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Not going out
20 December 2022
In the latest episode, Susannah and Sarah discuss the trials of the hospitality sector with more people staying in. They speak to Sophie Lund-Yates about some of the listed companies, including Whitbread, Young's and Texas RoadHouse, and how they're coping. Emma Wall talks to Anna Farmbrough, Portfolio Manager at Ninety One, about travel and leisure.
This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Tax rules can change and benefits depend on personal circumstances.
Susannah Streeter: Hello, and welcome to the Switch Your Money On podcast from Hargreaves Lansdown - I’m Susannah Streeter - I’m the senior investment and markets analyst here at Hargreaves Lansdown. And, as usual, I’m with Sarah Coles, our senior personal finance analyst, who was disappointingly absent from our podcast Christmas party. Sarah what happened to you?
Sarah Coles: I know I’m sorry. It’s just ridiculously difficult to leave the house at the moment when the kids are constantly unwell or sitting exams. So, I just sat at home with a mince pie feeling very sorry for myself. It was absolutely no consolation that I’m not alone, and that so many people are missing out on going out at the moment, what with so much illness doing the rounds, and people keeping an eye on their spending, and of course the train strikes.
Susannah Streeter: Yes, we’re increasingly likely to order something in, or celebrate solo – which is making life incredibly hard for the hospitality industry – for whom this time of year is so important. And that’s what we’ll be talking about in this episode of the podcast – which we’re calling ‘not going out’.
Sarah Coles: Yes, we’ll be looking at the trials of the hospitality sector, and Sophie Lund Yates, our lead equity analyst at HL, will be talking about some of the listed stocks in the sector. So, Sophie, it’s not all bad news is it?
Sophie Lund-Yates: Hi Sarah. No, so I’ll be talking about Whitbread, which has some things going in its favour, and US brand Texas Roadhouse, which has been benefiting from the mid-range restaurant sector holding up better in the states. So certainly not all bad news.
Susannah Streeter: Good to hear! We’ll also be talking to Gaia Cionnini who is the creative marketing manager of Ping Pong, a London restaurant chain serving handmade dumplings, buns and crispy dim sum – which has branched out to ready-to-steam dumplings at home, so it can benefit from people eating in as well as out. Gaia, it sounds like a very busy time for you then at the moment.
Gaia Cionnini: Hi hello everyone, it is a pretty busy moment for now on the online shop, but as well in the restaurant we have seen a lot of people transitioning back to eating at home, so it’s evening out lets say.
Sarah Coles: It will be great to catch up with you later in the podcast. We’ll also be hearing from Emma Wall, our head of investment analysis and research, who has been talking to Anna Farmbrough at Asset Manager, Ninety One.
Susannah Streeter: And, as usual, we’ll have the quiz and I’ve tracked down some lesser known facts about hospitality for you to tuck into later. I bet you can’t wait.
Sarah Coles: Well, I’m not sure my appetites up for it but I’ll give it a go.
Susannah Streeter: Good. But first, we have plenty to get our teeth into with the hospitality sector at the moment. The latest set of statistics from the Office for National Statistics showed that it had the highest proportion of firms reporting concern for their business, with 93% of firms worried about what December will bring. Part of the problem is, of course, people cutting back on non-essentials, which means almost half of us plan on eating out less. This in itself rings alarm bells for the sector, but it’s just one of a host of pressures they’re under right now.
Sarah Coles: Yes, and staff wages are rising too. The same ONS statistics showed more than one in five accommodation and food businesses had raised wages in October. This is partly because staff are so thin on the ground. So, overall a third of businesses with more than ten staff have been experiencing a shortage of workers, but this rises to 47% in hospitality. And at the same time, they face the rising cost of energy. A report for the British Beer and Pub association warned that the end of energy bills support in April would mean pubs make a loss on average of 20%. Statistics from the ONS showed that food and hospitality businesses were the most likely to have cut trading because of energy costs.
