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Tue 12th Feb 2019 - Update: Black Sheep and Travelodge expansion plans, Douglas Jack on Domino's, JD Wetherspoon
Black Sheep Coffee reveals plans to double UK estate and for international growth: London-based independent coffee shop Black Sheep Coffee, which operates 24 sites, plans to double the size of its UK operation within 12 months, while linking up with a franchise partner to launch into the Middle East. Expansion into the US is also on the cards, according to Marco Reick, who joined Black Sheep as HR director from natural fast food brand Leon late last year. “Black Sheep has a unique offer for the coffee market,” Reick told Propel. “Customers are becoming more accustomed to and educated about coffee. There is space for speciality shops of scale.” Black Sheep, which currently has 22 sites in London and two in Manchester, is set to announce new openings in the capital this spring. It also operates a “friend-of-a-friend” franchise in Manila in the Philippines. Reick said: “We’d rather open one site in London than two elsewhere, because by growing our footprint in London is it easier for the brand to grow. There’s still not enough people in London who know the Black Sheep brand.” Reick was featured on the 2018 HR Most Influential list and joins Black Sheep to support its ambitious expansion plans. Prior to Leon he was at Bill’s, part of the team that took the company from “newcomer to national brand”.

Douglas Jack – Domino’s Pizza valuation too low given long-term franchised growth model: Peel Hunt leisure analyst Douglas Jack has said Domino’s Pizza Group’s valuation is too low given the long-term franchised growth model. Issuing a ‘Buy’ note on the shares with a target price of 325p, Jack said: “Domino’s Pizza Group has the most profitable franchisees in Domino’s worldwide network. Although their average store profit doubled between 2013 and 2017, some of them want even better buying terms. We believe all the board back the company standing firm – the alternative could potentially expose the company to a continuous stream of further demands in the future. The only leverage the franchisees have is to not open stores. This is not a big concern – each store opening affects full-year profit before tax by circa £0.085m, less than 0.1% of profit before tax. If Domino’s Pizza Group misses its target of 1,346 stores by 2026, we believe it would only lose the 30 basis points royalty discount in seven years’ time. The performance of new stores was the key takeaway from the capital markets day. New store sales are up 38% over the past six years despite a 19% decline in addresses per new store. Without reducing average sales, lower address counts mean the stores are closer to the customers, reducing delivery times. This boosts reorder frequency and lowers labour costs through reducing driving distances and raising collection ratios. All this is great for franchisee margins. When franchisees split stores, cash returns at maturity fall from nearly 50% to almost 40% for the two sites combined. However, their return on equity can be even higher given franchisees typically borrow 90% (£290,000) of the £325,000 cost of new stores. Domino’s has multiple opportunities to drive up average spend per address. These include targeting higher lunchtime sales, increasing the collection ratio and using CRM to engage with less active customers. Our forecasts assume system sales grow by just 6.6% in 2019E and 4.7% in 2020E despite the company aspiring to grow sales at 8%, in line with the food delivery market. Our forecasts assume like-for-like sales growth of just 2.5% in 2019E and 2.0% in 2020E (versus an 8% historical average) and estimate each extra 1% of system sales is worth £0.9m of profit before tax. For a long-term franchised growth model, the valuation is too low in our view.”

BDO – many well-funded trade buyers actively looking for acquisitions in the pub sector: There continues to be many well-funded trade buyers actively looking for acquisitions in the pub sector in 2019, according to the latest BDO restaurants and bars report. The study said Young’s, Stonegate Pub Company, Fuller’s, Punch, Mitchells & Butlers and BrewDog would all be “actively looking to acquire” this year. BDO said differentiated brands such as Brewhouse & Kitchen, Barworks, Dirty Martini, London Cocktail Club, Inception Group, The Alchemist, Arc Inspirations, ETM Group, Coaching Inn Group, and Darwin & Wallace would all be “in the minds of investors”. The study said Loungers’ possible initial public offering would “make interesting viewing”, while it pondered whether Casual Dining Group’s appointment of Rooney Anand as chairman might mean 2019 could be the year the company “diversified into the pub sector”. BDO said with the sale of Wagamama and Rosa’s Thai Cafe in 2018, it also expects investors to look at the best operators in the fast-growing south east Asian segment, which has experienced strong growth with its “strong margins, convenience and healthy food credentials appealing to investors”. It said differentiated concepts such as Pho, Wasabi, Giggling Squid, HOP and Tonkotsu were “well positioned to catch investors’ eyes despite the challenging market”. BDO also said investors would look to spot winners in the fast-growing vegan segment, while further innovation in competitive socialising would see experiential concepts feature “strongly on the radar for investors” this year. The study said innovation in the sector was at an “all-time high” and, while 2019 would hold many challenges, “agile operators with differentiated offerings able to deliver exceptional and memorable experiences would continue to flourish”. Looking to the year ahead, BDO stated: “The well-documented desire for experiences among millennials and others has meant a value offering is now more than location, food and drink quality, service and price. There is an interest in authenticity of what is on offer, its provenance and back story, with premiumisation and personalisation key. There is also a real driver for healthy alternatives, which is fuelling an increase in vegan and vegetarian meals as well as a lower desire to drink alcohol – 25% of millennials claim to be teetotal or have minimal alcoholic intake, which is a real change for operators to cater for. In the pub trade, the wet-led operators have been faring slightly better than their food-led rivals as they don’t need such large investments in kitchen space and it is less competitive for the spend. But this is led by those that focus on the premiumisation trend – craft beer and gin and tonics lead the way. This is tricky to expand significantly, however, and so can’t continue forever. We should also acknowledge coffee shops, and the recent deal to acquire Costa from Whitbread by Coca-Cola demonstrates the belief this market has further to go. The food offering at the big four coffee shops is below average and an opportunity – but at what cost? If the current market conditions teach us anything, it’s that focus on what you are known for, good at and can exploit will be the key to success, which will fall to those with absolute clarity on what their brand stands for and how to offer the value and experience consumers require most efficiently. A successful business over the next three years is going to have to focus on its story and heritage and ensure its authenticity, the customer experience, the use of effective technology for the benefit of the customer, health-conscious options, premium offerings with personalisation a key driver and, of course, the execution needs to be efficient and optimised. There might also need to be a bit of luck.”

