Langton Capital – 2020-12-08 – PREMIUM – High St rents, Covid passports, footfall, Vianet, McDonald’s, refunds etc.:
High St rents, Covid passports, footfall, Vianet, McDonald’s, refunds etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Tricked into watching a couple of episodes of I’m a Celebrity a week ago, Langton felt its age when, after Shane Ritchie belted out most of A Town Called Malice, AJ somebody or other congratulated him on his singing but added that he didn’t have a clue what the song was or who had sung it.
I mean, really?
But then it struck us that, if this AJ was twenty years old or whatever, it was a bit like asking me in the 70s about Bing Crosby or Frank Sinatra and that felt kinda weird.
So weird, in fact, that we at Chez Langton immediately all downloaded the App and voted for him five times each, every day, to eat gonads and lay with the spiders until, at the first possible opportunity, we voted tactically to remove him from the show altogether.
Anyway, fitting seamlessly into grumpy old man mode, we paid £12.85 for three medium lattes and a medium hot chocolate in a Starbucks over the weekend. Scandalous. And this with VAT down from 20% to 5%. Would have never happened in our day. On to the news:
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CHANGES ACCELERATED BY COVID-19:
High Streets have been under pressure for some time. This hasn’t got any easier since the Covid pandemic began. 8 Dec 2020.
• Where is Mary Portas, The Queen of the High Street, when you need her?
• Not on Twitter recently, that’s for sure. Although she did tweet back in early November that consumers should pick three shops each and spend money in them.
• Problem is, unless they sold food, they would have shortly thereafter been shut for a month.
• And not Ms Portas’s fault but, if we’ve learned anything from such pleas, it’s that even when people are well-meaning, the half-life of good intentions is rather short.
• Because outlets need to be relevant and, if leases were taken out twenty years ago, they may be less so now than they were at inception.
Rents. They need to fall, don’t they?
• Maybe we’re missing something but aren’t rents perhaps too high? And haven’t local authorities perhaps levied business rates at too high a rate?
• And we understand that rents are at an ‘equilibrium’ level but, in most markets, there can be more than one equilibria – it’s just that it takes a jolt to the market to move from one equilibrium to another
The ‘problem’ with lower rents:
• Rents were agreed between consenting adults
• And landlords may have borrowed against them meaning that the status quo can’t be budged without some collateral damage
• Banks could suffer and, behind them, the government (a.k.a. the taxpayer)
• But if it’s right to move from one level to another, then surely it’s better to make a start?
• Yes, new rents could reflect a new reality. But most leases still have years to run as they may have had an original duration of 15yrs or 25yrs
• And the only way to move these is via a CVA or an administration – and doesn’t that just make the lawyers rich?
Hospitality in this context:
• Hospitality has a very direct interest in the levels of rent as it is a big occupier of space
• And it has an indirect interest in that, if rents are ‘too high’, they may drive retail online to large Amazon warehouses on motorway junctions and town-centre footfall will drop as a result
Is there a ‘Goldilocks’ rent reduction (if you want to retain retail)?
• Don’t cut rents at all and you might get a boarded-up graveyard. Cut them ‘too much’ and the type of shops will change markedly
• Admittedly we are dreaming here because very few turkeys vote for Christmas and even fewer landlords offer rent reduction unbid
• But, looking at York’s own ‘premier’ shopping area, Coney Street / Spurriergate, there are now a lot of empty shops and more by the look of it coming
• Boots took the old Woolies site and Sports Direct took BHS but where are the new, new entrants? Retailers have left and semi-permanent boarding has gone up
If you want to keep retail.
• Holding out for high rents means voids.
• These might be filled on a temporary basis by Xmas Card clearance outlets (for a fortnight at least, along with their plywood shop signs) and charity shops – but the attractiveness of the location may fall and that could put off longer-term lets
• The above would at least clear the landlords of the burden of business rates – but the town could get a suboptimal outcome as a result
• The market is great but not perfect. Indie retailers can’t compete on rents with the multiples. But the multiples may not be playing and the landlords might not budge on rents
• If these could be subsidised in some way, the market could at least ‘clear’
• Half-rent for five years followed by a step up (accompanied by a break clause) would go a long way to reduce risk
If you want to replace retail.
• Office space is plentiful, more people are working from home.
• Manufacturing in city centres is likely not realistic for social, transport & environmental reasons.
• The only leaves residential. And there’s little chance of residential paying anywhere near the same rents as prime retail meaning that supporting independent retailers (at least on the ground floors) may not be such a bad idea after all.
PUBS & RESTAURANTS:
• Tiers having a major impact, Tier 2 perhaps less draconian than earlier thought. Or publicans’ view of a ‘substantial meal’ has mellowed.