Susannah Streeter: Plus, there are higher food costs as well. The Food Service Price Index shows that the price of food supplies to restaurants is up a fifth in a year. Core products for hospitality like meat, fish, vegetables and fruit are now all up between 16% and 19% in a year. And then, of course, there are the strikes. Some 16% of accommodation and food businesses were hit by industrial action in October – the second most affected sector after retail, wholesale and the motor trade. And with many more strikes expected in the run up to Christmas, the action will cause fresh ripples of worry for companies. Analysis by UK Hospitality showed that rail strikes will cost the sector £1.5 billion on strike days – similar to the disruption from the Omicron variant last year. It said the sector had already seen mass cancellations as a result. And I tell you what, after looking into all of this – I am mightily pleased that I booked a Christmas dinner down the pub this year.
Sarah Coles: Yes – I suppose they need all the support they can get – even from your rabble of a crowd! So, there are a lot of pressures on the industry right now, so it seems like a good time to bring in our lead equity analyst Sophie Lund Yates who has the lowdown on some of the companies affected by these pressures.
Susannah Streeter: Sophie, there are certainly challenges for the hospitality sector and habits are changing, but that doesn’t mean all corners of the industry are struggling does it?
Sophie Lund-Yates: Hi Susannah, definitely not. So, while there are certainly some big challenges out there and it will be difficult as people rein in spending, some areas are set up to stand strong in the current environment. So, Whitbread owns Premier Inn. And I have to admit I’ve been really impressed by the work Premier Inn has put into its brand and proposition. So, things like Premier Inn Hub, which offer convenient, compact rooms, currently in London and Edinburgh, which are geared up for young travellers and workers. So, hubs are by no means the main part of the group’s hotels, but I think they show how Premier Inn has the ability to adapt and change. Now, in a time when consumer sentiment is subdued, the group's in a better position than other more expensive chains in my opinion. Its no-nonsense approach offers value per room and is a driver behind Whitbread’s financial performance in the first half of the financial year. So, this was driven by a strong rebound at Premier Inn as meetings and events returned to both the UK and the small but faster growing German operation as well.
Whitbread sees a potential ceiling of 125,000 rooms compared to current capacity of 82,700 in the UK and Ireland. I’d say that Premier Inn will need to pedal harder to sustain growth in the UK particularly as economic headwinds mount. Premier Inn has a much smaller footprint in Germany - there are over 7,000 rooms in the pipeline which would see the German estate double in size. Now, Whitbread's aiming to become the number one budget operator in Germany. About 60% of rooms in Germany are run by private hotels- so we think there's opportunity for an experienced hotelier like Premier Inn to establish a foothold. Um, but what I would say, with Germany likely to enter a recession in 2023 it could still be a bumpy ride.
Susannah Streeter: So, that’s Whitbread. Lets look at the fortunes of pubchains - and Young & Co in particular.
Sophie Lund-Yates: Yes, so Youngs is responsible for over 200, mid-to-higher end pubs across London and the South of England and at the half year mark we found out that like-for-like sales are actually up 5.5% on pre-pandemic trading, which is a real achievement. One of Young’s main assets is that its estate is predominately freehold, so that means it owns rather than rents its premises – by and large. That came as the group made the decision to sell-down its tenant-model business, which was the right move in my view. And having a freehold estate strengthens the balance sheet, reduces lease payments and also acts as an attractive asset for more favourable borrowing terms. So, excluding leases, the group has current debt of £96m, with plenty of breathing room on its available facilities. So, ultimately, I think Youngs is an attractive business, well placed for the long-term. Although, I would say that with a recession looming here in the UK, and peoples’ socialising habits going through change as we’ve been talking about, there could be some short-term challenges ahead.
Susannah Streeter: So, that’s Youngs. Clearly, short-term challenges really front and centre. But lets move on to Texas Road House. Would you say it’s a slightly different story?
