Langton Capital – 2020-10-29 – Pubs vs restaurants, AB InBev, Government, airports & travel etc.:
Pubs vs restaurants, AB InBev, Government, airports & travel etc.:
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A DAY IN THE LIFE:
Nice walk on the Moors yesterday.
Hole of Horcum, down into Levisham, nice lunch & a pint of Timothy Taylor (plenty to choose from, Black Sheep’s a particular favourite), then down into Dundale Griff, across the Hole itself & up the side again.
Easy, you might think.
But, the boots are a mess and, if anyone’s seen the Simon Pegg film ‘Run, Fatboy, Run’, specifically the scene where he falls down the steps in the gym because his legs don’t work after a bout of irregular exercise, they’ll know how I feel this morning.
Pleasant, nonetheless. But can’t go out today as it’s the month-end and the VAT collector, the payroll, the PAYE and the Make Tax Digital people, the landlord and a whole host of others including Amex and Visa are clamouring for attention. On to the news:
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PUBS VS RESTAURANTS: In Q2 last year, which seems like a lifetime ago, we ran a series of pieces during which we concluded that pubs were more adaptable and flexible than were restaurants. This remains the case. 29 Oct 2020:
• Although pubs & restaurants are often referred to in the same breath, they are arguably not the same thing at all.
• They both trade in food & drink but their property tenure, financing structures, usage and clientele are often not the same.
• Government regs have favoured restaurants (or disfavoured them less) than pubs. VAT is cut on food, restaurants can stay open in circumstances when some pubs have to shut etc.
• But, though pubs may be seen by some as the tortoise to the restaurant hare, we would still argue that the pub is better positioned than are restaurants.
• This was true before Covid, it is true during Covid and it will be true afterwards.
• We don’t want to drag this out, but it will need looking at in a number of parts.
• One. Today, we would suggest that Supply and Demand (of units). This has been at the core of a number of the two sectors’ issues
• Two. Tomorrow we’ll have the bulk of the notes. We’ll look at costs, pricing, discounting, distress, CVAs and the like. We’ll also consider tenure (freehold vs leasehold), existential threats (delivery etc.), government action (favouring restaurants & café culture) and alternative uses
• Three. Next week we’ll pull it all together & ask what it means for survivability in the age of Covid. We’ll also look at ‘other’. Flexibility, beer gardens, outside space in general and comment on any other ideas fed back by readers
Supply & demand:
• Taking beer as a proxy, vertical drinking in the on-trade peaked in 1979.
• Alco pops and ‘trading up’ have kept some tills ringing but, more widely, pubs have been either closing or focusing more on food, families, females & accommodation, ever since.
• The pub has carved out a niche as a ‘third space’ and as a hotel, a workspace, a hub for amateur sports, a venue in which to watch professional sport, for competitive socialising etc as well as just a drinking hole.
• On the supply side, new pubs are comparatively rare and a large number have closed permanently.
• Arguably, with a restaurant, you just go there to eat.
• Cheap money, innate (and often misplaced) optimism and complicit landlords have conspired to add perhaps 25% to 30% to the UK’s stock of restaurants in the 6-8yrs before Covid struck alone
• A herd mentality in the private equity industry has channelled new openings into the system
• The idea that the industry was easy (people have got to eat, what’s the problem?) may have exacerbated the problem
• This has had and will have long term implications.
• Oversupply has become something of a one-way street. At least it had before Covid, which has led to much more drastic solutions because, given the lags in the system, it was never going to be possible to turn off restaurant supply like a tap.
• This meant that new capacity kept coming onto the market long after many of even the more optimistic operators thought that adding more capacity was a good idea
• And to remove supply was always going to be (and now is) very traumatic for the operators concerned (and their landlords)
PUBS & RESTAURANTS:
Government regulations, Tier system, 10pm curfew etc.:
• No doubt the government is getting pulled two ways. The health lobby want to save lives & the libertarian end of the PM’s party want to open up the economy. The Red Wall Tories are keeping it simple & asking for money.
• Trade bodies UK Hospitality, the British Institute of Innkeeping and the British Beer & Pub Association have reported that just 1% of hospitality venues across the UK have been linked to NHS Test and Trace incidences.
• PHE regularly produces pie charts showing that hospitality has not been identified as the source in the vast majority of infections. But the government has said that it will not or cannot shut hospitals, care homes, workplaces, schools and universities (or ‘other’) so that perhaps just leaves hospitality.
