Langton Capital – 2021-06-23 – PREMIUM – Trading, WFH, inflation, aggregation, Krispy Kreme, Soho House etc.:
Trading, WFH, inflation, aggregation, Krispy Kreme, Soho House etc.:
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A DAY IN THE LIFE:
A little bit pressed for time after emergency beers accompanied match last night. England progress but Scotland, sadly, out of the competition. On to the news:
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PUBS & RESTAURANTS:
• The BBPA predicts that England fans bought 3 million pints in pubs as England face Czechia in the Euros. CEO Emma McClarkin said ‘While that is a good boost to typical trade on a Tuesday, it will be 750,000 less pints sold than if pubs were operating without any restrictions. So the restrictions will cost pubs over £3 million on Tuesday alone.’
• Further comment: Despite restrictions (and our comments on the dangers of aggregation, below), trading is perhaps better than might have been feared and, in many cases, is not hugely below 2019 levels. This data is sensitive to the weather and to events. How the pie is shared out across operators will depend on how many units are open (currently over 90% says CGA) and perennial issues such as the weather, sporting events etc. A medium term consideration, which could become apparent over the summer, is whether the ‘wall of money’ represented a one-off splurge spread over a few weeks or if, for some reason, the UK public has raised the proportion of its spend on pubs and restaurants permanently. Sadly, it is perhaps unlikely to be the latter.
• The Labour Party claims the delayed reopening will cost businesses almost £50m in wage costs once the government’s furlough scheme is cut back on 1 July. Labour said the figures, which are based on official data, showed that the chancellor, Rishi Sunak, should delay the tapering of the furlough scheme until the government could safely lift restrictions.
• Research by KAM Media and Zonal finds that over half of Gen Z-ers (defined here as those aged between 18 and 24 years) get frustrated when they are forced to wait for the servers attention when ready to pay. A similar proportion get stressed when they’re not able to split the bill easily at the end of a meal (55%).
• First Minister Nicola Sturgeon has announced all of Scotland could move to Level 0 on 19 July, but she cautions that some restrictions could remain in place to be potentially removed on 9 August. Whilst the rollout of the vaccination programme continues, the UK yesterday recorded its highest number of deaths since end-April. The extension of restrictions is likely to further impact planned cruises around the UK and to Scottish destinations in particular.
• The Scottish Beer & Pub Association has responded to the announcement by the First Minister that there will be a delay in Scotland to the easing of COVID restrictions saying ‘it is very disappointing for our sector that we have yet another delay to the easing of restrictions. The hospitality industry has borne the brunt of these measures since March 2020, and every day that goes by with them in place causes more hardship and will result in further business failures. It is positive that we now have indicative dates alongside vaccination milestones, but we desperately need to see an end to these restrictions altogether. Our sector’s recovery does not begin until that point. The 9th August cannot come soon enough.’ CEO Emma McClarkin says ‘we also desperately want to see some accommodations on curfew which would allow pubs to show the full Euro 2020 knock-out matches, which we
• The SBPA announced yesterday that Scottish pubs would have received a £2.8m boost to revenues if the national team had qualified for the next round of the Euros. The SBPA said ‘we expect Scotland fans to buy 360,000 pints in the pub while watching the match against Croatia and if we manage to qualify, an additional 720,000 pints will be sold for the next round, giving the trade a boost of £2.8m.’ Results went the wrong way and this did not happen.
• Scottish Licensed Trade News reports that ‘the Scottish hospitality industry faces “continuing uncertainty” following yesterday’s announcement from the first minister that the easing of coronavirus restrictions is likely to be paused for three weeks.’ UK Hospitality Scotland says this ‘adds to the continuing uncertainty for hospitality businesses’. It quotes one operator as saying ‘currently, we can only operate at around 30% of our capacity, but with increased staff costs to provide table service and fewer tables because of social distancing rules, most business continue to operate at a loss, racking up further debt every time they open the doors.’
Working from Home:
• As we tweeted yesterday, the battle lines are firming up and, at least while the sun’s shining and the football is on, disingenuity could reign. Lord Bilimoria, president of the CGI, has warned against giving workers the legal right to demand remote working. He says it could harm young employees and city centre economies. He says workers should ‘have the right to request it. But every employer should make that decision about the mix of working from home.’
• There are many instances in the Press re worker push-back to requests to return to the office. This makes interesting Press but, at this stage, the scale is unclear. It is beginning to feel, however, that the issue will not simply fade away in the way that city centre coffee shops, sandwich shops and bars (and, indeed, their landlords) would like it to.
