Langton Capital – 2021-05-14 – PREMIUM – Inflation, Tracker, Visa, R-Rate, jobs, D&M CVA, Variouos Eateries etc.
Inflation, Tracker, Visa, R-Rate, jobs, D&M CVA, Variouos Eateries etc.
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A DAY IN THE LIFE:
Do you ever get a guilty sense of relief when something you don’t want to do, like visit the dentist, cut the grass or take an exam, gets postponed?
The fact that it isn’t your fault gives you a frisson of satisfaction before the feeling that you’ve done something you shouldn’t, or in this case not done something that you should, creeps in to spoil the party.
Well, that was Langton and its grass cutting until yesterday when, at 1pm and with the sun shining, we ran out of excuses. There then followed several hours of cursing, anger, pain and tears – very similar to a visit to the dentist – after which the job was behind us and, again like a visit to the dentist, can be forgotten about for some time.
Sadly not six months, though. Anyway, the weather over the weekend is mixed and we might see the sun. But what we will see, for sure, is the inside of a pub from Monday. Have a good weekend and on to the news:
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THE ELEPHANTS IN THE ROOM:
• In the UK, if not in large parts of the wider world, Covid may be past its worst (in the absence of malign variants, that is).
• There are justifiable caveats, but it makes sense to look to the future, ask what the new normal will look like, etc.
• On the balance of probabilities:
o There is some pent up demand.
o Supply (the number of outlets) will be reduced and,
o There will be limited overseas travel this year meaning that it should be a good year for staycations.
• Which is great. But there are some elephants in the room. We’ll consider over the next few days (and not in any particular order of importance):
a) Labour shortages,
b) Cost and price inflation
c) Accrued debt (banks, bonds, landlord, VAT, supplier etc) and,
d) Other issues (supply chain problems etc)
COST AND PRICE INFLATION:
• Inflation hasn’t been much of a thing for a couple of decades. It’s too much money chasing too few goods or services. It is a feature of over-heated or overstimulated markets. A pent up demand to spend, a sharp economic recovery from Covid, coming as a result of financial stimulation laid on top of ongoing QE to deal with the financial crisis 13yrs ago, could just about do the trick.
• The outlook is mixed. Rents are falling and Sterling is strong (so some product costs should be held down in Sterling terms).
• But the labour market could be tight, partly as a result of Brexit and wage costs are likely to rise. Furloughed staff may not return (see earlier emails) and wages may have to rise to attract new workers.
• Whilst supply is reduced and demand is strong, prices are likely to rise.
• We ran stats last week on the proportion of operators that had put prices up. The majority have done so, some by a material amount. This in addition to the margin benefit from 5% VAT.
• It’s a bit early to be talking about a ‘spiral’. But if one, two or all of the above were to occur and persist, it’s easy to see how these things can happen.
• Does it matter? Inflation hurts the weak and benefits the strong. This is true for companies, countries, labour, capital and other economic actors.
• Unrepresented labour could suffer whilst trade unions will demand ‘parity’ and get their share. Companies with pricing power can use inflation to widen margins. Companies without cannot.
• The least attractive place to be will be in a competitive market, where you are a cost and price taker, and where you have no competitive advantage.
• Pubs and restaurants are in a competitive market. They are cost takers but they have some pricing power. This could go hand in hand with the quality and nature of any differentiated product because a me-too operator will simply lose market share if they put their prices up.
• Pity the unbranded suppliers to Tesco, etc. They have to take a global price (for flour, sugar, wheat or whatever) and then get beaten up by a customer 100x their size
• Economists are always looking for ‘lead indicators’. For inflation, these may be the oil price, global freight and shipping costs, bond yields or the number of job ads. These are all flashing amber / red.
• Consumer prices in the US jumped 4.2% in the 12 months through to April, up from 2.6% in March and marking the biggest increase since September 2008.
• Equity markets have been worried that inflationary fears could push up interest rates.
• Higher interest rates push up required returns on capital and have a depressing effect on the economy. With the cost of capital higher, projects may get pulled and the economy may slow.
• A potential ‘lead indicator’ in the US is the price of second hand cars. The idea being that a) there is excess demand, b) cars can’t be manufactured (or imported quickly enough) and c) the price of existing stock therefore rises. Car prices rose 10% between March and April.
PUBS & RESTAURANTS:
Coffer Peach Tracker:
• The Coffer Peach Tracker for April reports a 26% drop in like-for-like sales in April compared to the same month in 2019. This covers three full weeks of outside-only service in England as well as briefer trading in Scotland and Wales, and represents a ‘solid return to trading for the sector.’ The Tracker says ‘operators enjoyed the benefit of generally good weather and strong consumer confidence in the first fortnight of trading, though low temperatures and rain dampened sales towards the end of the month.’ The numbers are only for open units. Closed units would have been down 100% (if they didn’t have delivery). Pubs outperformed restaurants and wet sales outperformed food. Due to the number of closed units, total sales were down 60% in April 2021 vs April 2019.