• See yesterday’s email covering a Tory MP’s response to a constituent saying that the 10pm curfew may not do much good in terms of slowing transmission – but that it was a good example to set and at least showed that the powers that be were doing something rather than nothing.
• UKH, the BBPA and the BII point out that the ‘latest Public Health England data published also shows that hospitality was linked to just 2.7% of COVID-19 cases.’ See realpolitik comment above. The trade bodies say the findings reiterate that pubs, restaurants and hospitality venues are COVID-secure. The bodies are ‘now calling on the Government to consider removing the 10pm curfew on the sector, which SAGE has questioned as an effective way to combat the virus, and which is massively damaging hospitality trade in medium risk regions across the UK.’
• The whole of Nottinghamshire is to move into Tier III on Friday.
• Regional outlook. Worth a glance at PwC’s comments on London hotels below. There is a read-across for some pubs & restaurants in the capital.
• The Drinks Trust says it ‘has been able to award a significant number of financial grants to people within the industry who have been struggling with challenges at this time.’ It says ‘we are very keen to understand the needs of the people within our industry so we can ensure we provide the best possible support to them.’
• Breweries still have to pay business rates. We suggested yesterday that they didn’t. Retailers including hospitality retail outlets are exempt until the end of the fiscal year. Breweries are classed as industrial premises.
• Drinks Business reports that the English wine harvest came early this year after warm weather in August and September. It quotes one winemaker as saying ‘it has been a harvest of excellent quality, one of the very best we have seen.’
• Anheuser-Busch InBev has reported Q3 & 9mth numbers to end-September this morning, saying ’our third quarter results reflect our fundamental strengths as the world’s leading brewer and the resilience of the global beer category. We delivered a strong and balanced top-line performance by quickly adapting to meet the evolving needs of our customers and our consumers.’
• AB InBev says ‘in an ongoing volatile and uncertain environment, we remain focused on being part of the solution by prioritizing the health and well-being of our people, communities and customers.’
• The company shows revenue up by 4.0% in 3Q20, ‘positively impacted by a healthy volume performance and revenue per hl growth of 2.3%. In 9M20, revenue declined by 6.8% with revenue per hl growth of 1.6%.’ AB InBev says ‘total volumes grew by 1.9% in 3Q20, with own beer volumes up by 2.6% and non-beer volumes down by 2.5%. In 9M20, total volumes declined by 8.2%, with own beer volumes down by 8.3% and non-beer volumes down by 5.9%.’
• Regarding a dividend, AB InBev says ‘while our business is delivering improving results, we continue to face uncertainty and volatility arising from the COVID-19 pandemic. In that context, our Board determined that it would be prudent and in the best interest of the Company to forgo the interim 2020 dividend payment. This decision is consistent with our financial discipline and prioritizes our deleveraging commitments, which have been impacted by the COVID-19 pandemic. The Board’s proposal with respect to a full year 2020 dividend will be announced with our FY20 results on 25 February 2021.’
• Texas Roadhouse has reported Q3 & 9mth numbers saying that for the July, August, and September periods, comparable restaurant sales at company restaurants decreased 13.0%, 6.6%, and 0.5%, respectively. The company says ‘sales during the period were positively impacted by the continued easing of dining room capacity restrictions throughout the country. For the quarter, comparable restaurant sales decreased 6.3% at domestic company restaurants and 9.6% at domestic franchise restaurants.’
• Texas says results for the year-to-date for the 9mths saw ‘comparable restaurant sales decreased 16.0% at domestic company restaurants and 16.8% at domestic franchise restaurants.’ CEO Kent Taylor says ‘as our dining rooms continue to operate under decreasing capacity limitations, we are pleased to see our average weekly sales getting closer to historical levels. In addition, our operators continue to drive traffic through strong To-Go sales and outdoor dining. On the development front, we expect to open at least 20 company restaurants in 2020 despite pausing construction on a number of sites earlier in the year. Thanks to the strength of our operators, we remain confident in the positioning of our brands as we close out the year and head into 2021.’
• Regarding the outlook, the company says ‘as previously announced, due to the uncertainty surrounding the pandemic, the Company withdrew the financial outlook for the fiscal year ending December 29, 2020.’ It says it should open at least 20 company restaurant in the year.
• Up to 100 underperforming IHOP restaurants may close over the next 6mths the company has said. It may also close about 15 Applebee’s.
