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Morning Briefing for pub, restaurant and food wervice operators

Wed 25th Apr 2018 - Whitbread: Costa demerger, pricing flexibility, food development, expansion
Chief executive Alison Brittain and finance director Nicholas Carbury provide further insight into Whitbread’s full-year results:

Costa demerger details: Brittain said the demerger process would run parallel with the company’s continuing transformation plan. She added it was not envisaged Whitbread would keep a stake in Costa. Brittain said: “Whitbread is in the enviable position of having two high-quality businesses in Premier Inn and Costa that are leaders in their market. We have made enormous progress in the delivery of our UK strategy for both businesses. We have said at the right point in time a separation would enhance focus and optimise value – we believe that time is now. We are even more confident in our plans and will complete the demerger as quickly as appropriate. This opportunity has been talked about for a long time and we have been building the foundations so the businesses can be fantastic in their own right. Costa will become a listed entity in its own right and Whitbread will remain the owner and operator of Premier Inn. It will take a while but we are comfortable with the time-frame. I don’t know of any companies to have gone down a similar path that have been able to do it any quicker, certainly not in the space of a year. There is a lot of work to be done. For example, we have to separate procurement and IT systems, and appoint a management team and board, which will all be done over the next two years.” Brittain said she expected the demerger costs to be in “tens rather than hundreds of millions” but wouldn’t say if the company had received approaches to sell Costa. She said: “We think the demerger of Costa is the best option to create value for shareholders.”

Costa ROI and refurbishment: Costa, which was voted the UK’s favourite coffee shop for an eighth year in a row, is generating a strong return on capital of 46%, which is “ahead of guidance”. Brittain said the company was in the middle of its investment phase and hadn’t carried out as many refurbishments as planned in the past year because it had been working on a new store format. She added: “We will make up for it this year. It’s like the Forth Road Bridge – you have to keep repainting it to keep it fresh.” The average lease term is ten years with a five-year break clause. Brittain said only a small number of stores were loss-making and pointed out footfall on the high street had generally fallen between 3% and 4%. A total of 243 stores were opened during the year while 39 were closed. The company said it was optimising catchment level sales with its various formats and putting more emphasis on drive-thru sites and travel locations. Brittain cited Banbury in Oxfordshire, where the company has 15 sites including Express locations, where it had almost doubled sales from £1.3m to £2.4m in the past three years. The company said 60% of customers “drink in”, while a trial of click and collect was under way at 16 sites, with plans to extend that during the next year. There are now 5.3 million active Costa Club card users and the company plans to trial targeted offers to customers via direct email and through the Costa Club app.

Costa pricing: Brittain said the company hadn’t moved to increase prices as UK consumers were placing “even more importance on value”. She added: “We have options but it is not the first lever we would pull.” Brittain revealed the company had looked at offering different prices in different locations and had made the move in London. Outside the capital, there are no price variations except at franchised sites such as motorway service stations. However, the company said it had introduced new products such as coconut, where customers could purchase a coconut coffee for an extra 40p.

Costa food development: Brittain said the company was working hard to improve its food range. A lunch bundle had just been introduced consisting of a sandwich, coffee and packet of crisps for £4.95. Brittain said the early signs were “promising”. She added: “We are focusing on expanding our food range and will be looking at introducing more bundles and more premium options.” The company has seen a good uplift in savoury food capture rate following the launch of a new breakfast range in May last year. That uplift was sustained with an improved salad range in June, while further improvement followed in September with the launch of a new hot lunch range.  The company has a food capture rate of 40%.

Costa Express: In total, 1,187 net new coffee machines were added during the year with 805 partners in the UK. Internationally, there were 249 net new machines, with the format now trading in six countries. A machine generates circa £30,000. The company said there were plenty of expansion opportunities as it had only 600 machines so far in UK convenience stores, fewer than 500 in British work places and fewer than 1,000 internationally. Brittain said: “There is huge potential for growth in the UK and internationally.”