• Langton comment: The Tracker points out that pubs outperformed restaurants ‘thanks in part to greater availability of outside space.’ The Tracker reports ‘pubs’ April sales were 21% down on April 2019, compared to a 30% drop for restaurants. Bars [which often have little outside space] were the weakest segment, with like-for-like sales down 39%.’ It is also the case that a greater proportion of pubs reopened than did restaurants.
• The Tracker makes an interesting observation re delivery. It says ‘on a total sales basis, with the majority of sites still closed, groups saw a 60% drop in April 2021 from April 2019. Restaurants (down 51%) performed better than pubs (down 67%) on this measure, due to strong delivery and takeaway sales.’ CGA says ‘managed groups made the best they could of trading opportunities in April, amid some tough restrictions and the vagaries of the British spring weather.’
• CGA says operators ‘have been very resourceful in their use of limited space, and for pubs in particular it has been a good springboard for a fuller reopening from 17 May. But the drop in sales of more than half over the last 12 months is a reminder of just how hard the industry has been hit by lockdowns and restrictions. While consumers are eager to get back to hospitality, it is clearly going to be a long and uneven road to recovery, and the sector will need sustained support from government if it is to help reignite the UK economy over the rest of 2021.’ Fellow sponsor of the survey, RSM, adds ‘operators will be greatly encouraged by the response they have had to the reopening of their outdoor spaces and will now be turning their attention to welcoming back customers indoors from Monday. Many businesses remain in a financially precarious position and are unlikely to be back in
• Commenting on general consumer spending, Barclaycard reports ‘consumer spending grew 0.4 per cent in April as high streets and hospitality venues re-opened.’ It says ‘spending on essential items rose 10.1 per cent compared to 2019, with fuel spend seeing less of a decline as more Brits travelled.’ It says non-essential spending was down by 4.4% on 2019. Barclaycard says spending on accommodation and staycations rose, particularly across the over-50s age group. Spending in bars and pubs was still down 67.2%. This is a blended mix of reduced spending in open pubs (see the Tracker above) and less than half units being open.
• Langton comment: Barclaycard says ‘spending in the hospitality sector should improve with the potential further easing of restrictions next week, with 33 per cent of people saying they are willing to spend extra money on entertainment and leisure activities such as drinks or meals out compared to before the pandemic.’ Let’s hope that’s right. The travel industry ‘continued to be hit hard by ongoing international travel restrictions, with airlines and travel agents seeing steep declines of 82.1 per cent and 82.0 per cent respectively. However, resorts and accommodation continued to see improvement, as the category saw positive growth of 1.6 per cent as many Brits consider their holidays in the UK this summer.’
• Barclaycard says ‘the easing of restrictions provided a promising boost to a number of sectors in April, with consumer spending back in growth and confidence in the UK economy at its highest level since before the onset of the pandemic.’ It says younger shoppers were ‘spending more on clothing’ whilst ‘older consumers have boosted spending on UK accommodation and resorts, as they organise family staycations. Whilst there was a slight improvement in spending at pubs & bars and restaurants, the industry-wide restrictions on outdoor seating, sporadic colder weather and the rule of six all clearly dampened that recovery this month.’
Other covid news:
• R Rate. The NIESR says that the R rat in England is between 0.95 and 1.1. Wales is the same, Northern Ireland is slightly lower and Scotland slightly higher. Injecting a note of caution, the NIESR says ‘this is the first time since early January when we forecast daily reported cases to rise, albeit mildly. Hospital admissions and deaths due to Covid-19 continue their steady decline.’
• Vouchercodes.co.uk has commissioned research suggesting that pubs, restaurants and other hospitality venues in the UK could rake in £2.5bn next week. We’re not statisticians but that seems like rather a large amount at pretty much fifty quid for every adult in the country. The Centre for Retail Research, which conducted the poll, says that 104m visits will be made to hospitality venues. Again, this seems high. Vouchercodes.co.uk says ‘if people in the UK are known for anything it’s our love for pubs and restaurants, so it’s no surprise to see that so many people are planning to make the most of being able to sit inside and enjoy drinks and meals out next week.’
• Langton comment. The above numbers don’t seem to make much sense. We would like to think they’re right and, if they include a couple of million people spending a few thousand on a foreign holiday, then they may be. But, if they’re meant to reflect spending in pubs & restaurants, we can’t quite see it.