Sophie Lund-Yates: Yes, so slightly different one, um, to finish off with this week. As we’ve been hearing, there are certainly some tough changes happening in hospitality in the UK, but there are some interesting trends happening across the pond. Now, I hope no one’s hungry because I’m going to talk about a US BBQ restaurant giant, called Texas Road House. So, the steak and rib specialist has over $1bn in revenue each quarter alone, with a reasonably low proportion of sales coming through as take outs. Now, that tells me that sit down dining is still very much alive. The US is especially geared up to this because of the spread out nature of its hospitality – you know, apart from major cities you usually have to drive to get to your favourite bar or restaurant. Now, the latest round of job data from the US was positive, which showed that the labour market is still tight, and adds weight to the idea that US spending power is being propped up for now, and that directly helps mid-range restaurants like this. Restaurant margins are coming under pressure from inflation, the scale of food needed to serve $1bn worth of custom each quarter certainly doesn’t come cheap in today’s climate. With that said I’m not overly concerned, you know, I don’t view this as an insurmountable problem.
And, including its operating lease obligations, Texas Road House does have quite a bit of debt. Again, this isn’t an enormous problem, but it would be something to consider if demand were to wane in a big way.
Susannah Streeter: Ok Sophie, thank you very much. Some really interesting companies to keep an eye on. Just a reminder, this is not advice for a recommendation to buy, sell or hold any investment. And no view is given on the present or future value or price of any investment and investors should form their own view on any proposed investment. Of course, one ray of light for some businesses has been to branch out into ‘insperience’. A third of them took this step during lockdown, and despite more than half initially planning for it to be temporary, around a third of shoppers said they still wanted this kind of service in the future. Where, essentially, people eat in at home on restaurant food fare. So, this is a good time to bring back in Gaia from Ping Pong, because of course its added to its hospitality business with a dining at home range. Welcome back, Gaia, can you tell me a little bit more about your business?
Gaia Cionnini: So, Ping Pong restaurants have been around for over 6 years, we have 6 restaurants in Central London in key locations – Covent Garden, South Bank. Carnaby Street etc. We are serving dim sum and cocktails and we are in the casual dining sector.
Susannah Streeter: What made you decide to expand into eating at home?
Gaia Cionnini: We came up with the idea during the first lockdown back in March 2020, when all our venues were shut due to pandemic. We were just operating with one of the sites for takeaway and delivery and since the demand for home deliveries has seen substantial growth in that period, we came up with the idea of developing a cook at home range since with takeaway and home delivery we could only operate in the London area. We found a way to go nation-wide so our restaurant dim sum is daily produced in a central kitchen and shipped fresh to our restaurants in London. So, the set up was already there. It was just a matter of adapting to online retail, finding a courier partner and educating the consumer how to cook it at home.
Susannah Streeter: So, hows it going? Do you feel you’ve been particularly well placed given, of course, the fact that rail strikes have disrupted some of the trade in the run up to Christmas? Is that your experience?
Gaia Cionnini: Yes, it is. We’ve been obviously, our restaurant business has been disrupted by the strikes, but yeah delivery business has seen a bit of growth in this period because people are ordering in a lot more and to cook at home as well.
Sarah Coles: So, when people are coming to your restaurants, is it sort of the opportunity to kind of, you know, let their hair down, or are you finding people are actually spending less when they go out as well?
Gaia Cionnini: Obviously, everyone is looking at their wallets a bit more – they’re watching it. We had to come up with a bit more affordable packages. This year for Christmas you can have a set meal for £35 when last year the set menus were 50 and over.
Sarah Coles: And one of the things we were talking about earlier when we were talking about these rising costs and things like energy and things like staff costs- are those things that you’ve got to keep a close eye on as well?
Gaia Cionnini: Yes, of course. Energy costs we use a lot of energy obviously for our production and as you were saying before wages going up, cost of living and yeah everything else had an impact on our business.
Susannah Streeter: Do you think takeaways might alleviate some of those costs, given that you don’t, for example, have to warm up your customers as well as the buns if you’re delivering those buns to be heated at home?
