Langton Capital – 2021-04-12 – PREMIUM – Deliveroo, pubs reopening today, JDW, SBUX, McDonald’s & other:
Deliveroo, pubs reopening today, JDW, SBUX, McDonald’s & other:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
I’m beginning to think that Karma is, well, not much of a thing.
Either that or I’m building up one almighty favour from the wider Cosmos because, when it comes to items lost versus items found on trains, in taxis and in holiday lets, I’m very much out of pocket.
I mean including the years when the kids were younger, we’ve lost Gameboys, game cartridges, backpacks, bum-bags, holiday money, expensive resort guide books, a full box full of ties (don’t ask), fleeces, other clothes, cuddly toys and a countless, truly countless number of umbrellas.
And in the items found column? Nothing. No, really, nothing.
However, Hull City’s been on a good run recently – eight wins & two draws from the last ten matches – so maybe that’s payback of a sort.
Anyway, good luck to all those pubs & restaurants reopening for outdoor trade from today. It’s due to be nine degrees and sunny later in York, eleven or so in London. Could be worse. Maybe that’s Karma. On to the news:
DELIVEROO – SHARE PRICE ETC.:
• After steadying a little last week, Deliveroo’s share price fell to a new low of 254p on Friday, down nearly 10% on the day and some 35% lower than the price the company sold shares at in its IPO.
• It was only two weeks ago, on 27 March, that the Sunday Times, running what it believed was a scoop, felt able to write that ‘Deliveroo is poised to swerve around doubters in the City and roar towards a blowout float this week, despite mounting concerns about its use of gig-economy workers.’
• It would be glib to say that the paper found out quickly that this was an early (and unintentional) April Fool’s joke. Deliveroo was not poised to raise its price range, but rather to lower it to 390p to 410p. It would then issue shares at the bottom of the range and its shares would lose more than a third of their value from there.
• The Sunday Times said ‘the online takeaway giant…is set to price its listing towards the top end of the £8.8 billion range after filling demand for its offering on the first morning of the so-called roadshow on Monday, with strong interest from investors outside the UK.’ The market cap as we write is a still huge £5bn.
• It said ‘Deliveroo, which has been endorsed by chancellor Rishi Sunak, is understood to have secured three big cornerstone investors, including two from the US and one from Europe.’ It said that appetite from US investors was sufficient to boost the issue and the group’s shares in the aftermarket.
• Despite reported attempts by advisors to support the shares, they fell on issue and they have since fallen further.
• It has been called the worst IPO in London’s history and, in simple money-lost terms, this is likely true.
• Reputations (Goldman, JP Morgan, Rishi Sunak, assorted reporters & analysts etc) will have taken a dent and, though the advisors may have to suck it up, others, including shareholders, may bear a grudge.
• True, Facebook fell on its IPO but, as a scalable model that is now in profit to the tune of tens of billions of dollars, it is a different animal.
The fundamental issue:
• Several reasons for the failure have been suggested. Market turbulence, hedge funds shorting the issue, the threat to the gig model, the reopening of restaurants, pricing, the dual share structure etc are on that list.
• But we would suggest that the single major issue is that the business is not profitable and costs will rise alongside revenues in a way that they do not with true tech stocks such as Google, Facebook and the like.
• Whilst some fixed costs can be apportioned over a larger revenue base, marginal costs, i.e. the cost of delivery, will rise in line with sales.
• Hence, we believe it is much more important for this sort of business to show that its model is fundamentally capable of making profits in its current shape.
• This is arguably not proven for Deliveroo. The company made huge losses last year with the same ‘tail winds’ that Just Eat has mentioned as a positive. Restaurants are about to reopen.
• We could see vertical integration as a large part of the model going forward and this will not be without risk. If Deliveroo buys capacity (via purchasing restaurant companies or by building dark kitchens – which could be a more competitive market going forward) we may have a £5bn restaurant company on our hands that owns a lot of bicycles.
• Arbitrage hedge funds tend to sell acquiring companies and buy their targets – and one can see why.
ADVERTISE WITH US:
Langton’s free email now carries adverts. See front page of website for today’s copy & contact us for further details.
The comment was made about Dirk Gently by the narrator in Douglas Adams’ Dirk Gently’s Holistic Detective Agency.