• The numbers below are just for open units. Closed units are obviously down 100%, and their inclusion would skew numbers downwards.
• Analysis from S4labour shows that sales in Tier 1, 2 and 3 venues are down 30%, 39% and 78% respectively year on year.
• S4Labour says ‘as we expected, the tougher lockdown restrictions have been disastrous for the sector, however there is also proof in Tier 2 that despite greater restrictions on average than before lockdown (most areas in Tier 2 came from either Tier 1 or 2 in October/November), that some consumer confidence is there.’
• S4Labour suggests a ‘pent up demand for hospitality’ has driven sales up, despite restrictions.
• It points out that, except for those lucky consumers comprising 1% of the English population in Tier One, the cost of going out has increased as it isn’t possible to simply have a drink.
• S4Labour says this has made a trip out more expensive. Its results suggest that ‘as expected food sales are down by less year on year at 18.9%, whilst drink is down 49.6%.’
• The company says 25% of Tier 2 sites are still closed, and 91.7% of Tier 3 sites are closed. Take these venues into account and the overall figures are much worse, particularly in Tier 3. S4labour says ‘we can fear that with these levels of sales that a lot of venues will struggle to be profitable. The number of sites not open shows just how catastrophic the current restrictions are for the industry. This is a time that hospitality normally thrives, and many organisations rely on December revenues to get through January and February.’
• Meanwhile Springboard has reported that shopper visits across UK shopping destinations were down by 31.2% when compared with the same period last year over the Wednesday to Saturday period last week. The weekend was slightly better than the period as a whole with Saturday’s footfall down by 27.3% year on year.
• Minister James Cleverly has said that millions of people could have their lives “unlocked” by getting a card proving that they have been vaccinated against Covid-19. As many of these will be over-85 and in nursing homes, this is unlikely to do anything for pub & restaurant revenues in the short term.
• Cleverly wouldn’t be drawn on detail saying only that the cards were ‘about unlocking people’s lives, it’s about unlocking the economy, it’s about making sure we protect lives and protect livelihoods.’ Cabinet Office minister Michael Gove had previously said there were no plans for “vaccination passports.”
• Vianet has reported H1 numbers saying that ‘2020 has been a challenging year for many businesses and…the COVID-19 pandemic has had a significant impact on the financial performance of the Group.’ It says revenue was down to £4.1m from £8.4m with an adjusted operating loss of £0.4m against a profit of £2m last year. The basic loss per share is 4.9p (2020 EPS of 6.0p) with no interim dividend. The company says that ‘Smart Machines growth slowed, with new unit sales at 3,212 (H1 2020: 7,634 units), of which contactless payment sales at 2,152 units (H1 2020: 4,796 units).’
• Chairman James Dickson says the ‘period ended 30 September 2020 has been challenging for the Group as a result of the COVID-19 pandemic and the subsequent lockdowns and tier system restrictions forcing closures to the hospitality sector. Nevertheless, trading for the first six months of the financial year has been ahead of management’s internal revised revenue and profit forecasts.’
• Dickson says ‘while our Smart Zones division saw a dramatic reduction in demand for our services, given the overnight closure of pubs, we were able to engage with our customers as they seek data to understand the ‘new normal’ trading environment and to look to improve decision-making during the exit phase. We envisage this demand continuing as the hospitality sector returns to levels seen before the pandemic hit.’
• The company says ‘we are confident of the long-term success of the Group and we look forward to updating the market on our progress in due course.’ The chairman says ‘Stewart Darling, CEO, has notified the Group of his intention to stand down from the Board, having been with the Company since 2008 and CEO since 2013.’ He says ‘a search for Stewart’s successor will commence in due course. Meanwhile, having held the position of CEO prior to Stewart, I will assume the role of Interim Executive Chairman to ensure continuity of executive leadership and support for the management team through this transition.’
• Re the outlook, Vianet says ‘prior to the first lockdown in March 2020, the momentum and performance of both divisions had been encouraging.’ It says ‘the Board remains confident in Vianet’s long-term growth strategy and considers the Group to be well positioned to deliver earnings growth as the world recovers from the pandemic.’
• McDonald’s is to end a $50 million a year subsidy paid to franchisees for Happy Meals reports NRN in the US. It says ‘we recognize this subsidy has been in place for many years. However, it is no longer fuelling growth in the way it once was.’
• Nando’s has denied reports that it is in debt crisis talks. The company has told the BBC that Nando’s UK was “a strongly performing business in normal times” and that talk of a crisis was untrue.
• We reported the Telegraph’s story yesterday but added at the time that ‘many companies have had to approach bond holders and bank lenders in recent months as covenants would have been breached due to low (or no) EBITDA and reduced sales.’ We said ‘auditors at the moment are very nervous regarding ‘going concern’ and ‘material uncertainty’ provisions.