• Further comment: To bring it back to the hospitality industry, remote working is good for suburban operators and negative for companies with city centre sites. Bruce Carnegie-Brown, who is the chairman of the insurance market Lloyd’s of London, has warned against the sponsoring of a two-tier workforce, the danger being that people who worked from home could find themselves either in the slow lane or excluded from decision making (and face time with bosses when it came to negotiating pay rises and promotions).
• The Telegraph raises the prospect of London being particularly badly impacted (or beneficially impacted depending on your viewpoint). It says ‘London is braced for a long-term blow from Covid as offices prepare to make home working permanent’ adding ‘more than three-quarters of office-based businesses expect their staff to spend at least one day a week working from home after the pandemic, according to a survey by the London Chambers of Commerce and Industry, with almost one in five predicting no return to the office at all.’
• For London employers looking at the opportunity to downsize their offices and utilise some sort of hot-desk system, there are some benefits of remote working. For the hospitality venues serving their employees, there is little in the way of upside. Landlords could also be looking at more void space and, ultimately, at lower rents. The LCCI says the ‘eventual lifting of the work-from-home guidance will of course increase commuter footfall in the centre, but seemingly many businesses have already made decisions regarding their premises and ways of working once restrictions are lifted.’
Inflation – is it as temporary as some observers suggest?
• Hopefully, yes, because inflation has little to commend it. However, with some suggesting that wage growth could spike at 8% over the summer (see Sky News for sources), we are asking somebody in the supply chain to ‘suck-it-up’ and not pass on price rises to their customers.
• Further comment: This is a pretty big ask. It may be possible for some employers with fat margins but it may be impossible for others. And, if we are asking labour to take the hit, the c£700 per annum hike in prices of essentials may be a drop in the ocean to some employees who have savings or high salaries, but it could be a life-changing event for others.
The danger of aggregation:
• The hospitality industry may be 90% open and doing 80-85% of normal revenues, but individual units will face more binary choices. They will be either open or shut. In the latter case, they are running at 0% of 2019 and in the former, they may be running anywhere from 40-50% through to 150% or even more.
• Further comment: From the stock market point of view, you cannot invest in UK Hospitality PLC, you need to pick a stock. These stocks may approximate the averages stated for hospitality as a whole, particularly if they are large and geographically and product diverse but, in many instances, this will not be the case.
• Companies may have a regional or a product bias. This may be good in some years and dreadful in others. They will have different property tenure profiles. Leaseholds may have allowed them to expand rapidly but, in a tricky spot, they offer much less flexibility and much more risk than do freeholds. Similarly, the product will show a bias. Food versus drink etc. And time-slots vary. Late-night biases may exist or be absent and the age-profiles of the operators’ customers will vary.
• Life is complicated. Politicians may have to deal in aggregates but, even as the sector’s stats trend towards ‘normal’, it is perfectly possible that the majority of operators will be doing worse than in prior years whilst a smaller number of operators are performing much better.
• Krispy Kreme owner JAB Holdings intends to IPO its glazed donut company in a listing that could value it at around $3.8bn. Some $600m of new money could be raised as a part of the IPO later this year. This will be the second time that the company has been listed. Krispy Kreme has around 1,500 units. The company says ‘in recent years, we substantially invested in our business to accelerate performance and position us for long-term, sustained growth. We have invested in our omni-channel model, brand positioning, product quality and innovation capabilities.’
• Krispy Kreme generated some $1.12bn of net revenue in 2020, with a net income loss of $60.9 million (albeit during the pandemic). The company made $321.8 million in revenue for the first quarter of 2021, ended April 4, up 23% from $261.2 million the same quarter the year prior.
• Shake Shack has announced that it is continuing its ‘momentum in China with an expanded partnership to open 10 Shacks in new territories by 2031, including locations in Sichuan, Chongqing, Yunnan, Hubei, Shaanxi, Anhui, Henan and Guizhou.’ The company says ‘we are humbled by the enthusiasm our fans have shown us in China and see this extension to Chengdu and beyond as a natural next step for Shake Shack.’ It adds ‘China is incredibly fast paced, dynamic and remains our fastest growing international market. Maxim’s continues to raise the bar in spreading the Shack love across China and we can’t wait to show our guests what we have in store.’ Maxim’s has more than 60 years of experience operating in the food, beverage and retail sectors including full-service and quick-service restaurants, bakeries and coffee shops.
• Soho House appeals to its members to support its plans for an IPO in New York which would value the company at £2.2bn. The filing revealed that net losses widened from $45m to $93m for the first three months of this year after Covid restrictions prevented Soho House from opening its UK sites.
• Uber has become the sole owner of Cornershop, a Latin American delivery startup, purchasing the remaining 47% interest in Cornershop in exchange for 29 million shares.
• Crust Bros, a Waterloo pizza restaurant, will launch its second site this summer at a Wandsworth brewery.