CHANGED EMAIL FORMAT:
The Premium Email is unchanged. The Free Email is written and pre-sent the evening before. It may not include breaking stories nor Langton comment. See Twitter for in-day comment. Let us know if you would like an example of the Premium Email.
PUBS & RESTAURANTS:
Pubs & restaurants reopen for trade outdoors:
• Demand: We believe that there is some pent up demand – but the extent to which this is expressed, will depend on the weather. It was minus three with snow overnight in York. Today is better at minus two, rising to eight degrees with sun. Companies that have invested in some sort of covered (and maybe heated) areas could be at a premium. There will be some concerns as to whether the ambiance & atmosphere will make going out worthwhile. Some councils are reportedly demanding that face coverings are worn in beer gardens when guests are not seated.
• Supply:. The BBPA says that only 40% of pubs have the space to trade outside. The percentage for restaurants will be markedly lower. Supply will depend on a) the legal ability to open and b) the desire to do so (i.e. can you make a sensible return from a small beer garden or yard or even strip of pavement?) As always, supply and demand will be linked, not least because the former will be driven in part by an anticipation of the latter. Separately, the BII says that just over 50% of its members will be able to open today (if they choose to do so).
• Langton Comment: UKH has said that sales could be around a fifth of normal sales. The BBPA mentions 40% of units opening and The Telegraph says it has seen analysis suggesting that ‘shows that 25,979 sites have outdoor space – 43 per cent of all those in England. Only a quarter of high street bars and restaurants do, rising to 46 per cent of suburban sites and 68 per cent of rural outlets.’ UKH says ‘the vast majority [of pubs & restaurants] will remain closed without revenue for another five weeks. Just 22 per cent of the sector’s trading is likely to return, and that is weather dependent.’
• There are still some hopes that the 17 May date may be brought forward. Leader of Westminster Council Rachael Robathan has written to Kwasi Kwarteng, the Business Secretary, urging the Government to bring forward the date for indoor opening. She says there could be a ‘restricted form of indoor dining, limited to one family group, with strict social distancing measures in force throughout the venue. This would allow some venues to be able to operate, even with those indoor limits in place.’
• The reopening will not be equal across the UK’s regions. London will have less space, for obvious reasons given the cost of land, and urban areas will be more restricted than will units in the suburbs and in rural areas. Some councils such as Westminster have made moves to encourage (or at least to allow) outdoor dining and drinking. Newcastle City Council has reportedly fast-tracked 45 new pavement cafe areas this year. If the wind remains from the north, that could be quite bracing at this time of year.
• Other reopening news: PM Boris Johnson is telling people to “behave responsibly” as pubs and shops (partially) reopen. The hospitality industry could see as much as £314m spent in venues this week. The Centre for Economic and Business Research suggest that savers will dig into their cash piles to spend in the near term. It says that about £314m is expected to be spent in the newly reopened hospitality sector in this week alone. The Post Office reports that its customers withdrew £590m in cash in March, the highest monthly figure since September.
• Meanwhile accountant Deloitte’s survey of the heads of some of the UK’s largest companies finds that optimism among CFOs has risen. Most now see a “strong recovery in profits over the next 12 months, with profit expectations back to the previous high seen in mid-2014 at the top of the economic cycle”. This should boost investment and jobs and, ultimately, consumer confidence and spending.
• Company reaction. Young and Co says 144 of its beer gardens will be open today. Marston’s and a number of other operators have updated via RNS announcements in the last few days. Alex Reilley of Loungers tweets ‘to everyone in hospitality, whether you’re reopening today, need to wait until the 17th May, or hanging on for positive news ahead of the 21st June, well done for making it this far & keep going. It’s happening at a painfully slow pace but we are almost there.’ McDonald’s says it will reopen 443 branches for outdoor dining today.
