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Thu 18th Jan 2018 - Whitbread: Break-ups, pricing, refurbishments and restaurant concepts
Chief executive Alison Brittain provides further insight into Whitbread’s strategy following third-quarter results:

Break-up speculation: Brittain said: “We have open and regular discussions with our shareholders, the contents of which will remain confidential. We remain entirely open-minded about the structure of the business and are fully committed to reviewing it on a regular basis at board level. We are always looking at ways we can increase shareholder value in the medium and long term and are always open to discussing how best we can achieve that. We are halfway through a transformation project in Costa that will deliver better shareholder value and we don’t want management to deviate or be distracted from that.”

Costa ROI and refurbishment: Brittain said Costa’s new openings were generating a return on investment of about 45% compared with 35% five years ago as Whitbread pursued its strategy of locating the brand in high-footfall areas. She added: “We are using our short-lease options to churn any high-street sites where we think we have a negative position.” Brittain said the churn was very low and while like-for-like performance had fallen by 1.5% in the third-quarter at its UK equity stores, they were still profitable sites. She added: “Being in more convenient locations means we can put more cups of coffee in the hands of more customers in the UK, which drives loyalty.” A two to three-year Costa refurbishment programme is about to start that will include a new store format “we think we like the look of better”. The Costa Club loyalty app, launched in November, now has 1.2 million active users.

Costa pricing: Brittain said: “We continue to look at pricing in a competitive context and it’s never the first lever we pull. As a management team we’re focused on being as efficient as possible. We have to try to make the business work harder for every pound of revenue we gain. We still have options. We are cheaper than Starbucks and Caffe Nero but more expensive than the value end such as McDonald’s and Greggs. We sit in the middle and we’re comfortable with that. We have the option but at the moment we are in a difficult economic environment and convenience and value are key things for consumers. We want to do some more interesting things around food pricing such as bundle offers for breakfast and lunch.”

Costa Express: Brittain said: “Convenience is such an important thing. We are increasing our market share by providing machines in more convenient locations.” The company has added more than 1,000 net new machines during the past nine months. Brittain said there were significant opportunities in Costa Express to build a business of scale with strong return on capital and it is expected investment would increase over the next year to achieve that. She added: “In a growing market, there’s still a long way to go.”

Restaurants working for Premier Inn: Brittain said: “We’ve done a lot of work this year on menus and improving footfall. We are not strategically opening standalone restaurants. When establishing a new hotel we’re now thinking what food and beverage offer is best for the hotel and looking at our restaurants as ancillary income. That’s why we now have one managing director for Premier Inn and restaurants because they are working hand in hand. When we carried out refurbishments before we tended to do the hotel or restaurant separately, which was also quite expensive. Now they are being thought of as one project.” Brittain added there had been no price rises at its restaurants this year with “value at the forefront of what we have done”.

New restaurant concept on the way?: Brittain revealed the company had been conducting a trial in a “few places” that would lead to the launch of a new menu and concept. She said: “We have been testing concepts that will allow us to further slim down the number of brands we have and make sure our food offer is current and in line with fast-casual experiences.”

Premier Inn: Brittain said occupancy levels remained at more than 85%, with market weakness in London partly driven by the relatively high level of recent new capacity, which was expected to moderate in the year ahead. Almost 5,000 rooms had been added during the past 12 months, with 3,200 rooms opened year-to-date. Room openings in the current year have been significantly more weighted towards the first nine months compared with prior years, which were fourth-quarter weighted. This timing of room openings had a temporary effect on like-for-like performance, although new capacity is “expected to mature over the next few years”. Britain added the company was confident it could increase capacity to 85,000 rooms by 2020, with the remaining 13,700 rooms now secured through a mix of extending existing hotels, new freehold developments and new leasehold hotels.

International: Premier Inn has added a site in Dortmund to its German pipeline, which will take it to ten sites. In the year ahead, hotels will open in Munich, Leipzig and Hamburg, comprising 550 rooms. Work continues to accelerate this pipeline through a mixture of freehold and leasehold development, as well as exploring small acquisition opportunities. The international Costa business is now operating in 31 countries. Total sales growth moderated in the third quarter due to the closure of the equity-owned business in France together with the closure of underperforming stores in China. Following enhancements to the management team and a refocus of strategy, Brittain said Costa China had continued to perform well with total revenue growth of 5.3% year-to-date.

Making savings: Brittain said: “Our cost-efficiency programme has good momentum. We started making savings before we had challenging increases in headwinds such as business rates and the National Living Wage. We are very confident about our cost-efficiency plan to save £150m over five years.” The company said there had been a £70m to £80m increase this year in cost headwinds.

Looking ahead: Brittain said: “We expect the tough UK high-street environment and inflation in our sector to continue to pose challenges in the year ahead. However, we have good momentum in the delivery of our plan to enhance our UK market leadership positions, create an international business of scale in Germany and China, build our Costa Express business, and develop a more efficient infrastructure. This will create further customer loyalty and deliver long-term growth in earnings and dividends and a strong return on capital.”

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