• The Australian govt will complain to the WTO about the 218% tariffs China imposed on Australian wine last year. China says the tariffs were increased due to trading malpractice, which Australia denies.
HOTELS & LEISURE TRAVEL:
• The Times reports that govt sources have ‘downplayed hopes of a mass reopening of international travel this week’ at the next review of the traffic light system. Ministers are likely to unveil plans to exempt travellers with two vaccine shots from the requirement to quarantine for 10 days after visiting an amber list destination, with ambitions to implement the scheme by August.
• CEO of ABTA, Mark Tanzer, calls for greater transparency in the financial flows in the travel industry, saying ‘We need a transparent system where each player recognises and fulfils his or her obligations, and has in place the level of insurance or other cover appropriate to the risk being borne.’
• Tanzer also said that ABTA could bring legal action against the govt in order to get the travel industry the support it needs to survive the pandemic.
• Andrew Flintham, MD of Tui UK & Ireland, said the company hasn’t had a single meeting with prime minister Boris Johnson or chancellor Rishi Sunak during the Covid crisis. Flintham said it was indicative of the lack of support and engagement with travel at the highest echelons of government, despite the industry’s £37bn annual contribution to the economy.
• STR picks up on the staffing issues faced by the UK hotel industry as it says ‘furlough schemes, the huge reduction in revenue, employees seeking and finding new industries to call home and the lingering effects of Brexit all have created concerns for hoteliers.’
• STR comments that the events industry globally could return in a hybrid form where some guests attend remotely and others in person. Referring to the US, where distances are potentially large, STR quotes operators as saying that regionalisation is another trend, in order to allow attendees to drive rather than fly. Marriott says that hybrid meetings are ‘more complex and expensive’ than traditional, face-to-face seminars, events etc.
• The EU plans to stop defining British TV programmes as ‘European works’ as a ‘disproportionate’ amount of British television and film content is being shown in Europe. Under the EU’s audiovisual media services directive, a majority of airtime must be given to such European content on terrestrial television and it must make up at least 30% of the number of titles on video on demand (VOD) platforms.
• The Chemical Brothers, Blur, Primal Scream and Radiohead are among the artists urging the government to make it easier for British musicians to tour in the European Union post-Brexit reports Sky. The government is told that UK acts face “insurmountable financial and logistical barriers” following the UK’s departure from the EU without agreement on such issues.
FINANCE & MARKETS:
• Government borrowing in May was £24.3bn. This is a) down on the same month last year but b) roughly equivalent to the total borrowings in the full financial years running up to those impacted by the pandemic. Total borrowing is now 99.2% of GDP.
• Downing Street seems to be boxing itself in by saying what it will not do (ditch the triple lock, raise income taxes or VAT etc.) A raid on pension pots is possible. Or a hike in death duties (which are rarely noticed by the deceased person impacted).
• Sterling up at $1.3931 and €1.1686. Oil higher at $75.25. UK 10yr gilt yield up 2bps at 0.79%. World markets nearly all better yesterday but London set to open down around 8pts.
RETAIL WITH NICK BUBB:
Today’s News: The Joules pre-close update (for y/e May) is headlined “Continued strong digital momentum combined with store sales ahead of expectations since re-opening” and flags that, helped by a good contribution from the Garden Trading Company acquisition, profit before tax and exceptional items is anticipated to be in the range of £5.5m-£6.5m, slightly ahead of current market expectations. There is a bigger upgrade from the car dealer Vertu Motors (which operates predominantly under the Bristol Street Motors, Vertu, Farnell and Macklin Motors brand names), which says in its AGM trading update that in light of the strong trading performance to date, driven largely by the exceptional used car market environment, the Board now anticipates that the group’s full year adjusted profit before tax will be above current expectations and in the range of £28m-£32m. And yesterday lunchtime
Grocery Market Share Watch: We flagged yesterday that the latest published Kantar supermarket sales figures were for the 12 weeks to June 13th, but the privately disclosed figures for the last 4 weeks are what the City focuses on and we are now able to bring you these: on a “Total Till” basis, industry sales fell back by 6.7% on last year (up 10.8% on 2019), but on a pure “Grocery” basis (excluding Non-Food), overall Kantar sales fell by 8.8% in the 4 weeks to June 13th, with Aldi/Lidl outpacing the “Big 4”, with sales down by 3.9% combined (given their weaker comps). Morrisons saw gross sales down by 10.2% on this basis, whilst Sainsbury was down 9.6%, Tesco was 6.1% down and Asda was 9.2% down. Outside the “Big 4”, M&S Food “at home” Grocery sales dipped by 3.9% gross in the 4 weeks. However, it is worth noting that as Kantar’s data does not include “out of home” sales, it probably