Contract catering, energy price cap, labour, sales v margin & other:

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A DAY IN THE LIFE:

Our dog, in common with many others it seems, prefers human food to her own.

She’ll imperiously leave her bowl to the flies if she thinks there’s a chance of some leftovers and, if there is, it can be the devil’s own job afterwards getting her to clear her bowl of her own food afterwards.

Hence, sick of the waste and as humans are smart, right, and dogs are dim, I occasionally mixed in some thrifty-pilchards, which were apparently meant for humans and which have at least trace elements of pilchards in the tin.

And, when I first did this, it worked a treat.

But, as it became more common, I should have paid attention to her as she watches me like a hawk when there’s food around and she saw very quickly that the part-used tin was stored on the same shelf as her food in the fridge.

That clearly raised suspicions and, as she might be offered pilchards when we’d been eating something that she suspected was maybe chicken, she went on pilchard strike. She gave us her best ‘that’s dogfood, right?’ sneer and has been reluctant to eat it since. On to the news:

PUBS & RESTAURANTS:

Contract catering:

CGA by NIQ and Bidfood’s Contract Catering Tracker shows that sales in the industry are up 30% YoY in Q1, as consumers steadily returned to workplaces and other locations served by contract caterers. The comparative period last year was impacted by the Omicron Covid variant which kept some consumers away from public spaces…

• Karl Chessell, CGA’s director – hospitality operators and food, EMEA, said ‘ Demand for the sector remains high, and we can expect the positive trends to continue through the spring and summer. However, with soaring costs putting caterers and their clients they serve under strain, trading conditions will remain challenging for some time to come.’

• Debra Morrell, business development controller for B&I at Bidfood, said ‘We are heartened to see that positive upward trend across contract catering continues, particularly in the private sector, despite the three major challenges impacting the sector: rising food inflation, the cost of living crisis and staff shortages.’

Cost of living crisis:

Ofgem’s new price cap will mean a drop of £426 to £2,074 from July as energy prices come down since Russia’s invasion of Ukraine….

• Langton. Although prices are now falling, they are still significantly up on the typical energy bill of £1,137 just four years ago when the price cap was introduced. As the government subsidised energy costs down to £2,500, the drop in costs will be the £426 mentioned above rather than simply the headline difference between the Ofgem numbers.

Menu price inflation:

Lumina Intelligence’s Menu Tracker Q1 report shows that food menu price inflation has increased by +10.3% YoY…

• …with the average number of food and drink items on menus also increasing by +11.9% YoY to 150. The report suggests that restaurants focused on adding new meat-based dishes at higher prices, passing price increases onto consumers.

Labour issues:

UK Hospitality CEO Kate Nicholls has commented on legal migration figures, stating ‘Unfortunately, despite the numbers published today, there remain significant shortages across hospitality with 132,000 vacancies, 48% above pre-pandemic levels….’

• UKH has called consistently for special treatment for hospitality which, pre-Brexit, relied to a material extent on workers from EU countries. Ms Nicholls says ‘we need to take stock of the current labour market, where we have shortages and what role the immigration system can play in aiding businesses.’

Other news:

CBI Distributive Trade Survey shows that retail sales volumes dipped in the year to May following a return to growth last month…

• The Survey also indicated that headcount in the year to May declined at the quickest rate since February 2009. Martin Sartorius, CBI Principal Economist, said retailers are having to ‘cut back on the size of their workforce and investment plans.’

Green MSP and Circular economy minister Lorna Slater claims that Scotland’s controversial Deposit Return Scheme could be deemed unviable by the end of this month. Ms Slater said that a positive response from Westminster will determine ‘whether the scheme is viable or not to move forward.’

TARGET SALES OR MARGINS?

This was sent out to clients a few months ago when it became clear that a common theme across the sector was that sales were up but margins were down:

Summary:

• It would be nice if a company could record both revenue growth and margin expansion.

• But that doesn’t happen too often – particularly for companies once they have achieved a certain size and scale economies have been exhausted – not least because margin expansion is finite and sales growth (within reason) isn’t. 

• But there is also a trade-off the other way in that a company selling tenners for nine quid would a) be run off its feet and b) go bust.

• So, in practical terms, sales growth whilst maintaining margin – or whilst holding externally caused reductions to a minimum – might be a positive long term aim.

