retail

Sainsbury's is playing the long game by surrendering rates relief


Sainsbury’s Christmas trading update was a demonstration of why the boards of all the big supermarket chains were obliged to come to their senses last month and concede that, yes, all that relief on business rates had to go back to the Treasury.

After surrendering relief worth £410m this financial year, Sainsbury’s expects to achieve pre-tax profits of £330m, an uncomfortable year-on-year decline of 44% from the previous £586m. But consider the alternative: if it had kept the money, Sainsbury’s would now be forecasting profits this year of £740m, a year-on-year increase of 26%, which would have guaranteed endless publicity about profiting from a pandemic.

That reputational gamble was never worth taking, especially when you are also in the business of lobbying government for permanent reform of the outdated rates system. The case for change was strong before Covid: the playing field, in the standard imagery, is tilted too far in favour of the online brigade. After Covid, the argument ought to be overwhelming. Just wait to see the boost to sales and profits that tax-shy Amazon will have enjoyed in the UK in 2020.

A fairer system would whack up rates on warehouses (by 30% and 50%, Next’s chief executive, Simon Wolfson, has suggested) to fund reductions for shops and give battered high streets a lift. Such a move would merely reflect market reality – warehouses have soared in value since the last rates rejig; shops haven’t. The overall tax take from an evened-up system could even emerge roughly neutral.

By playing fairly on relief (albeit only after some prodding), the supermarkets may have done themselves a favour in the long term. The need for a fundamental rewrite of the perverse business rates system is now crystal clear.

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The hospitality industry is crying out for clarity

It’s a surprise that Mitchells & Butlers, the UK’s largest pubs company and one lumbered with the usual cellar-load of debt, has got this far into the pandemic without having to tap shareholders for extra cash. But the inevitable can no longer be delayed.

Sales fell by two-thirds in the last quarter and, even in the weeks that pubs were allowed to open, trade ran at 30% below normal levels. The staff are mainly furloughed again but bills for insurance and suchlike still arrive. M&B calculates it is burning cash at the rate of £35-40m a month during lockdown. Then there’s £50m a quarter that goes on servicing borrowings of £1.5bn.

With cash balances standing at only £125m, and the next debt payment due in mid-March, the need for fresh equity – as opposed to yet more borrowings – is blindingly obvious. The open question is how much to raise. The board hasn’t yet decided the price of prudence but the sum will surely have to be at least enough to finance another quarter of lockdown plus a bit on top – so £200m, say.

That represents about a fifth of M&B’s shrunken stock market value, so should be doable with ease. It also helps, of course, that the share register is dominated by billionaires. Joe Lewis, owner of Tottenham Hotspur, has 23%, and Irish horse racing duo JP McManus and John Magnier jointly hold 27%. M&B’s crisis can be managed.

Spare a thought, though, for independent publicans without M&B’s size or access to capital. The entire hospitality industry is crying out for clarity from the chancellor on whether the furlough scheme will be extended beyond April if necessary and if relief on business rates (for a sector that deserves it) will run beyond March. As argued here earlier this week, Rishi Sunak needs to decide – and quickly.

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Tesla’s share price surge is far too much, too soon

We gasped when Tesla became worth $500bn last autumn, boosted by a crowd-pleasing five-for-one stock split. Now, just a few months later, and with entry into the S&P 500 index in the bag, the company is worth $750bn and Elon Musk, its pioneering founder and 21% shareholder, is the world’s richest person on paper.

Tesla is a genuinely important company – there’s no longer any doubt on that score – and its technological lead in electric vehicles may survive for a long time and eventually also deliver success in battery storage. But a sevenfold increase in the share price in 2020 is inexplicable. It’s far too much, too soon, and seems to assume decades of sales growth has already happened.

Tesla’s astonishing share price is also exhibit A in the bears’ argument that parts of the US stock market are in the grip of a mania. Their case is getting stronger.



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