Trade bodies’ comments & observations:
• Trade bodies UKH, BII and BBPA have jointly published a one-page guide for the key rules that licensees need to know. The bodies say ‘the clarity is especially important after wildly differing – and often incorrect – interpretations of some of the new rules have been sent to businesses by some local authorities. The trade bodies have urged enforcement bodies to take a light-touch but consistent approach. This document will help businesses to push back on incorrect enforcement.’ The advice reminds operators that ‘social distancing applies between groups of customers (not within groups sitting at tables)’ and that ‘payment is permitted at the bar, as a last resort if payment cannot be taken outside.’ The trade associations say the ‘reopening of pubs and other hospitality businesses outdoors is a step forward for the full reopening of our sector.’
• The BBPA reports that ‘pub operating businesses have invested more than £285 million in supporting their leased and tenanted publicans as they prepare to reopen once more from April 12th.’ The BBPA says ‘the Government must now recognise the investment the pub industry has made in its pubs, ahead of their reopening from April 12th, by continuing to support the long term recovery of UK pubs and address the disproportionate tax burden faced, through permanently lower VAT rates extended to all food and drink, a cut in beer duty and Business Rates reform.’
• CGA says ‘most consumers will remain sharply focused on safety despite a growing boldness about going out as lockdown restrictions ease.’ It says ‘57% of GB consumers think it essential for staff to wear protective equipment’ but that ‘21% of consumers say testing on entry would make them less likely to visit a venue, and 15% feel the same way about the need to provide a COVID-related certificate.’ CGA says ‘with just over five weeks to go until indoor service can be resumed, there are signs that consumers are starting to feel bolder about being around other people in venues. A quarter (26%) of consumers now say they would prefer a busy or lively atmosphere when out, compared to just 15% in August 2020. The number wanting to meet in large groups has more than doubled since then, from 8% to 19%.’
• SIBA, CAMRA and Cask Marque have pointed out that ‘beer drinkers returning to pubs can finally get a taste of fresh cask beer.’ The trade and consumer bodies are running a campaign entitled ‘Cask is BACK, so back CASK.’ SIBA says ‘whether you’re a real ale enthusiast or sometimes beer drinker, we’re asking everyone to support their local independent breweries and opt for their first pint back in the pub to be some delicious local cask beer.’
Other Covid news:
• The Scottish Beer & Pub Association is calling for a ‘fairer deal for the country’s pubs, bars and other licenced venues ahead of expected reopening later this month, which they say is currently ‘grossly unfair’.’ CEO Emma McClarkin says ‘Scotland’s pubs and bars will be at a competitive disadvantage to those in England, where all limitations on trading times will be removed later this month.’
• Tenzo reports on the restaurant industry saying that ‘70% of businesses remained open through this third national lockdown compared to 40% in lockdown 1.’ It says that ‘compared to Q1 2019, Q1 2021 sales are hovering at around minus 40%.’ Tenzo says ‘the recovery within the industry has been incredibly impressive – we’re seeing that a number of businesses have adapted and innovated to survive a very challenging period.’
• Working from home. Evidence is still mixed as to the intentions of both employers and employees. Separately, the Centre for Business Research at Cambridge University has said that working does improve mental health (via a feeling of self-worth, interaction with colleagues etc) but it says that this can be achieved by as little as one day a week of work. The economy wouldn’t work too well on that basis – but it may speak to intentions (or at least to desires) post lockdown.
• Bizimply reports that ‘hospitality businesses are likely to face significant challenges in restaffing as they prepare to reopen after lockdown.’
• Deliveroo – see above
• The Mail on Sunday reports that ‘Wetherspoons founder Tim Martin made £50million from selling shares while [the] pub chain was claiming furlough cash.’ This may be comparing apples with oranges. But The Mail on Sunday says ‘the outspoken businessman is now facing calls to hand back the furlough funds.’ It mentions £25m of furlough receipts in the month of January. The paper quotes Tory MP Sir Bob Neill as saying ‘a number of reputable firms have returned furlough cash if they have managed to weather the Covid storm better than expected, and they’ve been applauded for it. Perhaps Mr Martin might consider following suit.’ A Wetherspoon spokesman said: ‘We are a huge net contributor to the Treasury. Even in the last financial year, when pubs were closed by the Government for a long period, Wetherspoons paid £436.7 million in taxes, in spite of making a loss of £89.6 million.’
• Starbucks reports that more than half of its sales now come from cold beverages.
