Langton Capital – 2022-05-27 – PREMIUM – Polarisation, consumer support, business confidence, delivery etc.:
Polarisation, consumer support, business confidence, delivery etc.:
A DAY IN THE LIFE:
Baldrick may have majored on turnips but Langton is grateful to one reader who is helping us in our quest to save money. He pointed out that cauliflowers are the same price now as they were before the Millennium.
Not checked that out in any detail but, if true, we could all shortly be looking for cauliflower recipes. Any suggestions?
Anyway, we’re fast approaching the end of the week. On to the news:
QUESTION OF THE WEEK?
Question of this week:
What will win out, premiumisation or the consumer hunt for value? Or will the market polarise between the two?
Answer of the Week:
Of course there is no single answer but we do have sympathy with the suggestion that polarisation is likely. This may be likened to a barbell or egg-timer-shaped distribution of demand. Consumers, to this way of thinking, will go either the one way or the other.
Familiarity bias comes into play here. To a mean Yorkshireman, the hunt for value seems obvious whereas to a relatively affluent (and free-spending) person, it may seem obvious that you should always go for quality.
One reader asked which variable would give way. You have ten pounds and you want to have three drinks – this is Yorkshire, remember. Do you go down the menu (or to a cheaper pub) and still have three drinks? Or do you still spend £10 and have two?
To take this a little further. Does the number of times a week (or a month) go down such that each occasion remains the same as it was prior to price rises? We could go on but we won’t.
Question of next week:
What will happen to the delivery market when times get hard and when restaurants are open for sit-downs (and they may be discounting)?
PUBS & RESTAURANTS:
Chancellor Rishi Sunak yesterday announced a temporary windfall tax of 25% of profits on a number of energy companies in order to fund measures designed to help consumers. All households will receive a £400 discount on energy bills and eight million of the lowest income families will also be given a one-off payment of £650. There will be a one-off disability payment of £150, and pensioners will get £300. The measures are reported to be worth £15bn in total.
• We won’t comment on U-turns or distractive timing but would rather say that, though welcome, the measures will not likely make anyone feel better off. Rather, people who would have been very materially worse off, will now be somewhat less so. This is good as far as it goes and should do at least something to ensure that hospitality operators who cater for less-well off demographics will not be as immediately impacted as they would otherwise have been.
• Reacting to the news, the BCC says ‘for business, the toxic mix of inflation, raw material costs and supply chain disruption is the flip-side of the coin to the problems facing consumers.’ It says ‘unless steps are also taken to ease business costs, they will likely feed into the inflationary pressure on the economy and quickly eat into the financial support announced today.’
• The BCC has consistently called for an emergency budget. It says ‘if we can ease the pressure on businesses then they can keep a lid on the price rises. Firms will then have the breathing space they need to raise productivity and strengthen the economy.’ It adds ‘a change of course is needed now. If the government does not act quickly then rising costs will put our economy in a stranglehold.’
• Prior to the Chancellor’s U-turn on windfall taxes and state aid for less-well-off consumers, the IFS had warned that the UK’s poorest households could be facing inflation at 14% after the rise in the level of the energy cap (expected to go to £2,800) in October this year. The IFS called on the government to take urgent action.
The IFS has said the government will continue to come under pressure to help people facing high energy bills next year. At some point, energy costs may come down. But not, the Institute of Fiscal Studies suggests, in the short term.
Chancellor Rishi Sunak has told the BBC that his measures will have a “minimal impact” on inflation. We have our doubts.
• This will be the case if he is just taking money from one group of economic actors, the energy companies, and giving it to another, consumers. But this isn’t the full story as the propensity to consume of the latter is greater than that of the former, so net demand will be increased.
• Furthermore, if the energy companies take action to mitigate the tax hit, for example, move profits offshore, then government borrowing will have to fill the gap and, over time, that is inflationary. Mr Sunak, says the BBC, avoided calling his measure a windfall tax, which Labour and the Liberal Democrats have been calling for, instead referring to it as a “temporary, targeted energy profits levy”.
The chancellor’s measures above, if they are moving money from business (via taxes) to consumers, could be deemed anti-business. Business confidence levels are currently rather low.
The Institute of Chartered Accountants in England & Wales has surveyed 1,000 members across the UK has found ‘confidence at 18.6 on the quarterly index for Q2 of 2022. This is down from a peak of 47 three quarters ago. Sales growth is up, but cost pressures and staff shortages are hampering expectations of a more positive outlook.’ Confidence matters as it can drive capex decisions which, in turn, influence employment levels.
