Langton Capital – 2020-08-28 – PREMIUM – Failed companies, EOTHO, Pret, Chilango, Gregg’s & other:
Failed companies, EOTHO, Pret, Chilango, Gregg’s & other:
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A DAY IN THE LIFE:
So, what have you not done in the last six months?
Langton hasn’t been on a train (mainline or tube), it hasn’t flown anywhere, been to a sporting event, a gig, travelled overseas by any means, been to any corporate ‘events’, taken a ferry or had any ‘vertical drinking’ sessions.
It’s saved money on lunchtime sandwiches, coffees, commuting, fashion items, petrol, shaving cream and foreign holidays. But it’s lost money on sticky customer debts and a general deflation in the level of optimism, trade and revenue.
Overall, not a particularly good feel but, perhaps, we’ve been bolder than some.
Because we’ve had two cottage holidays, eaten in six or eight different pubs & restaurants (perhaps 15x in total), have had numerous coffees indoors and ice-creams out of doors and we’ve been on more walks than we’d care to mention.
We’ve seen the North Sea from both sides of the Humber, the Dales, the Yorkshire Moors and we’ve participated in the EOTHO scheme several times. We’ve been in innumerable shops, have done our bit when it comes to spending, have got used (as much as we ever will) to wearing a mask and are trying our best to carry on.
Not ideal, but it is what it is. And, as my granddad used to say, ‘worse things happen at sea’. And we’ve got a long weekend to look forward to which, after its stopped chucking it down here up north and has cleared up, should be a fair one. On to the news:
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A COUPLE OF COMMENTS:
• Apologies to Wm Shakespeare but would a failed company by any other name smell just as bad? Administrations, pre-packs & busts to date – part II.
• EOTHO. Government extension unlikely, corporate extensions now coming through thick and fast.
• Porcupine graphs, human nature, over-confidence and the cruise industry.
FAILED COMPANIES BY ANY OTHER NAME:
• See yesterday for the not inconsiderable list of companies that have already undertaken pre-packs, CVAs, straight administrations or have ‘commenced negotiations with landlords’ regarding rent reductions and the like.
• We missed off Gusto, Prezzo and Bistrot Pierre and, as time is our enemy, we don’t have a running total of units closed and jobs lost. But the CGA estimate that 20% to 30% of units may never reopen does not seem absolutely out of court.
The scale of the problem at the micro level:
• All the companies mentioned have been visited by ill-fortune.
• But the degree of that ill-fortune varies widely from (what may be opportunistic) attempts to get rents down on a number of units right through to liquidations and collapse.
• Least serious could be the negotiations with landlords. Even the best of operators are taking the opportunity to discuss rents (and whether they shouldn’t be lower) with their landlords.
• If this is backed up by a threatened or an actual CVA, then the situation could be deemed somewhat more serious.
• Enacted CVAs are pretty serious. Creditors may insist that equity suffers a big loss and fees (value-leakage) to advisors will be significant.
• There will be a loss of reputation (less of an issue when ‘everybody is doing it’) and staff morale will take a hit (ditto).
• Pre-packs will see equity replaced and ownership change. Related parties may be in on the transaction, but this is a major issue for equity, debt-holders, landlords, other creditors, staff and suppliers.
• A straight administration followed by a fire sale is all of the above and more.
• A liquidation is the ‘go straight to jail’ card. It will often follow an administration, in which case some assets will have been sold (probably). But this is game over for everything that has been left over.
At what point has the company ‘failed’?
• Trigger’s Broom (see various YouTube sketches) was 20yrs old. But, as it had had 17 new heads and 14 new handles over that period, it wasn’t the same broom at all, was it? And the same is true for some catering operations.
• The name (e.g. Byron Hamburgers) will remain above the door of those units that do not close, implying that the brand has continued.
• And indeed it will have done in that case, although 60% of the operator’s units actually closed (with only 20 of 51 remaining open) and equity lost its stake in the business and creditors look set to take a haircut
• Even Patisserie Valerie, whose operating company, Stonebeach Ltd, ran aground amidst allegations of criminality and incompetence, has retained a presence on the High Street.
• But the performance of the corporate entity would not normally be judged a success.
EAT OUT TO HELP OUT – COMPANIES DOING IT THEMSELVES:
• EOTHO has been a great success on many measures.
