Monday 02/11/20

1. In MACRO & OIL NEWS, we look at the US election and beyond, downbeat Eurozone forecasts, UK lockdown implications and an agreement with TfL whilst oil prices fall
2. In RETAIL NEWS, footfall slides, toyshops close, Sainsbury’s looks like getting a Christmas boost while Sweaty Betty proves popular
3. In GAMING NEWS, Sony and Microsoft go head-to-head and videogame popularity surges in the US
4. AND FINALLY, I bring you the right way to eat Jaffa Cakes…

So the US election looms large, Eurozone and UK economies look tricky and oil prices weaken…

Will the US election pave the way for fresh stimulus? (Financial Times) highlights an important question as it is going to be a busy week in America. There’s the presidential election tomorrow, a two-day policy meeting of the Federal Reserve starting on Wednesday and the latest employment data release on Friday. Things have been slowing down of late as everyone waits to see who will get the keys to the White House and the state of limbo may continue if it takes a few days or a few weeks to count the votes given the record number of mail-in ballots due to the pandemic. A Biden win is expected to prompt a more generous stimulus package but nothing is certain, especially where Trump is concerned! Trump threatens legal action over swing state vote (Financial Times, Courtney Weaver and Peter Wells) shows that the President is threatening legal action against the result (unless he wins, presumably!) given that he is alleging that there is a potential for fraud in Pennsylvania and Nevada, two swing states. Some are saying that there could well be a delay in declaring the result because of huge numbers voting.

Meanwhile, Eurozone economic forecasts slashed as fresh lockdowns imposed (Financial Times, Martin Arnold) cites a survey by the Financial Times which shows that the eurozone economy is now expected to contract by 2.3% in the fourth quarter of this year (many economists surveyed

had expected growth previously) and Second England lockdown fuels fear of double-dip recession (The Guardian, Phillip Inman and Larry Elliott) shows that the Bank of England’s Monetary Policy Committee (MPC) is now expected to release more stimulus in the economy to cushion the blow of a second lockdown in an announcement due on Thursday.

Sticking with the UK for a moment, Sadiq Khan and Boris Johnson strike London transport rescue deal (Financial Times, Jim Pickard and Philip Georgiadis) shows that the two sides have reached an agreement for the moment with a rescue package of £1.8bn for TfL to keep bus and tube services going for the next six months. Further discussions will continue on another package for the following fiscal year, but at least this has addressed the immediate need. Talks have been testy, but some important concessions include keeping the size of the congestion zone as it is while fares will not have to increase by more than RPI inflation +1%, as agreed in early summer. On the other hand, TfL will have to come up with £160m in cost savings over the six months and pay any concessions for under-18s and pensioners by itself.

Then in Oil prices drop as new lockdowns hit economic outlook (Financial Times, Hudson Lockett) we see that the new European lockdowns have prompted fears that demand will fall. Brent crude fell to $35.74 in Asia, hitting its lowest level since May and West Texas Intermediate was down to $33.64. * SO WHAT? * Clearly there is going to be a slowdown in economic activity but I think that there is a risk here that the downside could be overestimated – after all, China is recovering strongly and economies aren’t COMPLETELY shutting down – so it could be far worse IMO.

Footfall is down and toyshops close while Sainsbury’s looks forward and Sweaty Betty proves to be popular…

Footfall to slide by two thirds as retailers face lockdown nightmare (The Times, Gurpreet Narwan) cites research by Springboard which shows that footfall is expected to drop by 62% year-on-year over the six weeks to Boxing Day – about double the drop it had been predicting before the announcement. Retailers rebounded sharply after the first lockdown was lifted but this is going to be a tough blow to take. The British Retail Consortium’s chief exec Helen Dickinson said that the new rules will do “untold damage” to retailers and the chief exec of the British Independent Retailers Association, Andrew Goodacre pointed out the rather sobering fact that the high street lost 25% of independent retailers in the last lockdown, with the implication that it could be worse this time around. * SO WHAT? * Clearly this is a very serious situation. However, I get the impression that retailers were steeling themselves for another lockdown anyway – and some have been putting more effort into much earlier pre-Christmas promotions. Although this will undoubtedly be catastrophic for many, I think that the true depth will be determined by how long the government keeps us under lockdown for. I would argue that if it keeps to its initial deadline there is still the possibility of consumers flocking to shops to buy in the run-up to Christmas whereas if it extends the deadline, it really could be terminal for far more high street operators.