• Jobs market. The hospitality may only find out for sure which furloughed staff are coming back next week. Recruiting and retraining replacements could be expensive and time-consuming. There may be a short and medium term need for locums or freelancers and companies such as Luminary Talent may be helpful in sourcing talent.
Company & other news:
• Drake & Morgan plans CVA. Bar restaurant company Drake & Morgan is planning to enter a CVA. It could exit three sites and move to a predominantly turnover-based rent model. This follows on from New Look’s High Court victory over landlords who had sought to prevent a similar move by the High Street retailer. The Caterer reports ‘under the proposals the Allegory and the Listing bars in London and the Refinery Spinningfields in Manchester will close. The bar group said affected staff will be offered alternate roles in the company.’ CEO Jillian Maclean says ‘we started last year as a profitable and growing business and, in common with the rest of the hospitality industry, have been significantly affected by repeated lockdowns and tier restrictions.’ She continues ‘this course of action, if approved, will safeguard the future of the group and give it the breathing space it needs to
• Various Eateries has announced that a company controlled by Hugh Osmond has transferred a million shares at 105p to another connected person, Lucy Potter. The company says ‘following these transfers, Hugh Osmond’s holding is deemed to be unchanged. He remains interested in 41,616,859 Ordinary Shares representing 46.75% of the total issued share capital of the Company.
• Pizza Express has said it will reopen all of its sites in the UK on Monday. This will be the first time that all of the sites have been open at the same time since March 2020. The company says it is looking to hire 1,000 new staff members. CEO Zoe Bowley, says ‘we’re overjoyed that after more than a year since the first lockdown, we will finally be able to have all of our pizzerias in England, Wales and Scotland open to serve customers.’ Shepherd Neame and a number of other operators have also said that they are looking for more staff.
• McDonald’s is to put up hourly wages by an average of 10% at its U.S. company-owned restaurants. This ahead of a threatened strike. The chain is reported to be looking for up to 10,000 additional staff.
• The On-Trade Consultancy has issued a white paper in a new series, titled ‘Simple but savvy steps to navigate complex categories and reach the right range.’ The whitepaper contains three chapters of principles, brought to life with relatable examples of drink types and brands that play the range roles to help businesses prosper.
• Zucchini is to open a site in the Metrocentre in Gateshead.
• Japan Centre is to open what may be the UK’s first mochi bar in Leicester Square.
• Carluccio’s will trial coffee shops in three Sainsbury’s stores
HOTELS & LEISURE TRAVEL:
Lest we get too carried away:
• The CMA has warned package holiday companies that they will have to give refunds to customers booking holidays if these are subsequently cancelled due to the Covid-19 pandemic. TUI, for one, has said it will provide clearer information on refunds upfront. On the Beach earlier this week criticised some of its competitors who, it said, were selling holidays that were likely to be cancelled.
• It takes two to tango. TUI has told Sky News that holidays being sold to Portugal may have to be cancelled if rules remain in place banning non-essential travel from countries outside the EU. Portugal itself has extended its “state of calamity” to 30 May. The restrictions cast some doubt over both holidays to the country and the Champions’ League final between Manchester City and Chelsea that is due to take place in Porto on 29 May.
• The WTTC has said that the travel and tourism industry in the UK has been harder hit during the Covid-19 crisis than many other major markets. It says tourism in the UK fell by 62.5% in 2020, above the global average of 49.1%.
• Bookings with Airbnb have risen sharply over recent weeks. The company has said there is now a “steady improvement” in business in the UK and France adding that the overall value of bookings rose by 52% to $10.3bn (£7.3bn) in the quarter. Airbnb reports that revenue rose to $886.9m in the quarter with a loss before tax of $59m. The company says ‘while conditions aren’t yet normal, they are improving, and we expect a travel rebound unlike anything we have seen before.’
• British Airways is road testing a new ultra-rapid Covid test that produces results within 25 seconds.
• Booking.com CEO Glenn Fogel has said that the business travel market may never fully recover from Covid. He says ‘I’m not sure business travel will ever get back to what it was pre-pandemic.. it may forever be a smaller share of the total travel pie… in terms of bookings and value.’ He adds ‘every CFO in the world is looking at this costs line, thinking ‘hmmm do you really need to do that trip, you could still just keep using Zoom and it’s just as good?’
• Switzerland has moved to allow vaccinated people and those who have recovered from Covid to enter the country without quarantine.
• Expedia says half of UK travellers will book holidays via an online travel agency after Covid-19, new data released by Expedia reveals. It says 52% of people surveyed would take a leisure trip by June and are most likely to travel between July and September 2021.