• Its greatest achievements may have been 1) to get staff off furlough, 2) to coax customers back into the habit of eating out and 3) to swell corporate coffers at a crucial moment.
• The more companies have intimated that they may continue the scheme on a DIY basis, the less likely has been a Treasury-funded extension
The market, red in tooth and claw.
• We’re now seeing typically stronger operators offering to extend the scheme at their own expense
• Where these players have a) high margins to play with (typically not dishes including a lot of meat) and b) are filling slack trading periods and are not stealing business from Thurs to Sun, this makes sense.
• Add in the suggestion that weaker competitors may be driven out of business and extending EOTHO looks like a positive move
What to look for:
• Weaker operators may re-close their least good units.
• They may bring forward redundancies.
• Stronger operators will need to keep an eye on cannibalisation, brand erosion and their own margins.
• But, overall, this looks like a good time to take market share – in fact, as weaker players may not have access to limitless capital in the near term, a decades worth of attrition and evolution could be crammed into the next six months
PORCUPINE GRAPHS, HUMAN NATURE, OVERCONFIDENCE & THE CRUISE INDUSTRY:
• Overconfidence followed by denial is a common response to adverse changes in circumstances
• This leads to the drawing, perhaps only mentally, of porcupine graphs.
• They show a sharp upturn in trade only a few weeks out. But the recovery always shifts to the right and, over time, the graphs written atop each other resemble a porcupine
• Step forward the cruise industry
What happened, is happening and will happen?
• The cruise industry denied there were problems. VP Mike Pence was heavily criticised by operators for saying pensioners might think twice before taking a cruise.
• Would be holidaymakers, watching the Diamond Princess on TV (and no doubt thinking about plague ships, floating prisons and the like) went on strike and the industry was shut down.
• The industry then spent the next 5-6 months pushing forward the ‘pause’ in their operations – by about an additional month every month. Think porcupine.
• Carnival is still playing this game with a number of its brands whilst Fred Olsen has said it will ‘take baby steps’ and adds that it doesn’t expect to be cruising until the start of Q2 next year.
Any read across?
• The events industry may be in a similar, no pun intended, boat
• Various trade shows were saying in the spring that ‘ministers believe it’s safe to go ahead’ and that they were still planning to do so days or even hours before the Excel was seized to become a Nightingale Hospital
• They then said they would postpone to July or thereabouts. Yes, but July on route to next spring, it turned out
OTHER THEMES TO BE PICKED UP ON WHEN WE HAVE TIME:
• Dead companies walking? Many companies were in a poor state last year. See our comments in prior emails based on dire Companies’ House report and accounts. Covid will have made this worse. It’s hard to see them surviving.
PUB & RESTAURANT NEWS:
The news is a bit thin on the ground ahead of the long weekend.
Eat Out to Help Out:
• With one government subsidised trading day left, Monday, both the odds of the Treasury extending the scheme and the list of companies saying that they will extend into September at their own cost, have lengthened.
• The FSB and a number of other trade bodies and food-led operators have called for the scheme to be extended. This is starting to look decidedly unlikely.
• However, Fulham Shore owned chains Franco Manca and The Real Greek have both tweeted that they will extend EOTHO throughout September. Franco Manca says ‘following the support from Her Majesty’s Government, Eat Out To Help Out has been extended. Rishi paid half your bill in August. Franco will pay half in September.’
• The Real Greek says ‘we have decided to extend the Eat Out to Help Out scheme to September.’ It adds ‘we will be offering 50% off everything from our Lunch Menu and out Filoxenia Dinner Menu every Mon-Wed in September. Lunch will cost customers just £3.98 and dinner will come in at £6.65.
• Premium bar operator Arc Inspirations has also announced plans to extend the Eat Out to Help Out initiative across its estate throughout September. It says this is ‘following its resounding success over the past few weeks.’ Arc says ‘the offer will be available on Monday and Tuesday in all its bars and gives customers a flat rate of 50% discount on food with no £10 cap.’
• Arc CEO Martin Wolstencroft comments ‘the Eat Out to Help Out scheme has undoubtedly helped to boost footfall, encourage customers back through our doors and reinstall confidence into drinking and dining out. It’s been a phenomenal success for us with total sales up 111% across Monday to Wednesday, which is very pleasing. Trading later in the week has also not been adversely affected which is also encouraging.’