Gaia Cionnini: Yeah absolutely, this alleviates the costs. The items that we are selling online are 30-40% cheaper than the restaurant price because there is no service and all the additional costs attached to it. So, it is beneficial for us.
Susannah Streeter: And what kind of marketing are you doing to get the message out?
Gaia Cionnini: We're doing a lot of influencers reviews, we invite the media to try our cook at home range, we do a lot on social, we do a lot of digital campaigns to promote our cook at home range.
Sarah Coles: And do you find that there’s a, sort of, you know when people come to the restaurant and try the food they then will look at the cook at home range as well as you’re kind of doing your own promotion in a sense?
Gaia Cionnini: Yeah, yeah we do. We have a lot of regular customers who were thrilled when they knew that they could have the same kind of product at home and cook it themselves. It’s been very successful.
Susannah Streeter: Have you had many Christmas parties cancel this year?
Gaia Cionnini: Yeah, we’ve seen a lot of cancellations coming through. We still see a lot of big groups and team gatherings but, yeah, a lot of cancellations.
Susannah Streeter: So, what are your expectations for 2023?
Gaia Cionnini: We are a bit cautious about, especially January and February, but we are gearing up for that so we are putting a strategy in place. We have the fortune of having the cook at home range so if people cannot come to our venues we have the online business so we will put more effort in whichever of the two needs to be, you know, working.
Susannah Streeter: Could you just sum up how you and the team are feeling right now given of course all the challenges still out there.
Gaia Cionnini: Well, we are a very strong team, we have to be very flexible at the moment obviously because there is a feeling of uncertainty. But we are keeping strong, we do a lot of staff incentives, we are looking after our staff and we try to transmit a sense of stability because we’ve been facing so many challenges since 2020 and in a way, or another, we always overcame and we’re still there. So, I think this is a key feeling to transmit to the staff to stay strong and positive. So yeah, we hope to see some more people venturing back to the restaurants looking ahead. That’s what we kind of hope for really.
Susannah Streeter: Fantastic, thank you so much Gaia. Really appreciate you giving us a snapshot of what’s happening at Ping Pong right now.
Gaia Cionnini: Thank you, it’s been a pleasure.
Susannah Streeter: You’re listening to Switch Your Money On from Hargreaves Lansdown and if you’re enjoying this podcast please do let us know what you think, and do subscribe wherever you get your podcasts so you get a fresh new episode in your inbox as soon as it’s ready.
Sarah Coles: Let’s bring in Emma Wall now – our head of investment analysis and research here at HL. She has been speaking to Anna Farmbrough at Asset Manager, Ninety One.
Emma Wall: Hi Anna!
Anna Farmbrough: Hi!
Emma Wall: So, we're talking today about experience and hospitality and the outlook for this sector as we look forward to 2023 where there is much expectation that we will have an economic slowdown at the very least - and at worst a recession. So, I thought we’d start by what, looking at what this sector adds to a portfolio before we get into the sort of here and now. So, what does hospitality and leisure add to an investment portfolio?
Anna Farmbrough: We like the sector because it’s been a long term growth story because people have spent more and more of their disposable income on travel and leisure particularly as the costs of travel have come down over time with the explosion of low cost airlines. However, many of the businesses that operate in this sector are not that attractive in terms of profitability. Because, if you think about hotels, they’re quite low margin, they’re very capital intensive. Reasonably low barriers to entry because all you need is a building, and then you fill it with customers. And that makes it hard to be very profitable. But what we do like, and you can say this is true of the airline sector too, we do like businesses that facilitate better profits for companies that are operating in this sector. So for example, we like InterContinental Hotel Group because it maximises the return on investments that hotels owners can generate. So, if you’re looking to open a hotel, if you join the IHG group, you can take one of their brands or you can operate your own brand under their umbrella and, in return, they give you a lot of support on the booking system and even a template on how to kit out the hotel. And you also get access to their customer base. They have over 100 million customers on their loyalty programme, and you can get those customers into your hotel, fill up your hotel much more quickly than you would be able to if you were an independent brand and that generates much higher returns on the investment that you’ve made. So, we like these businesses that take away some of the upfront costs of starting up in this industry and make you more profitable over time.
