Clarity on Covid, food costs, services, Whitbread & other:

PREMIUM EMAIL – PLEASE DO NOT FORWARD:

A DAY IN THE LIFE:

Just on a bit of a jaunt so shorter email than usual but, having hopped on a plane along, it seemed, with most of the rest of the population of the UK on Friday, I couldn’t help wondering when looking at the seatbelt signs, just when did they ban smoking on airplanes?

I mean the seat rest ashtrays seem to have gone but the no-smoking sign is still there.

Anyway, a quick Google tells us the answer but, for a bit of fun, which is which concerning smoking bans on (or in) UK trains, tubes, pubs and airplanes – 1987, 1990, 2005 and 2007?

On to the news. 

PUBS & RESTAURANTS:

Service sector:

The CBI’s latest quarterly Service Sector Survey has found that business optimism in both services sub-sectors remained broadly unchanged in the three months to May…

• It maintains that business volumes continued to fall across the two sub-sectors, but more sharply in consumer services. Profitability fell for a sixth consecutive quarter in both business & professional services, and consumer services.

• Charlotte Dendy, CBI Head of Economic Surveys and Data, said ‘Business volumes are set to return to growth in the next three months’ but that ‘rapid cost growth continues to squeeze services firms’ margins and adds to mounting evidence that underlying inflationary pressures remain strong.’

Food costs:

Health secretary Steve Barclay commented on ‘price-caps’ on basic food items in supermarkets…

• …saying ‘the government is working constructively with supermarkets as to how we address the very real concerns around food inflation and the cost of living, and doing so in a way that is also very mindful to the impact on suppliers.’

• Langton. The government may be criticised for interfering with the market at a time when food producer and food retailer margins are not rising. There has been no evidence found of profiteering.

• The BRC has also warned the supermarket price-caps will not make a ‘jot of difference’ and could harm efforts to cut inflation in the industry. The idea is said to be at the ‘drawing board stage’ and is expected to be modelled on a similar agreement achieved in France.

The BRC and Nielsen have reported that food inflation in the UK has slowed from April’s record level to 15.4%. The report says this is the second-fastest annual increase that the BRC has ever measured….

• BRC CEO Helen Dickinson says that food inflation “might be peaking”. She says ‘while overall shop price inflation rose slightly in May, households will welcome food inflation beginning to fall.’ She warned against the government introducing price caps.

• Nielsen says ‘to help mitigate the impact of inflation, shoppers are saving money by looking for seasonal promotions on the high street and taking advantage of the price reductions offered by supermarket loyalty schemes.’ It adds ‘food retailing in particular is competitive, so hopefully the recent price cuts in fresh foods is a sign that inflation has now peaked, albeit ambient inflation may take a little while longer to slow.’

Disposable income:

Nationwide’s mortgage costs saw significant increases  of up to 0.45 percentage points on Friday, following higher than expected inflation figures which in turn increased the expectation of rate rises by the Bank of England.

Rail strikes:

UKHospitality CEO Kate Nicholls has said rail strikes have put a ‘dampener’ on the May half term for hospitality. Nicholls said that ‘disruption throughout the week will cost £132 million to the sector, bringing the total impact of the year-long strikes to an eye-watering £3.25 billion.’

Other news:

UKHospitality Scotland Executive Director Leon Thompson claims that a UK-wide Deposit Return Scheme is ‘essential to make the Deposit Return Scheme a success, particularly for businesses.’ Thompson said ‘Hospitality businesses have sunk millions into preparing for a scheme and will likely have to spend more once again to meet new requirements.’

The FT has highlighted the fact that closures in the casual dining have exceeded those across hospitality as a whole…

• Langton. This is true but, whether it is a reflection of problems withing casual dining or a sign that the PE driven, me-too offers that had little to add had simply been opening too many sites, is less clear. With some caveats, we incline to the latter view.

• The FT quotes some operators as making dire predictions about the state of the market. Hugh Osmond, for example, says ‘the casual-dining chains, as was, are largely dead’. This may be directionally correct but the sub-sector as a whole is still operating. Osmond says ‘that doesn’t mean if you fast forward five years someone won’t have reinvented it …but what you won’t see is just the re-emergence of that broad-menu, middle-market, nothing remarkable type of casual dining.;

SOME CLARITY ON COVID:

This is an expanded version of a note that was sent to clients earlier in the year. The theme being that, as time was now passing, the impact of Covid – social, financial, cultural etc – was becoming a little clearer and the ‘new normal’ likewise.

On the other hand, other events, such as the war in Ukraine and the attempt to reverse QE have impacted trade, disaggregating the various factors has become difficult. Nonetheless…

Summary:

• The pandemic caused significant and rapid change in the hospitality industry.

• Some of these impacts disappeared almost as soon as lockdowns were lifted whilst other impacts are linger.

