Monday 13/06/22

1. In MACRO, MARKETS AND ENERGY-RELATED NEWS, US recession next year appears likely, flotations tank while more M&A is expected in Japan and we look at the food as energy debate
2. In CONSUMER/RETAIL-RELATED NEWS, fuel prices hit $5 a gallon in the US, food prices continue to rise, Morrisons’ owner looks to sell off assets, UK supermarkets crack down on unhealthy food temptation and online car sales wobble
3. In EMPLOYMENT TRENDS, railway workers rush to quit and poor conditions persist in Leicester factories
4. In MISCELLANEOUS TRENDS, Russia’s McDonald’s replacement opens for business and Sunak faces more pressure
5. AND FINALLY, I bring you an amazing Harry Potter café…

So the US faces tough times, flotations flounder, Japan is likely to see more M&A and we look at the debate on food vs fuel…

US set for recession next year, economists predict (Financial Times, Colby Smith and Caitlin Gilbert) shows that almost 70% of leading economists surveyed by the FT reckon that the US will experience recession next year. The Federal Open Markets Committee (FOMC), which decides interest rates, is to meet again tomorrow for two days and it seems likely that they could hike interest rates by 0.5% again – the first time it will do so twice in succession since 1994. The trick here is to raise rates enough now to take out the heat of inflation which will limit the level interest rates will need to rise to versus if they are raised more gradually.

In markets, Boom turns to bust on float bandwagon (The Times, Ashley Armstrong) shines a light on the performance of ten consumer flotations that occurred last year and how they have performed since. Deliveroo has been the biggest nightmare as it is now worth only £1bn versus its £7bn flotation valuation but Made.com, musicMagpie, InTheStyle, Victorian Plumbing, Moonpig, Dr Martens, ProCook, Parsley Box and Revolution Beauty have all tanked badly. In fact, ProCook’s share price fell by over a third on Friday after it slashed its profit forecasts on weak sales. How different everything is now when you consider that, last year, London raised more equity capital for newly floated businesses since 2007. * SO WHAT? * This kind of thing does nothing for sentiment and it means that potential candidates – including Mischon de Reya (law firm) and Olam (commodities trader) – are shying away from listing, opting instead to wait for better conditions. This has already hit investment banking revenues, as it is a massive earner for them, and it looks likely to persist. I would expect any parties involved in M&A advisory to increase redundancies, or at least repurpose staff.

Then in Nomura chief executive predicts weak yen will kick off foreign M&A wave (Financial Times, Leo Lewis) we see that Yen weakness (it’s now at its lowest rate for 20 years) is going to make buying Japanese assets very attractive for foreign investors who can take advantage of this as they are effectively 20% cheaper than they were last year. Of particular note will be Asia-focused funds, particularly private equity, who may shift away from an increasingly tricky China to Japan as the more liquid, accessible option. This is also likely to be fuelled by a large number of mid-sized owner-run listed Japanese companies that have succession uncertainties looking ripe for takeover action. * SO WHAT? * It’ll be interesting to see how this unfolds and whether Japanese companies start to adopt “poison pill” takeover defences in order to protect themselves. I’ve seen this happen before in Japan but there’s a chance this won’t be AS prevalent now given the macro situation and improved openness to overseas investors, although maybe Japanese companies will band together and indulge in domestic consolidation rather than let the foreigners in.

Then in Food vs fuel: Ukraine war sharpens debate on use of crops for energy (Financial Times, Emiko Terazono and Camilla Hodgson) we see that rising food prices have meant that biofuel producers are facing difficulties because previously plentiful things like corn are now more rare thanks to the Ukraine war. They are now being prioritised for food use rather than fuel-use as food companies and policymakers are asking for an easing of mandates that dictate levels of blending biofuels into petrol and diesel. Fun fact: the US is the world’s leading biofuels producers, soaking up 36% of corn production and 40% of soyabean oil supplies. Fun fact 2: Russia and Ukraine produced almost 20% of the world’s corn and over 50% of its sunflower oil. * SO WHAT? * Clearly, crops need to be prioritised as food in current circumstances but this serves to underline the need to diversify supply sources for the long term rather than rely on fewer suppliers at a lower cost.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Fuel prices rise, food prices rise, Morrisons’ new owner starts to sell off assets, UK supermarkets review unhealthy food and online car sales drift…

Petrol prices in US hit $5 a gallon as inflation picks up (Financial Times, Colby Smith and Derek Brower) shows that pump prices in America have hit their highest ever level, putting further pressure on inflation. US petrol prices have now risen by over two-thirds over the last year and almost doubled since Joe Biden took office. * SO WHAT? * Americans have always been used to cheap fuel (which is probably why gas-guzzlers are so popular over there) and even though they are whinging about the latest prices, they are the equivalent of £1.07 a litre, which is waaaaaay less than we are paying currently (about £1.83 per litre, according to the RAC).