In Toyshop lockdown may dampen Christmas joy for children (The Guardian, Zoe Wood) we see that many kids will be disappointed by Lockdown 2.0 in an industry that has been struggling for quite some time anyway. December accounts for 25% of the UK’s annual £3.6bn in toy sales but there may be another problem in prospect – if lockdown creates pent-up demand, some toy chains are concerned that they might not be able to make up for lost sales on reopening given social distancing rules. * SO WHAT? * Fortunately, under Lockdown 2.0, retailers will still be allowed to sell online and operate click-and-collect services, but many feel that it will not make up for lost sales. I wonder whether retailers could potentially offer a

timeslot system for shoppers where they have to book time. This would help the social distancing thing and, I would argue, may lead to more sales per customer because I think that people who book will have a higher propensity to spend – and spend more. Having said that, it could also put customers off, but given that most of us will not have seen the inside of a non-supermarket for a month by that time, we may just be keen enough to do the booking thing…

Elsewhere, Sainsbury’s set to ride sales boost into Christmas (Daily Telegraph, Laura Onita) shows that although Sainsbury’s is likely to be cautious about the end of the year, it is likely that all grocery retailers will do well going into the end of the year. The extra costs that they all incurred early on in the pandemic have stayed the same but sales are likely to go up and they are all better prepared this time than they were last time around. * SO WHAT? * I would expect grocers to be winners once again under lockdown because people will be focused on having a decent Christmas because that’s all than many of us can look forward to! After all, there will be no parties, no office parties, no other gatherings to go to – so all there is left is to enjoy Christmas at home! All of the grocers will get a lift IMO, but some will “win” more than others. I would say that a longer lockdown would favour the likes of Tesco, Sainsbury et al. (because they’ve got their own delivery capacity) whereas the budget operators – Aldi and Lidl – won’t do so well because they will have more limited delivery capacity.

I thought I’d mention Sweaty Betty in dash for new investor (The Times, Ashley Armstrong) because it is a British company that is currently surfing the “athleisure” wave alongside the likes of Canada’s Lululemon. Sweaty Betty is currently backed by L Catterton, an American private equity firm, and has over 60 outlets in the UK, US, Canada and Hong Kong. The founders have asked Goldman Sachs to seek out other private equity interest that could give the company a valuation of around £250m. Gymshark is another example of a British premium “athleisure” winner as it recently sold a 20% stake to General Atlantic which valued the brand at over £1bn. * SO WHAT? * This sounds quite interesting, but it is thought that Sweaty Betty is unlikely to achieve a rating as high as Gymshark’s due to it still being exposed to having traditional stores that will obviously be hit by lockdown.

Sony and Microsoft go head-to-head while videogames continue their rise in popularity in the US…

Sony and Microsoft look to match the hype with PS5 and Xbox launches (Financial Times, Leo Lewis, Kana Inagaki and Tim Bradshaw) highlights the fact that the imminent launch of new consoles from Sony and Microsoft will present a unique opportunity to prosper at a time when other entertainment like live events, sport and going to cinemas are nowhere to be seen. Interestingly, the CFO of Sony told investors that the real money is going to be made in software – not the consoles themselves. Some observers estimate that given the constraints of the current pandemic, production and distribution costs will mean that Sony could lose up to $170 per PS5 and may not hit the break-even point for three years – and Microsoft has also said that it could face a drag on gross margins as well. * SO WHAT? * Consoles are almost always a loss-leader (Nintendo is a notable exception to this), but the argument

goes that this is far outweighed by the earnings you get over a console’s lifetime. Production costs also go down as the years progress as more effective production techniques and cheaper components lead to eventual profitability on the hardware. This is going to be one hell of a launch, though!

Then in From ‘Fall Guys’ to ‘Among Us,’ how America turned to videogames under lockdown (Wall Street Journal, Sarah E.Needleman) we see that videogames are getting even more popular than they already were pre-lockdown. Existing players are playing more, former gamers are dusting off their old consoles and there are new gamers all the time as everyone tries to entertain themselves during lockdown. * SO WHAT? * Some of these games are the only way that gamers can communicate with friends and I think that a prolonged period of being shut indoors with limited entertainment options will cement and grow what is already a very popular pastime. I would imagine that this could have very interesting implication for the growth of e-sports as they will not be affected by social distancing and will plug successfully into the current upswing in gaming popularity.

…in other news…

I thought I’d leave you today with something shocking in Jaffa Cakes confirm ‘correct’ way to eat them – and it’s blowing people’s minds (The Mirror, Courtney Pochin). Well I never!