• STR reports that hotel supply has been coming back onto the US market. It says hotel occupancy fell slightly as a result to 56.7%. It says ‘demand was up week over week, but an increase in supply from both re-openings and new properties pulled national occupancy down.’
• Amadeus reports a third of global hoteliers as believing that social distancing and enhanced hygiene measures are here to stay.
• The English Premier League has renewed a £4.8bn TV rights deal with its existing partners Sky, BT and Amazon.
• Electric scooter start-up Bird has announced it will IPO at an implied valuation of around $2.3bn.
FINANCE & MARKETS:
• Bank of England economist Andy Haldane has said that the UK economy is set to grow at its fastest pace since the Second World War. This is in line with the Bank’s earlier comments. Haldane, writing in the Daily Mail, says ‘spring has sprung for the UK economy. This year it is set to grow at its fastest pace since the Second World War. It is easy to see why. As Covid infection rates have fallen sharply and the vaccination programme has been rolled out, the health risks facing us have plummeted.’ Mr Haldane predicted a sharp V-shaped recovery last year which did not materialise. This time he may be right.
• The European Commission reports that the economy of the EU will bounce back more quickly than previously expected.
• Bloomberg reports that Wall Street has thus far been the biggest winner from the City of London’s £2.3 trillion ($3.3 trillion) loss of derivative trades in March.
• UK shares were down yesterday – though well off their lows – on the back of renewed inflation concerns.
• The RICS says UK house price affordability will continue to diminish due to a shortage of properties on the market.
• Sterling lower at $1.4042 and €1.1617. Oil down at $66.82. UK 10yr gilt yield up 2bps at 0,91%. World markets down but then recovering yesterday. London set to open up around 40pts.
RETAIL WITH NICK BUBB:
Today’s News: The discount toys and books chain The Works has come out with a trading update for the 53 weeks to May 2nd, revealing that total sales were only 19% down, thanks to a 121% increase in Online sales. Gavin Peck, the CEO of The Works, said “Like many retailers, the last 12 months have been incredibly challenging for The Works, which has historically relied mainly on in-store sales…”, but “…our financial position remained strong, online growth exceeded our expectations, and when stores re-opened we saw customer demand returning quickly to pre-COVID levels”. Last night, Ocado announced the result of its AGM, revealing that there had been a 13% vote against the Director’s remuneration policy and a 23% vote against the re-election of non-exec Andrew Harrison (as the company was in between a Chairman to vote against). In terms of share buying news, the Frasers Group share buyback
Currys Watch: As a veteran of all things Dixons related, we couldn’t avoid a titter yesterday at 10am when we heard that the company is at last going to change its name, from Dixons Carphone…to Currys. Of course, the Carphone appendage has been an unwelcome reminder for some time of the disastrous merger with Carphone Warehouse back in 2014 (remember the hype about “the internet of things”?). And the Dixons name has long been absent from our High Streets, so after the recent announcement of the closure of its last vestiges, Dixons Retail in our airports, a corporate name change was clearly overdue…And it is ironic that the business is going back to the early 1980’s and focusing on the Currys name. It is certainly more of a mouthful than the current “3-in-1” name for the retail park stores of Currys/PC World/Carphone Warehouse and we welcome the demise of the Team Knowhow IT advice name,
Next Week’s News: The highlight of next week will be the reopening of pubs and indoor hospitality (including restaurants, cinemas and museums etc) on Monday, so expect lots of footfall figures from Springboard, tracking the revival of consumer interest post-lockdown. In terms of company news, Tuesday brings the Homeserve finals, the Topps Tiles interims, the Shoe Zone interims and the Land Secs finals. On Thursday we then get the Kingfisher Q1 update, the Next AGM, the Watches of Switzerland Q4 update and the McColl’s AGM. Friday then brings the ONS Retail Sales figures for April and the monthly GFK Consumer Confidence Index.
BDO High Street Sales Tracker: Given the impact of the first lockdown on “non-essential” stores and Food shopping a year ago, it is hard to make sense of year-on-year Retail Sales figures at present, but today’s BDO High Street Sales Tracker for medium-sized Non-Food chains obviously paints another very strong picture for w/e May 9th, given the very soft comps. The BDO index is, however, just an unweighted average of the percentage changes in the sales of their reporting retailers…and so it really shouldn’t be taken too literally. BDO Fashion LFL sales were up c92% (with Online Fashion sales up 24%), but Total BDO LFL sales (skewed by a handful of Homewares and Lifestyle retailers, as well as the Fashion retailers) were, improbably, said to be up by no less than c415% (up c27,613% in Store sales and up a mere c18% in Online sales)…