Friday 21/12/18

  1. In UK MACRO NEWS, the Bank leaves our interest rate unchanged, we look at current Brexit options while UK car manufacturing and consumer confidence fall to new lows
  2. In UK HIGH STREET/CONSUMER NEWS, retail sales figures are surprisingly good, Loungers eyes a float and Boots faces cuts whilst in consumer goods, Bang & Olufsen hits hurdles, mattresses get competitive and Nike has strong sales growth
  3. In INDIVIDUAL COMPANY NEWS, Naspers makes a big investment, the Siemens-Alstrom deal hit trouble, Huawei gets another kick and Twitter falls on harassment
  4. In OTHER NEWS, I bring you festive feasts from around the world. For more details, read on…



So UK interest rates remain steady and we look at current Brexit options but it’s bad news for UK car manufacturing and consumer confidence…

Bank keeps rates on hold as Brexit dampens UK growth (The Guardian, Richard Partington) tells us that the UK interest rate remains unchanged at 0.75% as the Monetary Policy Committee (MPC) voted unanimously to do so. Governor Mark Carney remarked that “The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth”. * SO WHAT? * Basically, the Bank of England will wait and see how the Brexit thing unfolds. If it is anything less than smooth, they probably won’t be raising rates for a while by the sounds of it.

Brexit: the risk rises of delay beyond March 29 (Financial Times, James Blitz) takes a look at what might happen re Brexit given that we are now within 100 days of the deadline for leaving the EU. Scenario one: MPs approve May’s Brexit in the Commons in the second week of January, which means that we would be leaving the bloc. Given the delay, however, many think that there will be too little time to get the necessary legislation through before the March 29th deadline, so Article 50 may have to be extended. Scenario two: Norway Plus or full customs union membership. The Norway Plus option would keep us in the EU’s single market and the latter option does what it says on the tin. Both of these options would involve major changes to May’s deal, which could take a long time debate and legislate on, which could again result in the need for an extension to Article 50. Scenario three: a second referendum. This would definitely necessitate an extension – and the EU is bound to accept this. The Constitution Unit at University College London estimate that the whole process for this would take a minimum of 22 weeks. Scenario four: No deal. Some think that the EU may be open to delaying the exit date to allow all sides to

prepare, but others think that the EU wouldn’t grant an extension because it would hurt the UK more than the EU – which might force the UK back to the negotiating table. So there you have it. If you love this kind of stuff (and who doesn’t?!?) there is actually a VERY good short video on this in the article – so if you have about three minutes to spare, you should definitely watch it.

Meanwhile, UK car manufacturing drops to lowest level in a decade (Financial Times, Peter Campbell) highlights the rather gloomy news that British car factories suffered their worst November for ten years in November, with a 20% fall in output reflecting concerns over the effect of Brexit as well as falling demand from Europe and Asia. 80% of cars produced here are destined for export, with over 50% going to Europe and Mike Hawes, chief exec of the Society of Motor Manufacturers and Traders which compiled the figures, warned that “Thousands of jobs in British car factories and supply chains depend on free and frictionless trade with the EU. If the country falls off a cliff edge next March the consequences would be devastating”. * SO WHAT? * This is hardly surprising. If you couple this with the continued plummeting of demand for diesel-powered vehicles, the motor industry has got a crisis on its hands. It still amazes me to think that the motor industry did not do more to curtail the production of diesel cars given the VW emissions thing AND the fact that major European cities had already started the trend of banning diesel-powered cars. I think this shows huge arrogance that this whole thing would die down and now the whole industry is paying the price.

Consumer confidence slumps to five-year low (The Guardian, Phillip Inman and Sarah Butler) cites the findings of the GfK index – used by the European Commission to gauge consumer confidence – which shows UK consumer confidence hitting new lows. This is mainly due to concerns over the economy rather than on personal finances. * SO WHAT? * Given all of the recent newsflow, this is hardly a surprising finding – but I guess this is just evidence of what we already know!



So UK retail sales actually RISE, Loungers considers a flotation, Boots looks down-at-heel and then in the world of consumer goods, we see problems for Bang & Olufsen and mattresses while Nike announces strong figures…

Shoppers defy forecasts as Christmas sales rise (Daily Telegraph, Tim Wallace) cites the latest figures from the Office for National Statistics which show that total retail sales volumes were up by 3.8% versus November last year – which was way above forecasts with rising pay, falling inflation and robust consumer confidence (presumably in personal finances rather than anything else) thought to be behind the unexpected surprise. Unsurprisingly, online sales were strong and broke through the 20% market share barrier, accounting for 21.5% of all retail purchases. * SO WHAT? * I don’t mean to say “I told you so”, but, hey…”I told you so” ;0). TBH, I think that while the overall mood is rightly downbeat and retailers really do need to be prepared for the worst, there are so many predictions of a doomsday scenario that the risk was very much on the upside when it came to actual performance. ANYONE who manages to conjour up some half decent sales numbers over the festive period will get an almighty boost to their share price because I think that disastrous performance is largely priced in already. There’s still time for retail calamity, having said that, but maybe it won’t be quite as widespread as some have been predicting.