Tim Martin responds to The Guardian journalist’s ‘heavily-edited’ video about company’s pay and employment practices: JD Wetherspoon chairman Tim Martin has responded to The Guardian journalist Owen Jones, who he claims misrepresented the company’s pay and employment practices in a video for the newspaper. Jones interviewed Martin at The Last Post, the company’s Southend pub, before releasing a “heavily-edited” video. Martin said: “On average, Wetherspoon pays 15.8% over the statutory minimum wage. Wetherspoon pays 5.5% more than the National Living Wage, which applies to those over the age of 25. Wetherspoon has also abolished ‘youth rates’, meaning 18 to 24-year-olds are paid the same starting rate as those over-25. Owen didn’t get the figures right and made critical comments, which aren’t justified. Owen’s video left out a very important fact – Wetherspoon pays, as I told him, more than 50% of its profits (more than £40m in 2018) as a bonus and free shares, to people who work in the company. More than 80% of the bonus goes to people who work in the pubs. We pay a higher percentage of profits, as a bonus, than any other substantial company of which we are aware, other than perhaps John Lewis. Wetherspoon has also adopted a share scheme for all employees, which was introduced by the last Labour government, in about 2004. We now have over 10,000 employees who have been allocated shares in the company. On average, employees have received 350 shares, worth about £4,000. Looking at Wetherspoon’s employment practices overall, 93% of our staff now have a guaranteed minimum hours contract. This has been a very popular move, and we believe this a greater percentage than any other substantial pub company. We’ve also got a very good apprenticeship scheme, with about 1,000 employees taking part. About ten people per pub have worked for the company for more than five years. We’ve got an average of three people per pub who have worked for us for more than ten years. In the pub world, where there are a lot of students, part-time workers and high staff turnover, this says something about the company. We try to encourage people to stay with us for a long time, and many do. We’ve also got very good connections with Leeds Beckett University (previously Leeds Metropolitan University) and several hundred people have got degrees or diplomas while working for the company. These factors have contributed to Wetherspoon being named as a UK Top Employer 2019, marking 16 consecutive years of recognition by the Top Employers Institute, in association with The Guardian. We don’t believe The Guardian or the Top Employer’s Institute would put their name to something if Wetherspoon wasn’t regarded as a reputable employer. One point that I made to Owen that he left out of his video relates to tax. Wetherspoon pays a huge amount of tax – 43% of our sales. For every pint that goes over the bar – 43% of that sale goes to the government through one tax or another. These taxes include VAT, alcohol duty, climate change levies and so on. In fact, Wetherspoon pays just about one thousandth of all the taxes paid in the UK. In other words, you only need just over 1,000 companies such as Wetherspoon and no-one else has to pay any tax whatsoever. That amounts to almost £10 of tax to £1 of profits. Not only do we, thanks to the hard work of our employees, restore buildings and generate a lot of jobs, but we’re also a big contributor to government finances. A website a lot of people look at is Glassdoor. Employees use Glassdoor to anonymously rate their own company. Wetherspoon does okay on this site, rated 3.3 out of a possible five. Some of our competitors are about 2.5, while Fuller’s, a very good pub company, are slightly ahead of us on 3.5. We’re also rated almost exactly the same as the Guardian. We’re sure the Guardian is a good employer and does its best, but may not be perfect. However, we’re sure the Guardian is trying to improve, and so is Wetherspoon.”

Travelodge reveals plans to plough £60m into opening hotels by railway stations: Travelodge has revealed plans to plough £60m into open hotels near railway stations to serve commuters travelling into London. The company plans to open ten sites, creating about 300 jobs. It said it was looking for more sites, which are less than an hour by train to London. Last month, Travelodge opened its 574th hotel, near Ashford International station, and has sites close to 200 of the UK’s busiest train stations. Property director Tony O’Brien said: “Our next stop is to open hotels by railway stations in key commuter towns across the south east that have a fast service into London. These towns are growing at pace.”

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