• Still other changes could be permanent.

Today, we’ll consider which effects melted away almost immediately.

• Pigeon-holing the changes into fleeting, transient, long-lasting and permanent will be tricky and best-achieved with the benefit of hindsight.

The obvious:

• Closures:

o Pub and restaurant closures, thankfully, have gone. So has social distancing, mask wearing etc.

o The flip side of this is that delivery or click-and-collect at 100% of out-of-home sales for pubs & restaurants was also never going to last.

• Government help:

o Ditto furlough payments, helicopter money, lower VAT rates, reduced business rates and easy-loans were ended as soon as was practical. The government hasn’t got the money. it didn’t during Covid, either, hence the inflationary spiral that the Bank is currently battling.

Factors that required a bit more thought

• Knowledge here would have been power. It’s one thing seeing events in the rear-view mirror but, if operators knew for certain what was going to disappear, they could have adapted their models accordingly.

• Would older customers revert to their old ways?

o This was a big question. It appears that, though they were slower to return, older customers have once again been gracing pubs and restaurants with their trade.

• Would some products remain out of fashion?

o The reduced popularity of some products, e.g. carveries was a feature of Covid. It seems as though these are back in favour.

• Will London be permanently damaged?

o No. It would appear that London is back. The West End recovered first but the City is lagging. See comments on working from home later in this series.

• Comments as to what other factors have been comprehensively reversed welcome. To be continued.

COMPANY NEWS:

The Telegraph reports that Whitbread is preparing a sale of part of its £700m pub and restaurant arm having hired advisers to explore options for the division…

• Sources have suggested that only a ‘small part’ of Whitbread’s food and drink operations was under consideration. The news follows the company stating that there is an ‘increasing divergence of performance of the hotel business and the food and beverage business’.

• Langton. Whitbread has maintained for years that the food offer, particularly for breakfasts, was an integrated part of the hotel offer and said that it did not, therefore, make sense to separate it out.

• That said, everything has its price, of course and, if the company is reacting to unsolicited offers at high prices, a sale may make sense.

Oodles Chinese has opened a unit in Walsall, taking the Indo-Chinese QSR concept to 36 sites, with plans to open a further 9 sites this year. The chain has openings lined up in Whitechapel, Newcastle, Northampton, Elephant & Castle, Aberdeen, Glasgow, and Birmingham.

TheBusinessDesk.com suggests that UK-based food manufacturer Plant and Bean may be on the brink of administration. Despite their standing as a supplier to numerous major supermarkets, Plant and Bean has filed a Notice of Intention to appoint administrators (NOI).

Yum China has said its Lavazza coffee shop network is thriving in China, reaching a total estate of 89 stores as at the three months ended 31 March 2023. In September 2021, Yum China and Lavazza pledged $200m to grow the concept to 1,000 stores by 2025.

Sky reports that the issa brothers, the owners of Asda, are set to announce a £10 billion tie- up of the supermarket with their petrol station empire imminently.

OTHER LEISURE:

Hollywood Bowl has reported 6mth numbers to end-March saying that it is seeing continued strong customer demand reflecting the attractiveness of its offer and the ‘great value for money proposition’….

• BOWL reports revenues up from £100.2m to £110.2m with group EBITDA of £43.9m against £42.2m in the prior year’s H1. It says PBT is £26.7m (2022: £33.4m) and the group is to pay a H1 dividend of 3.27p (last year 3.00p).

• Re the outlook, BOWL says it ‘remains well-placed to continue executing its growth strategy’ and says that ‘trading is in line with the Board’s expectations for FY2023.’ The group says it is ‘on track to meet target of 15-20 new centre openings by the end of FY2025 with strong new centre pipeline for Hollywood Bowl and Puttstars brands, as well as Canadian Splitsville brand.’

• CEO Stephen Burns reports ‘it is clear from our high customer satisfaction scores that our continually evolving proposition appeals to all generations looking to enjoy affordable leisure activities together.’ He says ‘we are looking forward to driving further growth in the UK and Canada, capturing the significant market opportunity ahead. Our resilience to inflationary pressures, strong balance sheet and cash-generative model gives us confidence in the future as we continue to invest so that our customers have the best experience possible in our centres.’

Sportech has updated on trading in a statement that will be read out at its AGM later today. The group says ‘in the first four months of the year, trading has been in line with the Board’s expectations. Sports betting continues to experience a stable rate of growth, supporting the operational cost base of the business….’

• The company goes on to say that current trading ‘underpins the Board’s optimism for achieving full year expectations, which includes generating positive Group EBITDA.’ It adds the ‘Board are evaluating numerous opportunities presently with regard to Group cash and will update the investors and the market in due course.’