Emma Wall: This sector has been one that has been challenged in the last couple of years hasn’t it. So. Leisure, travel, hospitality, you know, you say about sort of stocks that you prefer within the sector but we had the pandemic - which wiped out an entire sector altogether almost - it wasn’t enough to be the best within a sector, the stocks that professionals, like you, like to select, but that really that hospitality, leisure, travel got completely wiped out in the pandemic didn’t it?
Anna Farmbrough: Yeah, it’s been very challenging and we really thought that we’d see a recovery last year and then omicron came along and wiped out much of that recovery. So, it's lasted longer than I think we all imagined years ago. Having said that, IHG because it’s a very low-cost business model, very high margins and, amazingly, during the pandemic in spite of revenues absolutely collapsing they more or less generated a profit on a, sort of, underlying basis.
Emma Wall: What about the outlook then for then because as I started by saying, the economic outlook for 2023 is challenged and when we do see, as we're seeing now, a cost of living crisis, a recession, the price of just your every day items going up and up and up - that discretionary spend which often is what fuels hospitality, leisure and travel – comes down and therefore the sector outlook becomes more challenged doesn’t it.
Anna Farmbrough: I think you’re right. You know, our assumption is that we’re likely to see a continued recession next year. And, certainly people will cut back on discretionary spending. But travel and leisure is interesting because people haven’t, they still haven’t travelled as much as they used to. So, in the last few months, you’ve seen people travelling at similar levels to before in Europe certainly and in the US. But much of Asia is still locked down and Asia contributes about 20% of global travel and that’s probably still at half the levels that it used to be. China is obviously still pretty much locked down and even in Europe, although you had, you know, a good recovery in recent months, the beginning of the year was really challenging because of omicron. So, you still haven’t had a full year of recovered volumes. And that means, going into next year, although discretionary income might be lower and consumers are definitely going to be under pressure, there’s still some pent-up demand on a volume perspective. And, we also think if you see a recovery in Asian travel, that benefits those businesses which have Asian exposure but it will also benefit European businesses because Asian travellers will travel to Europe and then travel within Europe.
Emma Wall: Now, nothing is guaranteed of course but are there any other stocks within that sort of consumer discretionary bucket that you think are potentially robust going into 2023?
Anna Farmbrough: Yes, Amadeus. Which serves a similar purpose to IHG, but in the airline sector. Or, predominately in the airline sector, Amadeus provides the booking systems and all the IT solutions that sit behind an airline. Again, that’s a nice position to be in because they’ve invested heavily in software, but their sort of incremental costs of operating is very low. So, if they take on a new customer, there’s very little incremental costs associated with that. And they can make airlines more efficient which, again, in a very competitive challenging capital intensive industry, if you can squeeze out any profitability that’s very compelling.
And, Amadeus, although they’ve had a fairly good recovery in Europe and in the US, they haven’t seen that recovery in Asia yet. So, where you get weakness in parts of the globe, you should get a recovery next year as well. We don’t think that’s priced in Amadeus. And the other thing as well which is an interesting angle, is that they’ve built out, in the last few years, a booking system for hotels, so they now have another potential egg of growth which is providing their booking software for hotel groups. You can customise your room bookings, so you can choose whether you’re far away from a lift, or close to the stairs, or have a certain view. And generally, that tends to come with a price premium. So, you can eek out a few more pounds with every booking.
Emma Wall: Anna, thank you very much.
Anna Farmbrough: Thanks.
Susannah Streeter: That was Emma Wall, head of investment analysis and research here at HL, speaking to Anna Farmbrough at Asset Manager, Ninety One. And please bear in mind that these are the views of the fund manager and are not individual stock recommendations. You’re listening to Switch Your Money On from Hargreaves Lansdown. And now it’s time for the quiz, and as promised, I’ve been digging out some of the lesser-known facts about hospitality.
