Solid results suggest consumer confidence is bouncing back. Meanwhile, events at W&O spell the end for the ‘aggregation’ model
Crisis? What crisis? Over the last few weeks more than a few City analysts have been working themselves up about the supposed collapse in consumer confidence and the threat of a double dip in the UK economy.
The conventional narrative is that consumers know that big government spending cuts are looming and are also reeling from the effects of much higher than expected consumer price inflation. Cue weak discretionary consumer spending numbers and a bloodbath on the high street.
Clearly there are some very obvious pricing constraints – the retail sector will probably be grappling with massive overcapacity for at least one or two years hence – but the reality for travel companies selling big-ticket summer holidays is looking much more positive as we head into the middle of February.
Consumers may be scrambling to spend more money in all-inclusive resorts, but last week’s very positive numbers from Thomas Cook reveal that cumulative bookings for 2011 are up 6% and that the average selling price has increased by 5% even with a planned capacity increase of only 3%.
Overall Thomas Cook seems to be chugging ahead nicely, pulled along by a very strong business in Northern Europe and some recovery in sentiment here in the UK (the company’s problem country).
There were some obvious small clouds on the horizon, most notably the cash flow numbers – according to Thomas Cook over the three months to the end of last year seasonal operating cashflow excluding the Oeger Tours deal was down to £556m from £541m, and net financing costs actually increased followed the recent debt refinancing. But the quantum of these trading numbers from Thomas Cook shows that 2011 may well surprise to the upside.
The obvious risk now is that senior management at the leading travel companies take their eye off the ball. In Tui Travel, the leadership team are obviously having to firefight their accounting issues and shareholder grumblings.
Over at Thomas Cook, Manny and his team will have to deal with the Co-op merger which looks likely to gobble up a huge amount of time for what is in reality small change in global terms. A quick perusal of the merger numbers released in the back end of 2010 should remind us why Thomas Cook needs to focus on getting the global product spot on as well as proving to investors that the group can build a successful internet operation.
The combined EBIT of this UK retail operation (boasting a total of 1,204 retail premises) will amount to a total of £13 million. Or to put it another way, on average each of those retail premises produces an EBIT of just under £11,000, compared to an average lease cost on each Co-op Travel shop of around £30,000.
Those EBIT numbers may or may not rise following the merger, but looking at the mechanics of the operation I’d be worried that the leadership team will soon become mired in operational challenges. Take the £8 million programme to rationalise stores. An astonishing 125 units in the combined estate now sit on less than one-year leases, implying a wave of closures as the management consultants start crunching the numbers.
Equally daunting perhaps are the 48 stores in the Co-op estate where the leases are over 10 years. Woe betide any Co-op store that’s loss making but sits on a 10-year-plus lease.
Clearly any rational long-term assessment of this new combined retail business needs to take into account its importance as the brand window for the group, but add up those synergies and it amounts to no more than the cost of a single crisis such as Egypt or the Ash Cloud disaster.
Farewell Western and Oriental
So much for my musings that the City had somehow missed the potential at tiny travel group W&O! Last week’s announcement of the disposal of the group’s travel business to a director for £1m should act as a wake-up call to the industry and to any outside investor.
Here was a business built up over a number of years through 12 acquisitions, turning over £32 million last year and capable of producing profits in the hundreds of thousands, if not millions.
Now that the travel division is gone for just £1m – in cash terms the deal is actually only worth £200,000 as the director had already leant W&O £800,000 to cover continuing losses.
Not many City investors followed tiny W&O but for the few that did, this must be something of a shock. Here was a company with a compelling story that until a year ago seemed to be talking itself up as a new force in travel, especially in the supposedly higher margin luxury end of the market.
Yet again external investors were being offered the ‘aggregation’ story – combine lots of smaller players into one larger entity, draw out the synergies, grow revenues and cut costs. The reality now seems very different – central costs seem to spiral out of control, scale brings with it capital financing costs (for working and regulatory capital) and the bought-in businesses take much longer to pull together than first imagined. The net effect is a cash hit which immediately makes any small group vulnerable to big external forces.
Based on the W&O experience I’d suggest that the ‘aggregation’ travel group model is now dead in the water for anyone bar the very biggest players.