In other news bits on the high street, Stiff drink in hand, Loungers is set to float (The Times, Dominic Walsh) shows us that one of the few bar/restaurant operators doing well at the moment is pushing forward with plans for a £250m+ stock market listing, with a number of City advisers – including Numis, Peel Hunt, Berenberg and Liberum – in the mix to handle the potential Initial Public Offering. Performance of the owner of Lounge and Cosy Club contrasts starkly with the likes of Prezzo and Byron et al. * SO WHAT? * I really am guessing here, but I reckon the fact that Loungers is 60% owned by private equity company Lion Capital has a lot to do with Loungers’ haste at coming to market. If you consider overall consumer sentiment and all the uncertainties around both domestic and international growth you would have thought that they’d want to wait for better market conditions. If I was being cynical, I would say that Lion Capital are pleased to have weathered a difficult time on the high street for the last few years and want to crystallise some of that value while the going is good at Loungers. Clearly there are a number of risks next year, so if they can get some money

while Loungers is still doing well, then you can’t really blame them.

There’s some more downbeat news in Boots braced for cuts as US owner seeks $1bn savings (The Times, James Dean) as the owner of the high street pharmacist, American company Walgreens Boots Alliance, is reviewing its businesses following a deterioration in performance at the parent level. Walgreens now has 18,500 shops in 11 countries and employs around 415,000 people so there would seem to be a lot of scope for “right-sizing”. The company said that the cost-cutting would involve digitising existing operations among other things.

Meanwhile, in the world of consumer goods, Bang & Olufsen dives 27% as logistics problems hit sales (Financial Times, Camilla Hodgson) shows how the Danish headphone and speaker maker took a tumble after it cut its sales outlook for the year due to a number of logistical problems thrown up by store closures and openings as well as supplier changes.

No bed of roses as multiple mattress start-ups vie for sales (Daily Telegraph, Sophie Christie) is a really interesting read as it does a really good snapshot overview of a mattress market that has seen players like Eve Sleep, Casper Sleep and Simba enter the fray. All of them are having to spend a ton of money on marketing to get in consumers’ faces (they are mainly aimed at the younger end of the market) and there’s always the prospect of players like Amazon entering the playpen and shaking things up (Amazon does its own memory foam mattress that ships to a buyer’s door for less than £115, with others charging £200 upwards). * SO WHAT? * Given the high margins on mattresses, it is hardly surprising that there’s been so much activity in the last few years. The only thing is that the products are all pretty similar, making differentiation quite difficult. As Duncan Brewer of consultancy firm Oliver Wyman put it, “There are lots of identical businesses all competing in a fairly small market (how frequently does anyone change their mattress?). The key to success boils down to offering customers a clear reason to shop with you”. I suspect that there is a load of scope for M&A in this area – and we will no doubt see consolidation in the next few years.

I thought I’d end this section with something a bit uplifting in Nike Strides to strong sales growth (Wall Street Journal, Patrick Thomas) as the apparel and footwear seller unveiled strong figures after a tricky period following their backing of NFL-quarterback-turned-social-activist Colin Kaepernick in its advertising campaign. The apparel business saw a sales increase of 10% and footwear saw an increase of 8%, with sneaker sales in China rising by a very healthy 26% over the quarter. The company’s shares rose by 8% on the news.



Naspers puts $660m into India’s Swiggy, the Siemens-Alstrom merger hits a blockage, Huawei gets more bad news and Twitter tumbles over harassment claims…

Naspers leads $1bn funding round for India’s Swiggy (Financial Times, Amy Kazmin) heralds an interesting development for the Indian food-delivery service Swiggy as the South African e-commerce and media investor plunges yet again into India’s fast-growing tech sector as part of a big funding round. Swiggy is the self-styled biggest food delivery platform in India and enables diners to order from over 50,000 restaurants in 50 Indian Cities using 120,000 “delivery partner” drivers. Naspers is chucking $660m into the pot and will be joined by the likes of DST Global, Coatue Management and Meituan Dianping (China’s Swiggy equivalent). * SO WHAT? * This is a VERY hot area at the moment as the food delivery market is growing at break-neck speed due to rising incomes in the country. Naspers recently made a nice 32% return when it sold its stake in Indian e-commerce platform Flipkart to Walmart last year for $22bn, so it has some decent form!

In other news bits, Competition watchdogs join to block Siemens-Alstrom merger (Daily Telegraph, Oliver Gill) highlights unprecedented action to block the mega-merger that was originally announced in September 2017 because it “raises very serious and extensive competition concerns” and remedies suggested so far “fall far short of what would be required to address all concerns”. There’s more bad news for the Chinese telecoms equipment company-of-the-moment in Some global banks break ties with Huawei (Wall Street Journal, Margot Patrick and Julie Steinberg) which just means there will be fewer banks for them to choose from – although TBH I reckon that’s probably a bit of an annoyance rather than anything more serious at this stage. And then there’s Twitter shares tumble as it is called out over harassment (Daily Telegraph, Olivia Field) which highlights the 18% fall in Twitter’s share price yesterday after a report from Citron Research accused the company of being “the Harvey Weinstein of social media” for failing to deal with harassment.



And finally, in other news…

Given that this is the last Watson’s Daily of 2018, I thought I’d leave you with this: Mouth-watering photos show what different holiday feasts look like around the world (Insider, Rachel Askinasi Apart from our own, I’m liking the look of the Finnish and South Korean spreads!

I hope you have a brilliant Christmas and a fantastic New Year!