Sarah Coles: Well, I suppose at least if they’re lesser-known I have a good excuse for getting none of them right.
Susannah Streeter: Well, you never know. OK, so let’s start with some of the more unusual hotel jobs around the world. Which ones of these are real, and which have I made up? So, is there such a thing as a tanning butler, is there a sleep concierge, or is there a hawk weigher?
Sarah Coles: They all sound ridiculous, so I reckon this is another one of your trick questions, I reckon they’re all made up.
Susannah Streeter: Well, you’re sort of right. It is a trick question, but that’s because they’re all real. Honestly, the tanning butler is at the Ritz Carlton in Miami Beach – whose job it is to make sure everyone returns home with a good tan. And, anecdotally, did you know that Glasgow was once crowned tanning capital of the UK? In my past life as a business reporter, I can vouch it definitely was, because I was sent to cover the story live on TV from a health and beauty industry perspective of course – and I ended up with face a vastly different colour to the rest of me… Never a good look heading back on the plane like that…
Sophie Coles: I just wish I’d seen it, that sounds great.
Susannah Streeter: Anyway, back to the quiz questions - the sleep concierge is increasingly common as well, and tends to be armed with an array of pillows, scented mists, snacks and relaxing tracks. And the Falcon weighing is actually part of the daily routine of the Falconer at Gleneagles, because apparently overweight falcons don’t fly. So, there’s a good nugget of general knowledge for you. Right, next, we’ll go upmarket, to one of the most expensive hotel rooms in the world, Lover’s Deep, which is actually a luxury submarine in St Lucia, with plenty of glass so you can enjoy watching marine life. But how much will one night there cost, is it $1,750, $17,500 or $175,000 a night?
Sarah Coles: Well it’s bound to be ridiculously expensive, but surely nowhere is good enough to cost $175,000 a night – so I’m going to go for the middle one, for $17,500.
Susannah Streeter: No, I’m sorry, this one really does cost $175,000 a night. It better be good, for that! I mean –
Sarah Coles: You wouldn’t want to sleep for that kind of money.
Susannah Streeter: You definitely would be disappointed. I mean, I still think, particularly if you didn’t actually see any marine life floating past. Anyway, let’s move onto restaurants. One of the most famous in social media terms of recent years has been Nusr-Et, the home of Salt Bae. But in the London branch, how much will you pay for a giant tomahawk steak – without any of the infamous gold leaf. Is it £430, £530 or £630?
Sarah Coles: Well, I have to go for the top end here, because I know it’s so expensive, so I’m going to go for £630.
Susannah Streeter: You are right, although add a bowl of fries and that’ll cost you another £9. They don’t even throw in the fries for free. Oh my goodness. Let’s move onto pubs. The smallest pub in the UK is the Nutshell in Bury St Edmonds, and is apparently the town’s biggest tourist attraction, but how many of those tourists can they fit in at a time, is it 5, 10 or 15.
Sarah Coles: Oh I’ve no idea, but then if it’s the smallest I should go for the smallest number so 5.
Susannah Streeter: No you’re wrong, it’s 15 – the building is 15 foot by 7, so it must be standing room only, and with that few customers they have to hope everyone drinks fast if they want to make any money at all.
Sarah Coles: Do you know, it sounds like I’d probably have more space if I stayed in my front room
Susannah Streeter: Which is no excuse for missing the next Christmas do. Remember?
Sarah Coles: Promise. Definitely not.
Susannah Streeter: Ok, that’s all from us this time, but before we go, we need to remind you that this was recorded on 12 December 2022, and all information was correct at the time of recording.
Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.
Susannah Streeter: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. You can see our full non-independent research disclosure on our website for more information. So all that’s left is for me to thank our guests Gaia, Sophie, Emma, Anna and our producer Elizabeth Hotson. Thank you so much for listening. Goodbye.