• Bill’s has emailed customers saying that ‘we are delighted to announce that we will still be joining in throughout September.’ It says ‘you can enjoy up to 50% off by dining from our set menu, packed with amazing dishes, such as our 8oz Sirloin Steak, garlic butter, mixed seed salad and rosemary fries.’
• Other operators offering discounts through September include Hall & Woodhouse, the Signature Pub Group in Scotland, Toby, Harvester & Stonehouse Pizza & Carvery (to 9 September), Gaucho & the Thomas Cubitt pub and Peggy Porschen café in Belgravia. Many other single operators or small chains have made similar announcements.
Covid casualty. Pret to cut nearly 3,000 jobs:
• Pret A Manger said yesterday it will cut around 3,000 jobs in its UK business following its decision to not reopen a number of shops after the coronavirus lockdown. The cuts amount to around a third of its UK workforce. Even after reopening, the company has said that sales are running down some 60% on the same period last year.
• Pret has been a victim of both the lockdown and of the subsequent reluctance of a large number of commuters to return to their offices.
• Pret announced last week that it would permanently close some 30 shops across the country. The company has also cut working hours for its staff. CEO Pano Christou comments ‘I’m gutted that we’ve had to lose so many colleagues.’ He says ‘although we’re now starting to see a steady but slow recovery, the pandemic has taken away almost a decade of growth at Pret.’
• Pret maintains ‘we’ve managed to protect many jobs by making changes to the way we run our shops and the hours we ask team members to work.’ CEO Christou adds ‘I’m hopeful we’ll be able to review all these changes now that trade is improving again, and I’m encouraged by the improvements we’re seeing every week.’
• Sky says that ‘in the City of London, business has fallen by 80%.’ Public transport passenger volumes are running at little more than a quarter of the numbers seen before the lockdown.
Other Covid-19 news:
• Barclays comments on the ongoing recovery from the Covid-19 pandemic and from the shutdown that accompanied it saying ‘hospitality and leisure leaders seized the opportunity to spring clean and prepare for reopening in a very different environment.’ Mike Saul, Head of Hospitality and Leisure, Barclays Corporate Banking, says there are reasons to be optimistic about the sector’s future.
• Barclays says hospitality is ‘a sector in need of an upturn in fortunes, but also one that is ready to make its own luck. It says ‘while there is understandable uneasiness about what the short-term might hold, business leaders are looking to technology to refresh the way they serve customers and increase revenue through digital streams both now, and in the future.’
• Barclays says ‘unsurprisingly, levels of confidence in the short term are low as many don’t yet know when they’ll be back to operating at full capacity. However, there are glimmers of hope and industry leaders are becoming more optimistic about the future.’ It adds ‘confidence is buoyed by new government measures intended to provide an immediate boost to the sector, including the VAT cut to 5% and the Eat Out to Help Out scheme, which has seen strong initial take-up.’
• Barclays’ Head of Leisure Mike Saul says ‘in all my years of working in hospitality and leisure, I’ve never seen a climate as challenging as this. And while there are many new hurdles to overcome, I am hugely encouraged by qualities I see time and again from within the industry. It’s full of smart, inventive, resourceful leaders who will ensure the future is bright and the present is as good as it can possibly be.’
• The Federation of Small Businesses in Wales has said ‘with the average tourism business having lost half of its annual income, it is clear that the concerns of these seasonal businesses facing three consecutive winters is beginning to be borne out in many places.’ It says ‘many firms need a lifeline to help see them through this incredibly difficult period, and if Welsh Government does not step in soon then time is going to very quickly begin to run out for Wales’ tourism firms.”
• The SBPA has said that the ban on background music in pubs north of the border is ‘having a devastating impact on the country’s pubs, with increased likelihood of closures and job losses as a direct result of the policy.’
• The SBPA says ‘the policy has had a severe impact on Scottish pubs, with some seeing an immediate drop in trade of over 20% since the ban came in – on top of the fall in trade they are already facing as they recover post-lockdown.’ CEO Emma McClarkin comments ‘music adds to the ambience and atmosphere of the pub. Without music our venues are losing more of their soul.’