• Nando’s says discussions that are taking place are being undertaken “in an orderly and pre-emptive fashion”.
• Remy Cointreau has sold its remaining shares in spirits company Lucas Bols for €71.3m. Remy says the sale is consistent with its brand elevation strategy.
• The Richmond Club, Richmond’s first private members club, opened yesterday.
• Cracker Barrel Old Country Store in the US has reported Q1 2021 same-store sales growth slightly improved though still negative at minus 16.4%. Deliver remains ‘very strong’.
• B&Q owner Kingfisher announced yesterday that it was to return £130m in business rates relief. The naughty step is a little less crowded as a result.
HOTELS & LEISURE TRAVEL:
• Jet2.com and Jet2holidays have refunded over £1 billion in Covid-19 disruption refunds to customers since the start of the pandemic in March. CEO Steve Heapy says ‘our guiding principle of putting customers first will not change for anything, including the pandemic, and the feedback we have received shows we have done the right thing throughout.’
• Jet2 says ‘if we are unable to provide customers with the service that they have paid for, then we will promptly refund their money because it is the right thing to do and it is how you run a responsible business.’
• Some questions as to the level of consumer protection offered by home rental giant Airbnb have been raised by established UK hospitality trade bodies ahead of its planned shares listing. Trade bodies including UKH, the Bed & Breakfast Association Tourism Alliance and Professional Association of Self-Caterers, were interested in the level of protection offered to consumers and how this compares with that offered by traditional businesses.
• The level of employment at a sample of over 4,000 hotels in the U.S. has fallen by c365,000 per STR. STR goes on to say that a degree of this should reverse next year. It quotes Hotel Effectiveness as saying ‘the virus is expected to be much more controlled by this summer. This will lead to an occupancy rebound in a very short period of time. Since room sales and jobs are directly linked, hotels expect to have an unprecedented number of job openings all at once. Preparation for mass recruitment and onboarding will a top priority among larger hotel companies.’
• Norwegian Cruise Lines is to introduce continuous active Covid disinfection via new air filtration system technology reports Travel Weekly.
• Uber is to sell its driverless car subsidiary to start-up Aurora Technologies.
• Bob Dylan has reportedly sold the rights to his entire back catalogue to Universal Music Group. Mr Dylan is 79 years old. The New York Times has estimated the value of the deal at $300m. Not bad for a few tunes.
FINANCE & MARKETS:
• The head of Toyota in Europe has warned that a no-deal Brexit could make its UK plants uncompetitive. He says it would be “very, very negative” for the car company’s business.
• Sterling lower at $1.3362 and €1.1024. Oil lower at $48.30. UK 10yr gilt yield 7bps lower at 0.28%. World markets broadly lower yesterday with London set to open down around 35pts.
RETAIL WITH NICK BUBB:
Today’s News: The home shopping company Studio Retail has announced decent interims (with revenue up 17% up in the 26 weeks to 25 Sept and PBT up 52%) and strong current trading (with sales running up 32% in Q3 so far) and on the back of that it has agreed to a request from its main shareholder, the ubiquitous Frasers Group, that it should conduct a “strategic review”, ie put itself up for sale. The group has a market cap of just under £230m and the other main shareholder, Schroders, has given its backing to the plan, so Studio Retail is in play, although it is not clear whether Frasers itself will be interested in bidding…Interestingly, Studio Retail report that “the marketplace has been significantly less promotional than in November 2019 due to the second lockdown in England”, with gross margins much improved as a result, whereas Joules, in their pre-close update today, complain about
BRC-KPMG Retail Sales figures for November (the 4 weeks to Nov 28th): We expected today’s figures, which came out overnight, to show decent growth again, despite the lockdown, but total sales were only 0.9% up (after the 5.9% increase in September and the 4.9% increase in October), notwithstanding further strong Online sales growth (on the back of extended Black Friday promotions). The exact Food/Non-Food split of total sales last month is buried within the 3-month moving averages (of +7.0% and +1.3% respectively), but it looks to us as if total Food sales growth picked up from c5% in the previous month to +8%/+9% and that total Non-Food sales slumped from +5% in October to -7%/-8%. The overall poor Non-Food performance masked further good growth in Home-related sub-sectors like Computing, TV/Gaming and Electrical Appliances, but was pulled down by notably weak Clothing and Footwear
News Flow This Week: The latest monthly Kantar and Nielsen grocery market share figures (for the 4 weeks to Nov 28th/Nov 29th) come out at c8am and cover the same period as the BRC-KPMG November survey. The Ocado Q4 update is on Thursday, along with the Frasers interims.