Then in Food prices to keep going up, as costs surge (Wall Street Journal, Jaewon Kang and Annie Gasparro) we see that companies like Kraft Heinz and some McDonald’s franchisees have said that they will continue to raise prices as they face higher costs. Official Labor Department figures show that grocery prices rose by 11.9% in May over the last year with prices at eateries outside the home rising by 7.4% over the same period. Pressures on household finances in the US are continuing to tighten as producers pass on rising costs, but the same is also happening over here.

In retail news, Morrisons plots sale of food production arm as costs bite (Daily Telegraph, Matt Oliver) shows that the private equity owner of Morrisons – Clayton, Dubilier & Rice (CD&R) – having just had its takeover for the supermarket approved, is planning to sell properties that have been used by its food production division. This includes warehouses, factories and fisheries that would be sold and then leased

back and could be worth over £600m. * SO WHAT? * CD&R paid through the nose for Morrisons and, given current circumstances, doing a bit of sale and lease-back makes a lot of sense in terms of releasing cash. However, it is also losing market share according to the latest figures from Kantar – it has gone down from 10% a year ago to 9.5% due to Aldi and Lidl snapping at its heels. The sale of properties was always going to be a danger of the deal because the fact that Morrisons owns most of its real estate portfolio was highly attractive to buyers of the business and macro circumstances will give CD&R the perfect excuse to sell off the assets.

Staying on the subject of supermarkets, UK supermarkets prepare to move unhealthy foods out of temptation’s way (Financial Times, Jonathan Eley) highlights that, by the start of October, all stores in England that are run by companies that have over 50 people and take up over 2,000 sq ft will not be allowed to use prominent locations within stores to push products that are high in fat, sugar or salt. * SO WHAT? * This sounds very worthy, but on the other hand I would have thought that confectionary in particular will stand to lose out in terms of sales. It does make me wonder whether there will be a sort of naughty area in supermarkets where people can gather together to feel guilty about buying a Bounty and fantasise about crisps or something 🤣.

Then in Is the online car sales revolution running out of road (The Guardian, Jasper Jolly) we see an interesting discussion about the cooling off of online car sales as Cazoo in particular is running out of puff. I mentioned its decision to cut staff last week and it seems that US rival Carvana is also having a hard time as it announced its own job cuts. * SO WHAT? * As things stand, it looks like shiny salespeople at car dealerships will not become extinct due to the online onslaught, particularly as the rise of electric vehicles gains hold because I think more buyers will need help in making purchases.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

Railway staff seem keen to leave and poor conditions persist in Leicester factories…

Rail workers rush to quit despite union claims on cuts (Daily Telegraph, Oliver Gill) is an interesting one as we head towards a summer of railway strikes as it turns out that a voluntary redundancy scheme for railway workers fielded 5,000 applications, double the number of places available. This makes the Rail, Maritime and Transport Workers union (RMT) action on taking an aggressive stance on strikes look somewhat weaker although they argue that this scheme was only made available for managers. As things stand, the strikes will happen on June 21st, 23rd and 25th when 40-50,000 RMT members will walk out. * SO WHAT? * At this moment in time, power is with the workers, but that’s not always going to last…

I thought it was also worth mentioning Poor working conditions persist in Leicester garment factories, finds survey (The Guardian, Sarah Butler) as I was wondering the other day what had happened to those workers who were paid below minimum wage at one of Boohoo’s suppliers’ factories not so long ago. Well it turns out: not much. A new study shows that over 50% of Leicester’s garment workers said that they were paid below minimum wage and get no holiday pay. Many of the respondents feared that they would lose their jobs if they spoke out about conditions. * SO WHAT? * I know this is cynical, but I just don’t think that consumers ACTUALLY care that much about conditions of the workers who make all these clothes so cheaply. As finances get squeezed I think that bargains will prevail over human rights, but then again such is life if you don’t have the money to splash out higher sums on more ethically sourced products.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

A new fast-food joint rises like a phoenix out of the McDonald’s flames and Sunak faces a ton of pressure…

In a quick scoot around other interesting stories today, McDonald’s in Russia reopens under new ownership (Wall Street Journal, Ann Simmons, Yuliya Chernova and Heather Haddon) shows that some of the McDonald’s branches in Russia that were abandoned after Russia’s invasion of Ukraine are now rising from the ashes under new management. The new place, called Vkusno & tochka, will keep pretty much the same menu, staff and standards. * SO WHAT? * This sounds pretty interesting but it will be interesting to see how it does longer-term as it seems to

me everything is the same as before, just rebranded (and cheaper, by the sounds of things). Note: McDonald’s retains the right to buy its Russian restaurants back within 15 years. 

Then in Big business warns Sunak to get a grip on tax before recession hits (Daily Telegraph, Tim Wallace) we see that chancellor Sunak is facing calls from the Confederation of British Industry to cut business taxes now before recession kicks in properly. The main concern, from businesses’ perspective, is that promises by Sunak to unveil a set of measures in the autumn could be too little too late and pressure is increasing to get him to do something now. Will he cave??

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

…in other news…

You know I like a Japanese themed café as much as the next man, but I think that this one is particularly special: Harry Potter Cafe opening in Tokyo and the menu is nothing short of spellbinding (SoraNews24, Katie Pask). The detail on display is absolutely off the scale!!!