• The ICAEW says ‘after reaching a record high in mid-2021 as we emerged from the third lockdown after the success of the vaccine rollout, business confidence has fallen back significantly.’ CEO Michael Izza says ‘sales growth has been healthy, following contractions during the pandemic, but businesses are aware that this could be derailed by the economic threats posed by the cost-of-living crisis, soaring inflation and global instability from the Ukraine-Russia war.’
• Help for the consumer. In comments made before the Chancellor spoke, the ICAEW boss says ‘the chancellor should address the high cost of living with targeted, strategic financial measures to prevent disastrous consequences for people’s standard of living and the amount of spending in the economy, which could result in real pressure on businesses.’
• Costs and prices. The ICAEW unsurprisingly highlights input cost rises and the reaction of firms, which has been to raise prices.
• On staffing, it says ‘staff turnover and the availability of non-management skills are the most frequently cited growing challenges, each affecting two in five businesses. This is possibly a repercussion of people not seeking a return to work following the pandemic, particularly at a time when demand in the economy is high.
Nat West’s Alison Rose has said that confidence is falling across its corporate customers. Ms Rose says ‘we are still seeing positive tailwinds from recovery from the pandemic as companies scale back up again, but definitely business confidence is being affected.’ She adds ‘one of the challenges we all need to recognise is that, for a lot of business owners and lot of families, an environment of inflation and rising interest rates is not something they’ve had to deal with for a long period of time.
Foodservice analyst Peter Backman has launched a new product, TheDelivery.World. He says ‘restaurant delivery has taken off around the world – driven by changing lifestyles, the availability of the necessary order capture and delivery services, and a boost given by covid during lockdowns.’ He looks at the various different models and reports that ‘the 18 largest restaurant delivery companies had combined revenues of $54 billion in 2021 (GMV / GTV / GOV of approximately $350 billion). These companies represent over 90% of the global delivery market.’ He adds that ‘within these 18 companies, the five largest accounted for a shade under 78% by revenue.’
• These companies are losing money, even after the boost provided by Covid. Mr Backman says ‘the five largest companies had managed to generate combined EBITDA losses in their last reported year figures of -$9.3 billion on sales of $38.6 billion.’ He says ‘this picture, of loss making activities in a wide variety of countries, is also reflected across the wider cohort of major delivery companies.’
• At some point, delivery will need to make money. We have concerns as to when or if this will happen. CGA recently said that UK delivery and takeaway sales were down a third from their Covid peak. Deliveroo’s shares are down to 87p from an IPO price of 390p. In the search for profit, one of the most obvious courses of action is to try to put your competitors out of business.
The US restaurant industry has continued its growth run. National Restaurant News reports ‘sales growth continued to be positive in April. The industry experienced a 15-month streak of improving sales year-over-year. The last time industry sales growth was negative was February 2021.’
Return to the office:
Grosvenor Estates yesterday commented on its performance, including trends such as the gradual return to the office. It says the ‘UK and European performance recovered with improved rent collections, but valuations remained subdued as central London grappled with the impacts of Covid.’
The Cross-Party Group on Beer and Pubs in the Scottish Parliament has launched the “Brew with your MSP” Certificate. The initiative will encourage members of the Scottish Parliament to visit local breweries.
RedCat Pub Company has acquired the Castle of Brecon hotel, within the Brecon Beacons National Park, expanding its subsidiary, The Coaching Inn Group.
The MA reports that Heineken UK has proposed the closure of its Caledonian Brewery, citing the decades old infrastructure causing ‘significant inefficiencies and costs’. The closure of the historic building, which has been running for more than 150 years, would mean a loss of 30 jobs.
KFC UKI will trial delivery only kitchens in London, with each kitchen creating 30 jobs. Customers will be able to order from the delivery only kitchen locations through Deliveroo, JustEat, UberEats & via KFC’s website and app.
The British Honey Company, which is a producer of premium British honey and craft spirits products, has announced that it has agreed to terminate its JV with Tusmore Park. The venture was intended to operate a new whisky distillery and a bonded warehouse. CEO Mark Jones says ‘the BHC board is pleased to have reached this agreement with Tusmore which it believes is in the best interest of all shareholders and which enables us to develop our own whisky strategy in the future. We have sufficient whisky stock and production capacity at our Market Harborough distillery for our future growth needs.
The MCA reports that Knoops, the chocolate-focused cafe brand, is targeting 100 sites in the UK over the next five years, with its first central London site to open next week in Covent Garden. Knoops has 10-15 sites earmarked to open this year, and has ambitious plans to expand globally, reaching 3,000 stores worldwide, before 2030.