• Burger King parent Restaurant Brands International has reported better than anticipated Q3 results. The company’s drive-through outlets have been particularly strong. Comp sales at Burger King were down 7%. Tim Horton’s was down 12.5% and Popeye’s was up by 17.4%.
• Italian spirits company Campari has reported LfL sales +12.9% in Q3 after a 15.9% fall in Q2. The company strikes a cautionary note saying ‘with the resurgence of the pandemic in many areas of the world towards the end of the third quarter, the overall scenario in the short-term remains highly uncertain.’
HOTELS & LEISURE TRAVEL:
• The Airports Council International Europe has reported that some 200 airports across the UK and Europe are at risk of going bust within months due to the dramatic collapse in air travel caused by Covid-19.
• ACI Europe says ‘eight months into the crisis, all of Europe’s airports are burning through cash to remain open, with revenues far from covering the costs of operations, let alone capital costs.’
• Heathrow has been knocked off the top slot as Europe’s busiest airport by Paris’s Charles de Gaulle. Heathrow has reported losses of £1.5bn for the first nine months of this year. Heathrow wants the government to commit to airport testing before the end of next month.
• HotStats says re global hotels that ‘September was a lot like August, in that all global regions—except for the U.S.—recorded positive GOPPAR, but it’s still tenuous.’
• HotStats says ‘it’s evident that the hospitality industry is far from being out of the woods. And with a summer leisure bump now predictably over, hoteliers will have to hustle and hope to produce positive performance in Q4.’
• Tricky outlook for London hotels.
• PwC comments further on the UK hotel industry saying that ‘hotel occupancy rates in 2021 are forecast to be 55% across the UK, and could take four years to return to pre COVID-19 levels.’ It says occupancy could be around 52% in London and 59% in the UK’s regions. This after occupancy rates of around 29% in London and 38% in the regions in the current year.
• PwC says it believes that ‘business travel will remain muted. Key gateway cities relying heavily on international leisure, or corporate and events driven demand, including London and Edinburgh, are forecast to experience lower occupancy rates in 2021 compared to coast and country locations.’ Staycations could provide a boon for the UK’s regions.
• Re London, PwC says that it sees ‘a slow recovery in domestic business trips though this is conditional on how government advice evolves on people working from home. The capital’s prospects are worse than that of the UK regions next year. London hotels are more dependent on business trips, meetings and events, as well as international travel – all of which show weak demand. In addition, fewer UK domestic tourists are visiting the capital for a staycation as consumers favour coastal and country locations due to COVID-19.’
• STR also says that REVPAR in September, this time in the US, was broadly in line with August. STR says operators are hoping some US citizens will stay in the country and extend their holidays this autumn & winter.
• Boeing is to cut c7,000 jobs as losses mount. Not a place you would want to be just now.
• Club Med is to open a new Moroccan resort as part of a €100 million investment.
• Travel Weekly quotes Barrhead Travel and Advantage Travel Partnership as joining Jet2Holidays in saying that demand for holidays to the Canaries has soared since a travel corridor without quarantining was opened. Advantage says the opening up ‘has provided a glimmer of hope to travel agents up and down the country and consumers in search of some winter sun.’
• Senior Conservative MPs are reported to be calling on Boris Johnson to cut quarantine to five days with Covid testing.
• Carnival-owned Costa Cruises announced yesterday that it was reviewing its Schedule For Winter 2020-2021. It says ‘due to limitations in place in some European countries and evolution of the epidemiological situation, the Italian company announced updates to its upcoming cruises for winter 2020-2021. The company runs through the itineraries for the Costa Smerelda, Costa Deliziosa and Costa Diadema in some detail. It says that ‘the new ship Costa Firenze, which is currently in the final stages of completion at the Fincantieri shipyard in Marghera, will be delivered as planned in mid-December 2020, but she will begin offering its seven-day cruises in Italy, France and Spain only from Feb. 28, 2021.’
• Costa Cruises says that ‘the Costa Favolosa cruises in the Caribbean are cancelled and the ship will return to operate from April 2, 2021, with mini-cruises in the Mediterranean.’ It says ‘the 2021 World Tour of Costa Deliziosa is also canceled, with the possibility for guests to book the 2022 edition.’
• TUI is to return to Tees Valley airport in summer 2022 after what will by then have been a nine-year gap.
