Thursday 07/05/20

  1. In MACRO NEWS, the US ratchets up the rhetoric with China, Brussels warns of the consequences of discord and UK business rates face a delay in their overhaul
  2. In CORONAVIRUS “WINNERS” AND LOSERS, we see “winners” in online shopping, news and cycling versus trouble in ride-sharing, casinos and advertising
  3. In OTHER NEWS, VW sees strong car sales in China, JD Sports whinges about Footasylum and there’s more about US meat shortages
  4. AND FINALLY, I bring you a priceless reaction to Mentos and Coke…



So the US gets feisty, Brussels warns of discord and UK business rates overhaul faces a delay…

Following on from what I was saying the other day, US looks to step up economic action against China (Financial Times, James Politi and Lauren Fedor) shows that Trump is considering some feistier economic measures against China using the accusation that China caused the pandemic as an excuse explanation. * SO WHAT? * This sounds like a lot of hot air to me as Trump hasn’t produced any evidence of his accusations and it all sounds like a hastily put together way of Team Whitehouse trying to torpedo the January trade agreement before President Xi does. In the run-up to the November election, he clearly wants to give the impression that he is calling all the shots but I think there is a danger here that in trying to look like the hero, he may make economic recovery harder because many American companies NEED to do business with China (just ask Apple). Xi has the perfect excuse for walking away from the January agreement in the coronavirus, but if he keeps the January trade pact intact it would make me wonder whether Xi is telling us the real story about China’s underlying economy.

At the moment, it doesn’t look like Brussels could organise a p!ss-up in a brewery and Coronavirus threatens future of eurozone, Brussels warns (The Guardian, Daniel Boffey) highlights the difficulties in getting all the eurozone’s member states to agree on anything in the face of what is expected to be the worst recession since the Great Depression. * SO WHAT? * The EU’s economic commissioner, Paolo Gentiloni, called for more unity. However, this is easy to say and difficult to do because there is a growing divide between the poorer southern European countries who were already having problems before the outbreak and the more prosperous

northern European countries who are proving to be increasingly reluctant to take more of the collective financial burden. Let’s hope that for everyone’s sake they manage to sort this out as some of the numbers they are bandying around regarding the scale of the economic damage are frightening (although, let’s be honest, no-one’s got a clue – it’s all “best guess” stuff). The UK is expected to suffer more because of the additional complications of Brexit.

Government delays overhaul of business rates (Financial Times, Jonathan Eley) is the equivalent of the government kicking retailers in the genitals while they are already on the floor writhing around in pain from being punched in the face by thrifty consumers and given a wedgie by the coronavirus. It turns out that the government will delay the resetting of property-based tax from next year to 2022, according to the Department of Housing, Communities and Local Government yesterday. It argues that this will remove uncertainty for businesses, but critics say this will just mean higher bills for longer next year at a time when they could do with some help. * SO WHAT? * Business rates are reviewed every five years (the process is called “business rates revaluation”) by taking into account the rental values of company premises and then coming up with a multiplier that rises with inflation. At the moment, many retailers are “enjoying” a business rates holiday in 2020-21 to help them through the coronavirus effects, but this decision means that they will start to have to pay bills from April next year based on rental values last measured in 2015 (they were way higher back then, so the bills are higher). Things were rocking in 2015 – we had yet to have the Brexit vote, David Cameron had yet to buy his posh shed and of course there was no global pandemic to worry about either, so rents were high. I think that there’s still time before next April to come to some kind of compromise (or extend the rates holiday), but as things stand at the moment it does not look good and may mean that more businesses decide to call it a day.



Online shopping, news and cycling pop while ride-sharing, casinos and advertising flop…

Although Amazon gets most of the media attention for online shopping success, Shopify surges as retailers rush online (Financial Times, Tim Bradshaw) shows that the Canadian e-commerce group is also doing pretty well as it reported better-than-expected first quarter results along with accelerating growth in April. * SO WHAT? * Its success will cement its reputation as a player snapping at the heels of Amazon’s dominance (eMarketer figures now put it ahead of eBay in terms of market share for US ecommerce sales) and it said that it has not seen much of a drop in consumer spending during the course of the outbreak. The company added that retailers that were signed up to Shopify and who had to close their physical shops were able to claw back 94% of their sales volumes online between mid-March and late-April. The company has benefited from providing back-end support to thousands of businesses large and small who use its software to run independent online stores. New stores created via Shopify shot up by 62% in that time period and although things are going well now, the company was at pains to say that future spending patterns would be difficult to predict and did not provide guidance for the remainder of the year.

Times like these are a boon in New York (The Times, Simon Duke) is really interesting because it shows that, contrary to what we usually hear about newspapers, The New York Times has managed to sign up 587,000 new digital subscribers over the first quarter – its biggest quarterly increase since it implemented a digital paywall in 2011. The New York Times is the second most-read newspaper in America after USA Today and is not well-liked by President Trump who describes it as “the failing New York Times”. It started to push digital subscriptions in 2011 to reduce its reliance on advertising revenues.