• McDonald’s is to close hundreds more sites within Walmart stores in the US. The Wall Street Journal reports that the number of co-located stores will be down to 150 by this summer, from a peak of 1,000 sites.
• London-based Vegan subscription box company The Vegan Kin has reportedly raised £3.5m in a Series A funding round.
• Moody’s reports that Constellation Brands’ non-cash impairment charge of $650-$680 is ‘credit negative because it suggests that capital already invested has doubtful recoverability, while solid growth in Constellation’s core beer business will necessitate capacity expansion in future years, thereby keeping capex elevated.’
• The Bad Axe Throwing company is to open a second site, at Boxpark Croydon, next month.
• The far-reaching impact of lower footfall. Sky reports that NCP is asking its landlords to write off substantial accumulated rent arrears.
• Alibaba in China has accepted a $2.8bn fine imposed by the country’s anti-monopoly regulator. Alibaba was accused of abusing its market position.
HOTELS & LEISURE TRAVEL:
• Legal changes from today. Overnight stays are now permitted in self-contained accommodation with members of the same household but overseas holidays are still illegal.
• Transport Secretary Grant Shapps said on Friday that he is no longer advising people against booking their summer holiday. A traffic light system should be announced later today. Shapps’ comment suggests that not all lights will be red. There is some suggestion that ‘luxury’ long-haul destinations could open up before some more mainstream resorts in Europe.
• The average cost of a PCR Covid-19 test in the UK is more than double the price in other European countries. This could dampen demand. The government has said it will get prices down. At £128 per person, the tests will materially bump up the cost of a family holiday.
• Jet2holidays has said it will not recommence flights until at least June 24. CEO Steve Heapy says he is disappointed in the government’s suggestions to date. He says ‘after five weeks of the Global Travel Taskforce putting together the report they’ve come up with something that isn’t an awful lot different in structure to that we had in place last summer. They’ve committed to looking at cheaper tests but there’s no real detail. We are trying to run an airline, and we don’t know when we can start flying, where we can start flying to and the conditions under which we are operating.’
• The World Health Organisation has said it is opposed to vaccination certificates for travellers. The US government says it will not require them. The EU is dubious and the Labour Party in the UK is holding its fire.
• Celebrity Cruises says it has seen a “phenomenal response” from consumers for its UK cruises.
• IATA reports that the financial position of airlines has deteriorated further. This will happen in a high fixed cost model if demand is down 89% on two years ago, as it was in February.
• The Sunday Telegraph reports that CVC is backing a bid led by portfolio company Sisal, the operator of Italy’s most popular lottery, to run the UK national lottery. Camelot has run the draw since its inception.
FINANCE & MARKETS:
• The Halifax Building Society reports that there was ‘something of a resurgence’ in the UK housing market in March. It says prices were up 6.5% year on year.
• Sterling weaker at $1.3673 and €1.1502. Oil lower at $62.76. UK 10yr gilt yield up 3bps at 0.78%. World markets heading modestly lower on Friday with London set to open down around 30pts.
RETAIL WITH NICK BUBB:
• Today’s News: The week has kicked off quietly, with no major retail company news, although cake lovers will be drooling over the upbeat update from the Cake Box chain and tech investors will be poring over the details of the IPO launch of the much-vaunted AI business Darktrace…In other news, Hammerson has confirmed the Sunday press story that it is in talks to sell its retail park portfolio to the big Canadian property investor Brookfield and the embattled Heathrow Airport has announced a slight improvement in its fortunes, with passenger traffic in March “only” 83% down on last March (with flight numbers 63% down).
• Saturday’s Press and News (1): The front-pages of the Saturday papers were dominated by the death of Prince Philip, although the main headline in the FT was about the continuing Greensill scandal (“Suspect Gupta invoices used for Greensill loans stir fears of fraud”) and the FT also flagged that “French wine harvest in peril as blast of “winter frost” withers spring vines” and that “New generation caught up in Northern Ireland strife”.