A bit more detail:

• Avoiding the often-appropriate ‘sales are vanity, profits are sanity’ comment, we would suggest that pursuing growth in sales whilst virtually ignoring margin might not be sensible beyond a certain point

• Sometimes a land-grab (or customer-grab) is warranted.

• But too much of this could lead to a company becoming a busy fool and, in moves that may take time and money to unwind, it could open too many units in the wrong places selling products to people who couldn’t really afford to pay the ‘right’ price

• Reading the above correctly is easier to say than do. But companies that shuttered units or underwent CVAs in 2018 and thereafter may well have fallen into this trap and there are a number of listed companies that are currently cutting some sites

Implications:

• Certainly a company of any size will have a tail but, if unit reductions go beyond a certain point, the cuts may be indicative of a strategic error (or a big external event, taxes, politics, upheaval etc) along the way

• Something, in any case, that has made a number of the units uneconomic under new circumstances

• We are perhaps seeing this with JDW cutting material numbers of units and, if Loungers goes for sales rather than margin for ‘too’ long (defining ‘too’ is not easy), then it may ultimately face similar issues

HOLIDAYS & LEISURE TRAVEL:

Aviation specialist OAG has suggested that transatlantic flights will exceed pre-pandemic levels this summer…

• It says London Heathrow to New York’s John F. Kennedy Airport is likely to be the busiest route. The route between Paris Charles de Gaulle Airport and New York JFK, meanwhile, will see the biggest increase in flight frequency, up 45.2 per cent on 2019.

UKHospitality Scotland has said ringfenced visitor levy funds must be spent effectively to ‘protect and enhance’ Scotland’s reputation as a leading tourist destination…

• UK Hospitality Scotland Executive Director Leon Thompson said ‘The introduction of the visitor levy will leave hospitality businesses frustrated that yet another cost is being lumped onto a sector already challenged by record costs.’

British Airways yesterday cancelled 43 flights from London Heathrow due to IT issues.

The French government has gone ahead and formally banned some short-haul domestic flights where there is an alternative train journey of less than two and a half hours.

Tech provider Cvent reports that London remained the premier destination in Europe for meetings and events this year….

• Current year data is the first published since the Covid pandemic effectively shut the industry down. Cvent’s Graham Pope says ‘after four long years, we’re excited to share these insights once again and provide a resource that is used by event organisers to find great hotels and destinations and by hospitality professionals.’

• He says ‘fortunately, destinations and hotels alike have seen a dramatic comeback from pandemic lows as they benefitted from the pent-up demand for in-person experiences.’

OTHER LEISURE:

The MCA reports that retail, leisure, and entertainment concept Gravity plans to open a further 10 sites across the UK, adding to its current estate of 18….

• The company plans to open two new sites this year, in Westfield Stratford and Liverpool One.  Co-founder and chief growth officer Michael Harrison stated ‘We’re looking to become a billion-dollar company within five years’.

Prime Minister Rishi Sunak is to meet Google CEO Sundar Pichai today for talks about the future of AI. The meeting is said to be focused on AI-related challenges, although it was also expected to address other issues including the UK as an investment environment for major tech companies.

FINANCE & MARKETS:

The Daily Telegraph comments on the market’s view of the UK economy when it says ‘UK borrowing costs surged to levels last reached under Liz Truss’s ill-fated premiership after traders were spooked by unexpectedly strong inflation….’

• The coupon on UK 10yr gilts has risen to 4.36% as of mid-afternoon yesterday. This is indeed back to levels last seen in early October last year as the markets obliged the resignation of then-PM Liz Truss and chancellor Kwasi Kwarteng. Incoming chancellor Jeremy Hunt reversed virtually all of the duo’s policies but, some eight months later, the market is once again forcing up UK rates.

Interest rates. The Telegraph reports that ‘traders now expect interest rates to rise to 5.5pc by the end of the year, up from 4.5pc currently, betting Threadneedle Street will raise interest rates at its next three meetings in June, August and September…’

• 10yr bond rates are up virtually 60bps in a week. This implies that at least two more 25bp rises are anticipated on top of whatever the market was expecting a week ago. Terminal rates look set to settle comfortably above 5%.

The German economy, which has historically been dependent on Russian gas, has entered recession.

RETAIL WITH NICK BUBB:

• News Flow Next Week: After the Bank Holiday on Monday, things are quiet next week on the company news front, but Wednesday brings the B&M finals and the WH Smith Q3 update, as well as the latest Nielsen monthly grocery sales figures and the quarterly FTSE index review.