Simon Johnson is in charge of Mid and Small Cap Consumer Services research at UBS Warburg. His team's corporate client base encompasses groups such as Jarvis Hotels, First Choice Holidays, Greggs and Carpetright. He recently joined UBS Warburg from CSFB where he headed up the Leisure & Hotels research team.
The quoted leisure sector is very much a UK phenomenon . With a highly fragmented industry base, a wide variety of leisure outlets, concepts and an element of fashion retailing , specific company analysis is critical. There are, however, some very clear investment guidelines.
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Be aware of the economic cycle.
While spending on eating out, health, fitness and other leisure pursuits is undoubtedly in long- term secular increase, it is also highly discretionary and one of the first to go in an economic downturn. Cut holdings as the economy falters and do not buy until you are confident of recovery. Some bottom-end operators may benefit from 'trading down', but generally people 'trade out' until better times return.
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Look for a replicable concept.
Better a concept that has had 50 previous successful openings than one that has to be re-invented every time. Not only is this cheaper (design costs spread out over a larger base), but it also reduces risk. Managers of the most replicated and successful concepts can tell within days if a new location is working, and if it isn't, can do something about it quickly.
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Be aware of fashion.
Leisure is a fashion retail business. The supertanker concept of today may be marooned by next week. As a result, paybacks need to be quicker the higher up the design curve a unit is. Most preferable is a 'timeless' concept that can be refreshed rather than needing remodelling.
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Be aware of the costs of refurbishment.
As leisure tastes evolve , so do amenity requirements and these cost more to include than a simple refurbishment of the existing site. London's Waldorf Hotel was considered a luxury hotel when it opened because it had 1 bathroom for every 4 bedrooms. If it had been maintained over the years only to its original standard it would now be a Youth Hostel!
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Allow for the property element.
Returns in the industry are notoriously difficult to calculate, as a valid part of the calculation is the asset appreciation of many freehold businesses. This is particularly true of the longer living elements such as hotels and pubs. If such businesses give good returns before capital appreciation , then so much the better. Rising property values then come free!
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Look out for legislative step-changes.
Leisure is regulated by a whole swathe of legislation. Occasionally, legislative changes throw up huge new opportunities. The Beer Orders in 1991 changed the landscape of UK pubs forever, and the implementation of many of the recommendations in the Budd Report on Gaming and Gambling in 2001 could have similar impacts for casinos, betting shops and bingo clubs. However, make sure such recommendations are going to be implemented!
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Buy on consolidation, sell on disaggregation.
Leisure companies in the 1980s and early 1990s paid up for leisure concepts and businesses when conglomerates were seen as the way forward. The same groups had to write down the value of those businesses when they came to sell them in the late 1990s.
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Be wary of claims of 'synergy benefits'.
Leisure remains a single site concept, with high personnel costs attached to each unit. Central structures and raw materials make up a relatively small part of the overall costs and therefore claims of synergies between units should be viewed with a degree of scepticism.
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Trust your eyes and instincts .
Do you like a concept? Do you tell your friends about it? Could every town support one? If so, it might be worth further investigation. Look also for spin-off benefits or problems. If there are no good movies on at the cinema, it will not only be the cinema that is suffering, but also the bar and restaurant chains next door.
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Listen to the story with a critical mindset.
If it sounds too good to be true, it almost certainly is. Few people manage to reinvent the leisure wheel!