• Rank has announced that it has reached agreement to sell its Blankenberge casino and associated digital licence in Belgium to Kindred Group plc. It says ‘the disposal is subject to regulatory approvals by the Belgian Gaming Commission and the Blankenberge City Council and constitutes a Class 2 transaction for the purposes of the Listing Rules.’ The company says ‘having closed its Middlekerke operations in 2017, Blankenberge has been Rank’s sole remaining casino venue in Belgium. For the full year to 30 June 2020, Blankenberge contributed £2.7 million to Group profit before tax and reported gross assets of £4.2 million as at 30 June 2020.’
• Rank CEO John O’Reilly says ‘today’s announcement of the sale of the Blankenberge casino secures the next chapter for a great venue in Belgium and a team that deliver an excellent customer experience to the local community. As a standalone casino, the business was non-core to Rank’s international growth plans and the £25m sale proceeds supports the Group’s liquidity and future growth initiatives.’
• Escape Hunt has announced that it is opening its next UK owner-operated site based in Basingstoke today. CEO Richard Harpham says ‘the site has a prime position in Festival Place and our recent experience in Norwich, which has opened incredibly strongly, gives us a great deal of optimism for sites in premium schemes, such as this.’ He adds ‘work at our twelfth UK site, at Brewery Quarter in Cheltenham, is now substantially complete and is similarly positioned in a prime location in the town, giving us confidence that it too will be well received.’ He concludes ‘we continue to see attractively priced sites in prime locations and are actively continuing our UK site roll-out strategy.’
• Gfinity has reported full year numbers for the year to end-June saying that revenue fell to £4.5m from £7.9m but that the operating loss was reduced to £5.5m from £8.6m in the prior year. The company CEO John Clarke says ‘we are delighted that our sharpened focus on three core areas is now driving improved financial performance and we have significantly strengthened our market positioning to create an exciting platform for future growth.’
• Caesar’s, which has agreed to bid for Wm Hill, is reported set to sell Tropicana Evansville for $480 million in cash to Gaming and Leisure Properties and Twin River Worldwide Holdings.
FINANCE & MARKETS:
• A report by The Resolution Foundation has suggested that young and ethnic minority workers are more likely to be lose their jobs when the furlough scheme ends this week.
• The Resolution Foundation says ‘once you become unemployed, finding new employment looks like it’s even worse than it was after the financial crash.’
• Financial markets tumbled yesterday on growing concerns that the second wave, which has been upon us for some time, is perhaps not a good thing. Mixed reports on vaccines (they won’t happen, they may or may not work, they may be rushed, their efficacy may not last etc.) and high and growing hospitalisation numbers have led to an adverse swing in sentiment.
• Sterling down at $1.3018 and €1.1073. Oil lower at $39.26. UK 10yr gilt yield down 2bps at 0.22%. World markets down yesterday. London set to bounce by 6 or 7 pts at the open.
RETAIL WITH NICK BUBB:
• Today’s News: There has been no Retail company news this morning, but there have been a few related snippets: Supermarket Income REIT has announced the acquisition of the freehold of the big Sainsbury’s superstore in Heaton, Newcastle, from the National Farmers Union for c£53m, reflecting a combined net initial yield of only 4.1%. And Foxtons, the leading London estate agent, has warned that although, at the end of September, the sales commission pipeline (based on the value of properties ‘under offer’) was up around 30% on the same time last year, “transactions are taking longer to move through to exchange and the economic uncertainty is also driving higher than normal transaction fall-through rates”. And the embattled Motor dealer Lookers has announced that the legendary industry figure of Tony Bramall is stepping down after 14 years as a non-exec.
• Retail Sales Watch: The Retail Sales month of October (the 4 weeks to Oct 31st) will soon be over and the chart in the Next Q3 update yesterday implied that it has gone pretty well so far, but we haven’t seen the final word yet on how good September was on the High Street…The Office of National Statistics (ie the ONS or what we mockingly call the “Planet ONS”) reported on Friday that non-seasonally adjusted total Retail Sales by value were up by 5.8% in September (ex-petrol), which was a tad better than the BRC-KPMG measure of gross sales, which was up by 5.6% in gross terms. So, who was right? Well, the Retailing consultancy group, Retail Economics (RE), which was founded by Richard Lim (who used to run the monthly BRC-KPMG Retail Sales survey), has come out with its own detailed overview of September (the 5 weeks to Oct 3rd) and their estimate is that gross Retail sales rose in value
• News Flow This Week: Over in the US, the tech giants Amazon and Apple both announce their latest quarterly results after the close this evening.