Other “winners” include Wheel turns full circle as cycling gives Halfords a boost (The Times, Ashley Armstrong), which highlights Halfords as a beneficiary of the rejuvination of cycling amid lockdown. It has been classified as an “essential retailer”, which has meant that it has been able to stay open and its strong performance in yesterday’s trading update helped to push its shares up by an impressive 23%. Not bad for a company that said in March it was expecting a sharp drop-off in sales. Weakness in its motoring division (because of fewer car journeys during lockdown) was more than offset by the strength in its cycling division as people looked for alternatives to public transport to get to work. * SO WHAT? * I must say that I had been wondering at the beginning of the year whether we had reached “peak cycling” and that the years of growth enjoyed by industry following Bradley Wiggins’ triumphs at the London Olympics and beyond had started to tail off. Now I don’t know the breakdown of sales but I do wonder whether it’s not the sporting side of things that’s powering the renewed interest in cycling but more the commuting/leisure side of it that’s powering Halford’s pedals. It will certainly be interesting to see how sales go in the coming months as more people return to work and whether they decide to buy new bikes in greater numbers to get them there.

Peloton rides a coronavirus surge in home workouts (Wall 

Street Journal, Sharon Terlep and Micah Maidenberg) highlights the ongoing success of Peloton as its quarterly sales shot up by 66% as locked down Americans pedalled away their lockdown frustrations on their $2,000 bikes (which are experiencing delivery delays). The number of subscribers to its online workout classes almost doubled in the first quarter – as has its share price since mid-March. * SO WHAT? * I have always maintained that I think Peloton is a bit ridiculous due to having to stump up $2,000 for a bike that you can only use indoors and that you still have to pay something like $40 a month to have access to online classes. I use my own bike (which I can also use outdoors) on an old turbo trainer (I used to be into doing triathlons many moons ago!) connected to Zwift (about £12 per month). HOWEVER, given that social distancing is likely to continue for the foreseeable, that gyms may be closed and that people may feel uneasy about sweating in close proximity to others for a while yet, Peloton may well continue to benefit.

And in the losers’ corner today, Uber, Lyft cut costs as fewer people take rides amid coronavirus pandemic (Wall Street Journal, Tim Higgins and Parmy Olson) shows that the two ride-sharers are bracing themselves for fewer passengers and cutting 14% and 17% of their respective workforces as a result. Uber’s CEO, Dara Khosrowshahi, hinted in a memo to workers that there may be more cuts to come as the company advanced efforts to “adjust the company’s cost structure” (i.e. sack people). * SO WHAT? * Given what’s been happening, you can understand why these cuts are being made. Mind you, I do wonder whether some workers would prefer to get an Uber rather than sweat the commute on a bike or ride with other people on public transport. Anyway, it’s interesting to note that this announcement came not long after California announced plans to sue both companies for misclassifying their drivers as contractors rather than employees. The beef here is that if they are classified as employees, the companies will be forced to pay more in the form of benefits etc. which will eat away at their profitability.

Meanwhile, things are looking decidedly difficult in the world of casinos in MGM Resorts warns 63,000 workers of possible layoffs (Wall Street Journal, Katherine Sayre) highlights a gloomy message to the company’s employees due to the impact of travel restrictions and Wynn Resorts details coronavirus damage (Wall Street Journal, Katherine Sayre) shows that it is not alone as it announced a big net loss and huge revenue decline in the first quarter.

I was quite surprised to see Costco’s sales fall for the first time in over a decade (Wall Street Journal, Sarah Nassauer) as lockdown restrictions hit customer traffic, taking its sales down to levels not seen since July 2009. * SO WHAT? * Grocery retailers such as Costco, Walmart and Target all saw a big spike in sales at the beginning of the outbreak but then their costs increased as they had to employ more staff keep up with frenzied demand as well as to cover those who were ill. Some Costco stores are returning to normal hours as more states relax restrictions.

Back in the UK, Five more Debenhams stores to shut for good with 1,000 jobs at risk (The Guardian, Joanna Partridge and Sarah Butler) shows further suffering in department stores and ITV advertising revenues slide 42 per cent in April (Daily Telegraph, Chris Johnston) just puts a number to what I was saying on Monday as the company has born the brunt of massive cuts in advertising budgets by clients who are trying to conserve cash to survive.



VW sees a sales uptick, JD Sports has a huff and the meat sweats continue in America…

VW hails speed of car sales recovery in China (Financial Times, Joe Miller) highlights something that goes against what many car manufacturers have been saying as the company says that demand for cars in China is almost as high as it was this time last year, signalling a roaring comeback in an important market. It added that it expected its China business to recover to the same monthly levels as it did in 2019. However, the company did point out that this is largely helped by the high number of first-time buyers – which is different to most other regions. Its general outlook, however, remains uncertain.

JD Sports attacks regulator for blocking Footasylum merger (The Guardian, Sarah Butler) is now blaming the UK’s competition watchdog for putting jobs at risk as it torpedoed the merger between JD Sports and Footasylum. JD Sports – which also owns Blacks, Go Outdoors, Millets – is considering an appeal.

Regular readers of Watson’s Daily will know that I have been banging on about the American meat shortages – well A smart guide to the US meat shortage (Wall Street Journal, Jaewon Kand and Jacob Bunge) does a great job of summarising the story so far. The conclusion is that it is likely to get worse over the coming weeks as more processing factories shut down because their staff are getting ill. I would imagine that chopping up animal carcasses day-in-day-out is not a job that is easy to recruit for…more good news perhaps for the plant-based protein alternatives like Beyond Meat etc.?



And finally, in other news…

“Alternative” stories were a bit thin on the ground today, so I thought I would leave you with something that made me laugh so hard I genuinely almost fell off my chair when I first saw it. For those of you who don’t like swear words, I warn you that there is one at the end of this video. You can see what’s going to happen, but the reaction is priceless…

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Some of today’s market, commodity & currency moves (as at 0734hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
5,854 (+0.07%)8,80910,606 (-1.15%)4,432 (-0.98%)19,675 (+0.28%)2,872 (-0.23%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)