Premier Inn in UK: Premier Inn now has 72,466 rooms in the UK and is producing a return on capital of 13.4%. It has line-of-sight of more than 100,000 hotel rooms. Its London hotels saw sales growth of 9.1%, while sale revenue at regional sites was up 6.6% as Premier Inn continued to gain market share. The company plans to open 4,000 to 4,500 rooms in the UK and Germany in the next financial year. Premier Inn has a committed pipeline of 14,750 rooms up to 2020. Of that pipeline, 70% of new hotels will be in areas where the brand has no or little presence. In terms of bookings, 97% are made through its own channels while it has an occupancy rate of 79.3%. Premier Inn has reduced its room refurbishment cost by a third but has still enhanced guest scores with its YouGov brand index score for quality second only to Hilton, while it came top in terms of value score. A total of 87% of its rooms are now in the latest format. Premier Inn has an average TripAdvisor score of 4.2. During the past three years it has opened 13,842 rooms – more than Travelodge (3,454 rooms), Holiday Inn Express (1,392 rooms) and Ibis (562 rooms) combined.

Costa in China: Whitbread acquired a 49% stake of its joint-venture partner in China for £35m, enabling it to have full control of operations and estate. The company opened 79 Costa sites during the year while it closed 39. It is negotiating with more franchise partners as it looks to accelerate expansion. Brittain said Costa was breaking even in China in terms of revenue but pointed out it was investing in new sites, which was leading to an overall loss. She added Costa generated about £25m internationally with half of that coming from China. The company will prioritise expansion in transport locations and shopping centres and continue to churn non-core city stores. It now plans to have 1,200 stores by 2022.

Premier Inn in Germany: The company currently has one hotel open and trading but is in the process of acquiring 13 sites. With its committed pipeline, the company will have 31 hotels in 15 cities. Three Premier Inn sites will open in Germany in the new financial year – in Munich (216 rooms), Hamburg (182 rooms) and Leipzig (182 rooms). Brittain said: “Bookings are being made directly rather than online travel agencies (OTAs). We can always move to OTAs if that doesn’t work – we can’t start by using OTAs and wean ourselves off unless we have a well-known brand, which we don’t yet. We’re trying to build one. Once you have a presence of 30 hotels in 15 cities you can start having a relationship with corporate companies – you can’t expect them to use you regularly if you only have a couple of sites in a handful of cities. Carbury said the company was confident its Premier Inn estate in Germany would generate a similar return on capital to that of the UK in the long term. Its target cities include Bremen, Bonn and Hanover.

Investment: Whitbread invested £118m in its existing Premier Inn sites during the year, down from £148m the previous year, while it invested £41m in its Costa outlets, dropping from £58m the year before. The company invested £227m in new hotels as well as extending its existing sites compared with £303m the previous year. It spent £47m on new Costa sites compared with 341m the year before.  

Making further savings: Whitbread plans to deliver a further £100m of efficiency savings during the next two years to offset inflationary pressures – a total of £250m. Of the £100m, £70m is planned over the next year – £50m in Premier Inn and £20m in Costa. Brittain said the company’s supply chain savings had been “bubbling away” and were starting to deliver.  

Property: Whitbread has added 1,700 freehold rooms to its pipeline along with 2,900 leasehold rooms. It has 110 Costa drive-thru sites in the pipeline. Whitbread said its strong covenant, flexible funding options and proven value creation gave it a significant competitive advantage when it came to securing sites.

Technology: Whitbread has completed 15 projects, including its new business booking platform for Premier Inn and putting a new till system in place for Costa, which will allow it to expand its click-and-collect facility. Another 17 projects are under way, which includes the roll-out of click and collect for Costa and new HR systems across the group.

Looking ahead: Brittain said: “We have two high-quality businesses with scale. We are focused on continuing to grow alongside working on the demerger of Costa, which we will continue to provide updates on.”

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