• RD Capital Partners has bought Mexican restaurant chain Chilango out of administration for an undisclosed sum. The new owners will keep 10 of its 11 restaurants open. RD says ‘we are delighted to partner with a brand and business we have long admired. Chilango has a great proposition, which appeals to a diverse customer base.’
• Chilango underwent a Company Voluntary Arrangement earlier this year. Administrator RSM led deal. Chilango MD Richard Franks, who will stay with the business, says ‘despite Covid-19, the team has put forth an outstanding effort to continue bringing our vibrant flavours to the UK. I’m grateful for the team’s commitment and resilience and the strong results from delivery, speak to their hard work and determination, all of which was recognised by RD Capital Partners.’
• The FT reports that an investor has told it that he & others planned to take the two founders (not Mr Franks) to court alleging that they had mismanaged the company. The company says ‘the directors of Chilango have acted in the best interests of the business at all times, and would defend themselves against any claim that they had not done so robustly’.
• A Greggs distribution centre in Leeds has been forced to close as 20 staff members have tested positive for Covid-19.
• Drinks Business reports Majestic Wine’s chief commercial office Rob Cooke as saying that Christmas trading this year is harder to call than for some time. He says ‘trying to gauge with any degree of certainly how customers will act over the next few months is very difficult and certainly it’s the most difficult Christmas to predict since I’ve been in retail.’
• Cooke says Majestic is still seeing strong online sales growth but adds that this has calmed down from the “wild demand” of the early stages of lockdown.
• Retailer New Look has launched a CVA
HOLIDAYS & LEISURE TRAVEL:
• Travel Trade Gazette has reported that ‘summer 2021 sales are soaring according to [its] latest Travel Agent Tracker survey, with respondents reporting consumer confidence in 2020 travel having slumped to new lows.’
• TTG says ‘the rate of Tracker respondents reporting summer 2021 bookings in Week 20 (week to 21 August) surged 6.5 percentage points (ppt) to 47.5% meaning nearly half of all respondents made at least one booking for summer 2021 last week.’
• Meanwhile, Jet2.com and Jet2holidays have suspended their Balearic programme for the remainder of the summer 2020 season. The companies say this is ‘because of the ongoing uncertainty caused by the Covid-19 pandemic, as well as the current UK government advice.’
• Quarantine-free travel between London and New York is reportedly being discussed by UK and US officials under plans for a transatlantic “air bridge”
• Airport retailer Global Travel Retail has reported sales of wines & spirits down by around 60% at present. It does not see volumes recovering to 2019 levels until at least 2023.
• Travellers returning to the UK from Switzerland will have to self-isolate as the government has decided to remove the country from its exempt list. A similar requirement is not in place for returnees from the Czech Republic.
• Fred Olsen Cruise Lines it to commence sailings over most of its ships in March or April next year.
• STR has reported that ‘the middle of summer brought better hotel performance data…since the COVID-19 pandemic started in the U.S.’ It says ‘gross operating profit margin was positive for the first time since March, and more U.S. hotel markets are now realizing positive gross operating profit per available room.’ STR says all classes of hotels showed positive GOPPAR in July for the first time since February.
• STR reports occupancy across the US hotel industry was down 30% in the week to 22 August with room rates down by 23%. The resultant REVPAR was some 46% lower than the same week last year.
• Playtech yesterday commented on ‘the recent speculation regarding the possible disposal of its financials division, TradeTech’ saying ‘it is continuing to evaluate all options for TradeTech, including a potential sale of the division.’
• Playtech ‘confirms that it is in discussions with a number of parties regarding a sale of the division. However, these discussions are at an early stage and there can be no certainty that any transaction will be forthcoming or whether acceptable terms will be agreed.’ It says ‘a further announcement will be made if and when appropriate.’
• Hollywood Bowl is to open a new, 28,000 square feet venue at the newly-built York Stadium leisure complex. The site will have cost £2.8m and will provide around 30 jobs.
FINANCE & ECONOMICS:
• Sterling stronger at $1.325 and €1.1166. Oil lower at $45.11. UK 10yr gilt yield up 3bps at 0.34%. World markets lower in Europe and the UK yesterday but up in US & Far East higher in Friday trade. London set to open up around 25pts.
START THE DAY WITH A SONG:
The song has been furloughed. See you on the other side.
RETAIL WITH NICK BUBB:
Nick is back after the Bank Holiday.