• Richard McGuire, Executive Chairman, said ‘we are delighted to share the news of our strong start to the year, which can be attributed to the outstanding efforts of our management team. By capitalizing on our exclusive pari-mutuel betting license, we have successfully tapped into a new demographic of sports betting enthusiasts, opening up valuable cross-selling opportunities.’

• The Chairman adds ‘the addition of sports betting as part of our product range has played a pivotal role in ensuring the financial stability of our Venues and paving the way for fresh avenues of growth.’ He concludes ‘we look forward to collaborating with the  new Connecticut sportsbook provider as we approach an exciting period brimming with potential for collective success.’

FINANCE & MARKETS:

The Telegraph quotes Luke Hickmore, investment director at asset manager Abrdn, as saying that the UK will fall into recession by the end of this year or early next year…

• Abrdn maintains that rising core inflation in Britain will force the Bank of England into action on interest rates, despite governor Andrew Bailey saying previously that inflation would be transient. Interest rate action, in turn, will depress the economy. Abrdn warns that rising interest rates will weigh on mortgage holders and reduce levels of disposable income.

Sterling $1.2352 and 1.1539. Oil price $76.36. UK 10yr gilt yield 4.33%. UK FTSE set to open up around 2pts as at 6.30am.

RETAIL WITH NICK BUBB:

• Bank Holiday Monday Press (1): According to the invaluable Guardian morning email briefing, Monday’s Guardian led with a front-page scoop: “Met police to stop going to mental health callouts”. Elsewhere, apart from “Phil and Holly”, the backlash against the proposed food price cap was the main focus: “Supermarket bosses hit back at PM’s plan to cap food prices” and “Supermarkets warn ‘price cap’ won’t reduce food bills” were the splash headlines in the i and the Daily Express respectively, whilst “Price caps will create shortages, PM warned” was the Daily Telegraph lead story, flagging that Rishi Sunak is being warned “1970s tactics to lower food prices won’t work”. “British police bid to stop migrants leaving Africa” was the Times’ headline, highlighting that the National Crime Agency wants to work with Tunisia and Algeria. The Financial Times led with news from the US: “Republican
chiefs try to quell revolt with debt default deadline looming”.

• Bank Holiday Monday Press (2): Monday’s papers were a bit thin in terms of Retail news, but the FT had an interesting feature on the problems of casual dining chains that over-expanded before the pandemic, as the restaurant market polarizes (“Mid-market dining chains fight for survival”). The Daily Mail noted the expected ejection of Ocado from the FTSE 100 index on Wednesday evening and on its News pages it flagged the fresh and chilled food shortages at many Waitrose stores over the weekend caused by an IT systems failure. The News pages of the Telegraph also noted that Waitrose has apologised for empty shelves after an IT update disrupted supplies.

• Today’s News: There is no news out this morning from listed retailers, apart from the usual share buyback announcements, but there is a big development elsewhere, via the formal announcement of the merger of Asda with the EG petrol forecourt business, which is, of course, also co-owned by the Issa brothers and the TDR private equity group. EG is valued at c£2.3bn, with the transaction to be mostly funded by more debt and freehold property sales and the deal is expected to be completed in Q4, assuming the wretched CMA gives its blessing. Mohsin Issa will continue to lead the business for the time being, but a search has begun for a new CEO for Asda.

• Today’s Press: According to the Guardian morning email briefing, “Labour to let councils buy land cheaply to tackle housing crisis” is the Guardian’s page one lead this morning, along with a photo from the epic finale to “Succession” on TV yesterday. The Financial Times is on the same page as the Guardian, in terms of news focus: “Labour plans land valuation reform to ease housing crisis”. “Stop banks ‘ripping off’ loyal savers” says the Daily Express (the story draws on a Which? survey). The Times splashes with “Legal wrangle looms over Johnson’s WhatsApp chats”. The top story in the Daily Telegraph is “PM backs feminist in Oxford row over free speech”. The Daily Mail has “Fury at Starmer’s £1.5m from Just Stop Oil donor”.

• BDO High Street Sales Tracker: The weekly BDO High Street Sales Tracker for medium-sized Non-Food chains gets a lot of attention (even though it is statistically flawed, is focused on relatively upmarket businesses, is skewed to Fashion and underplays “big ticket” spending), because it is the only weekly (as opposed to monthly) guide to what’s happening to retail spending…and the latest survey, for what it’s worth, shows that trading was again weak in the w/e May 21st: Total BDO sales (including a few Homewares and Lifestyle retailers, as well as the Fashion retailers) were down by 3.7% LFL on the year before (with Store sales up by 1.4% and Online sales down by 8.7%), with Fashion sales alone down by 7.2% LFL.

• News Flow This Week: After the Bank Holiday yesterday and with skools on half-term, things are fairly quiet this week on the company news front, but tomorrow 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, whilst the Dr Martens finals are on Thursday.