April was 13.8. Markit says ‘April’s PMI data highlights that the downturn in the UK economy during the second quarter of 2020 will be far deeper and more widespread than anything seen in living memory.’ It says the April survey is ‘consistent with the economy falling at a quarterly rate of approximately 7%, but we expect the actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the self-employed and the retail sector.’

• The US is to borrow a record $3tn in Q2 in order to fund coronavirus-related rescue packages

• Sterling down v dollar at $1.2433 but up v Euro at €1.1466. Oil higher at $31.01. UK 10yr gilt yield down 2bps at 0.21%. World markets higher yesterday with Far East mixed in Wednesday trade. UK set to open down around half a dozen points.

START THE DAY WITH A SONG:

The song has been furloughed. See you on the other side.

RETAIL WITH NICK BUBB:

• Ocado: Ahead of its showdown with shareholders about CEO Tim Steiner’s share option package at the AGM today, Ocado has tried to defuse the row by issuing a bullish trading update, flagging that it has been able to ramp up enough capacity to see Q2 revenue to date jump by 40.4%, after only 10.3% growth in Q1.

• JD Sports: The wretched CMA has salvaged its anti-business reputation somewhat in recent weeks by making surprisingly sensible decisions to wave through the Just Eat and Deliveroo deals, given the impact of the pandemic, but it has returned to form with a vengeance today by finally blocking the Footasylum acquisition by JD Sports, over a year since the deal was completed, and insisting that the chain be sold!

• Today’s News: As well as the Ocado and the JD/CMA news, the embattled shopping centre landlord Hammerson has confirmed that the £400m deal to sell its retail parks to the Orion Real Estate Fund has fallen through (despite exchanging unconditional contracts on Feb 21st)  and that Hammerson has taken up the £21m cancellation fee…And Halfords has flagged that its final results are being delayed for a month (despite being at the top end of its £50-55m range) and that sales over the last 4 weeks have been only down by 23%, given strong cycling sales.