30 June 2016

Week In Brief: BUSINESS AND THE CITY

STIMULATING THE ECONOMY:  There may be a need for strong stimulants over the next few months as Britain’s economy enters a brave new world (or sinks into a declining old one, if that is your take).  If you find yourself seeking “something to go” from Costa Coffee, Costa is also seeking something to go – something to make the business go with a bit more verve.  Whitbread, the erstwhile brewer who migrated to less alcoholic offerings, buying and expanding Costa to be Britain’s largest chain of coffee houses, (outlets in every high street, shopping centre, even in motorway service areas and sports stadiums), is struggling to get more turnover and profit out of what is essentially a mature business, under attack from several other chains and from a torrent of smaller independent operators.  Growth was low in 2015, but new Whitbread Group CEO, Alison Brittain, has begun offering a wider range of drinks and finer coffees, and bought a half share in Pure, an up market London salad and snack chain.  She is also cutting costs – not easy with extra lines on sale – and is expanding overseas, with plans, for instance, for 700 new stores in China.  So far, so good – sales were up 2.5% in the first quarter 2016, compared with 0.5% for the same period in 2015.

Whitbread’s other main business is Premier Inn, the budget hotel chain, in which it has invested heavily in recent years to give a quality, but money conscious, offer. It appeals particularly to one night stayers, such as families travelling and budget business travellers. Its reputation has risen, but unfortunately not revenues, which saw occupancy rates down 1.5% for the year 2015, though still at a respectable 79% overall.  By cost control and clever pricing technology, the group has invested heavily in systems which predict occupation levels and adjust pricing, the business showed a 2% plus increase in revenues.  Premier is still increasing room numbers in the UK – and if we are in for a period of austerity that may turn out to be a clever strategy indeed.

POWERING THE WORLD:  Whitbread have gone from beer to coffee; Nestle have gone from coffee to wind power.  Nestle has entered into a long term lease agreement to buy electricity from Community Windpower, which is a major UK supplier of wind turbine power.  In this instance the wind farm is on-shore, in the Scottish border country, where wind is reliably present.  Also helping reliability – on the financing side – is that this farm is being built with renewable energy subsidies, now been phased out for on-shore wind turbines after protests from countryside campaigners and concerns over the efficiency of turbines in many locations.  Nestle says this contract will supply about half its electricity needs for its thirteen factories in the UK.  Nor is there a danger of the KitKat production line coming to a halt on still evenings.  Nestle will continue to take their supply from the National Grid, whilst Community Windpower feed in when the turbines can operate efficiently.  The power lease is for 15 years, longer than generally seen, but Nestle says it prefers to commit for this period to assure supplies and costs, and it helps the farm operator secure long term (cheap) finance.

BREXIT HEADLINES:  Three tales of Brexit vote effects:

A Winner?: The British Hospitality Association, which promotes tourism in the UK, was quick off the mark to praise the fall in the value of the pound. They pointed out that this should encourage more foreign visitors to come to the UK seeking great value for money – but also should discourage Brits from holidaying in foreign parts because of the extra costs involved. They got support from one tourism promotor – Donald Trump, in Scotland to open his upgraded Turnberry golf course, also called for the pound to go down “so more people will come to Turnberry”.  Tourism has been a strong growth business for some time.  But however low the pound sinks – can it overcome the summer we are having so far this year?

A Loser?: If the tourists come, EasyJet will be hoping they come on their economy orange planes.  EasyJet has been having a tricky time recently; bad weather across Europe, French air traffic control strikes, and problems at Gatwick with lack of runway capacity and docking stands have meant cancellations and customer dissatisfaction.  A weakening pound at the UK end of the business has not been compensated for by extra earnings from Euro travellers, making for a grim first half of the year.  The quarter just ending looks worse – fuel costs going back up will not help – and the airline says profits could be £28m down.  Now the Brexit vote adds yet more trouble – less flights, more discounting, bad weather (cuts the tourist business and causes delays), and possibly EasyJet being ejected from the EU aviation area – which allows European domiciled airlines to operate freely within European airspace.  The airline is Europe’s second largest budget airline so extra bureaucracy and costs in trying to maintain the network in an ever more competitive market would not be welcome.  Not surprisingly, the share price dropped 20% in Monday’s market.

A Likely Excuse?: On Monday Foxton’s, the hip upper end London estate agent, announced that profits would be down significantly following the EU vote.  It said it had been expecting sales to pick up in the second half of the year but that this was unlikely to happen now. The market read this as confirming anecdotal evidence that sales were significantly down in the first half, with discounting of prices at the top end of the market, and marked the shares down 23% in early trading. Some analysts are now suggesting profits could be reduced by half, year on year, though as Nic Budden, chief executive, was at some trouble to say, Foxtons has a substantial letting and management business which should be helpful in maintaining revenues in a recession.  As Foxtons pays part of remuneration by sales related bonuses, it also should be able to rein costs in fairly sharpish.

VROOMING INVESTMENTS:  If conventional investments are all too worrying or too gloomy to contemplate, maybe you should put the family savings into a classic car.  That market has been in a rapid growth mode for ten years or so, especially at the top, and recent auction evidence seems to confirm it is still powering away.  The best financial performers, says the Knight Frank Luxury Investment Index, are Ferraris and Porsches.  Over the last five years, the KF classic car index has risen 161%, compared to average hedge funds at 4.75%.  And if all else goes wrong, you can drive to the beach and watch the sun go down.  You can’t do that with a hedge fund.

KEY MARKET INDICES:  (as at 28th June 2016; comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate: 0.5%, unchanged: 3 month 0.65% (rising); 5 year 0.51% (falling).

Euro€: 1 mth -0.30% (falling); 3 mth -0.27% (falling); 5 year -0.24% (falling)

US$: 1 mth 0.47% (steady); 3 mth 0.60% (falling); 5 year 0.96% (rising)

Currency Exchanges:

£/Euro: 1.20, £ weakening

£/$: 1.35, £ weakening significantly

Euro/$: 1.11, € weakening

Gold, oz: $1,331, rising

Aluminium, tonne: $1,591, falling

Copper, tonne: $4,691, rising

Oil, Brent Crude barrel: $45.65, falling

Wheat, tonne: £109, rising

London Stock Exchange: FTSE 100: 5,982 (steep fall). FTSE Allshare: 3,238 (falling)

Briefly: Since last Friday morning the markets have responded to the pro-Brexit vote through widespread volatility. The main loser has been sterling against the dollar; the stock market has fallen, though not by as much (at the time of writing) as the headlines might make you believe. Oil, almost unnoticed, fell 8% on the week; gold continued its steady rise.  Not many expected this result and the markets are still working out how to react to it.

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the Shaw Sheet