Meatless Farm has created a range of five ready meals, with three frozen and two chilled. They are made using the same pea protein as the rest of the brand’s products.
Hostmore’s shares dropped by around 14% yesterday as the group announced lower sales, higher costs, lower margins and, presumably, lower profits. The group’s shares listed in Q4 last year and traded around 133p. They are currently changing hands at 43p.
HOLIDAYS & LEISURE TRAVEL:
RSM UK reports that rising inflation, the cost of living and falling consumer confidence are combining to dent recovery in the travel sector. Ian Bell, head of travel and tourism at RSM UK, said ‘Air fares have also rocketed by 12.6% year on year so it’s inevitable that winter breaks and summer 2023 holidays will cost more which could impact future outbound sales.’
• RSM says ‘the UK staycation market, which benefited from the travel restrictions in the pandemic is also seeing accommodation prices increasing by around 11% and may not seem a cheaper alternative.’ It adds ‘the size of these increases will certainly test consumer demand and it will be interesting to see how the sector can adapt to offset the inflationary headwinds to support the much-needed bounce back.’
• We would agree that the UK staycation market could, at some point, price itself out of competition with a resurgent overseas offer. Many consumers will not have holidayed abroad in either 2020 or 2021 and, if prices in the UK rise by a material amount, they will be doubly incentivised to do so this year. That would potentially impact sales in UK pubs, restaurants and visitor attractions.
On a more optimistic note, UKinbound claims the sector needs to build on the boost to business that has come from the Platinum Jubilee celebrations. Many of its 300-plus members will host overseas visitors who have planned their visit to the UK to coincide with festivities for the royal landmark during June 2-5.
The UK government’s Flightpath to the Future plan has been welcomed by aviation industry bodies as it will see the formation of a new Aviation Council to facilitate ongoing dialogue between sector representatives and government.
The CEO of Norwegian Cruise Line Holdings, Frank Del Rio, is confident the sector would not face another shutdown due to the emergence of a new Covid-19 variant.
Manchester United has reported larger losses and an increase in debt for Q3 of its financial year. The company, which is listed on the New York Stock Exchange, has recently finished the English football league season with just 58 points, its lowest total for the club in the history of the Premier League. The club will play in the Europa League next year.
• CEO Richard Arnold says it ‘has clearly been a disappointing season for the men’s first team.’ He says ‘work is well underway to address this.’ That might be more easily said than done. Revenue for the three months to end-March was up by 29% to £153m. The group lost £27.7m in the quarter and debt rose by 11% to £496m.
A number of Twitter investors are suing Elon Musk and Twitter itself over the handling of Mr Musk’s approach to buy the company.
FINANCE & MARKETS:
The Institute for Economic Affairs comments on the possibility of a ‘disruptive summer of discontent sparked by trade union militancy’ (presumably in response to a tight labour market and triggered by the need to push to keep wages moving in line with inflation).
Purplebricks has reported a drop in new instructions this year to date. This fits in with anecdotal evidence from elsewhere suggesting that the housing market might be cooling.
Sterling mixed at $1.2646 and €1.1757. Oil higher at $117.66. UK 10yr gilt yield up 7bps at 1.98%. World markets better yesterday. London set to open down around 23pts.
AG Barr holds its AGM today.
Next week is a short work-week running up to the Jubilee Bank Holidays. Very few companies have inked in announcements. We have Sportech’s AGM on Tuesday and that, at the moment, is about it.
The following week (beginning 6 June) is only a little more active with City Pub Group holding its AGM on the Wednesday and Fuller’s full year numbers on the Thursday.
RETAIL WITH NICK BUBB:
• Today’s News: There is no company news of note this morning, but yesterday the Ted Baker finals came out at 10.19am, after an odd delay for audit completion issues. Despite a c21% recovery in revenues, to £428m, the business remained loss-making, but the company was pleased with the £21m reduction in the underlying loss, to £38m. There was also a detailed Q1 trading update, for the 12 weeks to 22 April, with revenues up 20%, with “return to office, weddings and travel providing positive tailwinds for the brand” and management said that progress was continuing post Q1 in the UK and EU, although Q2 was “more challenging” in North America.
• Next Week’s News: Ahead of the Bank Holidays on Thursday and Friday, to celebrate the Platinum Jubilee, next week is quiet, but the B&M finals are out on Tuesday, along with the latest monthly Nielsen grocery sales figures.