• Saturday’s Press and News (2): In terms of Retail stories, there was plenty of news around on Friday and the main focus was on the launch of the new “Anyday” own-label homewares range by John Lewis: this was the lead story in the very thin Business section of the Telegraph (“John Lewis bets big on budget range”) and the Daily Mail took a similar line, although the Times highlighted, as its main Business story, that the MD of John Lewis has promised not to close any more stores (“John Lewis calls halt to axing stores”). The Times, the Daily Mail and the Guardian also flagged the announcement by Frasers Group first thing on Friday that it was doubling its likely year-end property impairment charge to £200m, because of fears of a third wave of the virus and more lockdowns, a statement so odd that it attracted the attention of Lex column in the FT, which thundered that the bizarre move by
• Saturday’s Press and News (3): The other news out on Friday morning, that mighty Boohoo has acquired a new warehouse in Daventry, was picked up by the Times, which noted that this will increase its sales capacity to a chunky £4bn, but it was the Daily Mail that had the wit to spot that this is the former (and much sought-after) brand-new Arcadia warehouse (which was bought by an American property investor for between £60m and £90m and then leased to Boohoo). More generally, there were plenty of articles in the papers, on both the News and the Business pages, about shops re-opening in England today (“On your marks, get set, shop!” was the headline in the Daily Mail), with the Guardian focusing on the re-opening of Hamleys (“The toys are back in town”), as well as John Lewis. The Times had a couple of separate articles about the savings mountain that consumers could use to go shopping
• Sunday’s Press and News (1): The headlines on the front pages of the Sunday papers were again mostly about the death of Prince Philip, although the Observer ran with “Scientists warn: virus hotspots could lead to third wave” and the Sunday Times had more revelations about the Greensill lobbying scandal involving David Cameron, whilst there were also some photos of Rachael Blackmore, the first female jockey to win the Grand National.
• Sunday’s Press and News (2): In terms of Retail stories, there was plenty more about the re-opening of shops in England today, with the Observer focusing on the Essex commuter town of Harlow (“”My staff have been climbing up the walls”: battered retailers get ready to reopen”) and the Sunday Times focusing on Peterborough, one of the towns to lose a John Lewis anchor store (“Shops are back – but what about shoppers?”). And the main Business story in the Sunday Times was headlined “Market bets on summer bounce for ailing retailers”, noting the strong performance of the General Retail sector and the fact that hedge funds have been cutting back their short positions in retail and hospitality businesses. Interestingly, that Sunday Times story also contained a snippet flagging that M&S has been “quietly softening up” the City for a disappointing performance from its Food business, ahead
• Sunday’s Press and News (3): In terms of all the Economics comment columns in the Sunday papers, we would, as usual, highlight the column by the Sunday Times Economics correspondent David Smith (“The virus cost trillions, but the world’s bouncing back”), in which he highlighted that “Given the size of last year’s fall, the UK needs all the growth it can get”. And we would also give the usual shout-out to the column by the veteran City commentator Jeremy Warner in the Sunday Telegraph (“A Western alternative to Belt and Road is a great idea, but will it still fly?”), in which he noted that President Biden is looking to emulate China, as part of his plan to upgrade US infrastructure.
• Last Week’s News: After the Easter break, there were a few things going on last week, beginning with an in-line pre-close update from the home repairs and improvements business Homeserve on Tuesday. The monthly Nielsen grocery sales figures on Wednesday confirmed the previous Kantar figures on recent trading for supermarkets, given the tough recent comps, with till sales down c3% in the 4 weeks to March 27th (up 92% Online and down 14% for Stores). The Dunelm Q3 on Thursday flagged that, after a resilient performance in the 13 weeks to March 27th, with total sales only c17% down, “we expect to end the year modestly ahead of the top of the current range of analyst expectations”, although it was interesting that Dunelm spelt out that “we have underperformed the homewares market during the quarter, reflecting the fact that other retailers selling homewares have been classified as
• This Week’s News: The big event this week will be non-essential shops re-opening in England today (along with gyms, hairdressers and outside hospitality), but first thing tomorrow we get the BRC-KPMG Retail Sales for March (which will be flattered by the early fall of Easter and weak comps), along with the JD Sports finals and the Just Eat Q1 updates. The Tesco finals are on Wednesday, whilst on Thursday we get the THG finals/Q1 update, the Travis Perkins/Wickes Q1 update, the Deliveroo Q1 update and the Naked Wines finals. On Friday John Lewis is holding a Strategy event for analysts at their Oxford Street store.