In its half-year earnings report, Whitbread, owners of the Premier Inn brand, saw favorable revenue and EBITDA numbers, but RevPAR was either flat or down.
DUNSTABLE, England—Whitbread PLC, which owns hotel brands Premier Inn and Hub by Premier Inn, showed strong revenue gains during the first six months of 2016, although revenue per available room for regional United Kingdom was flat and for London down by 7.4%.
At a press conference to announce the results, Whitbread executives said RevPAR declines in the capital were due to increased supply combined with a slowdown in corporate business. Those declines, however, were mitigated by strong inbound leisure demands during summer, they said.
Many of the well-publicized headwinds in the U.K. market—Brexit, decline in the pound sterling exchange rate and increases in the minimum wage and National Living Wage (expected 1 April)—have not yet begun to show any effects, which worried some analysts.
Analysts were buoyed, though, by Premier Inn’s total sales increase of 8.9% to £271.5 million ($329 million) and improved earnings before interest, tax, depreciation and amortization across the whole company. EBITDA rose 8.8% to £433.2 million ($525 million), which “enabled (the firm) to fund capital expenditure of £329 million ($399 million).”
Alison Brittain, Whitbread’s CEO, said the company, which has most of its hotels in the U.K., had not experienced anything concrete yet in terms of an expected strengthening of headwinds.
“All we can do is to predict where things are going,” Brittain said. Whitbread CFO Nicholas Cadbury added the firm needs to maintain flexibility, but he also has seen no noticeable price changes across the hotel division.
“We are not seeing an increase right now in CapEx. … We do not make much steel in the U.K. now, but out fixed contracts are tied down,” Cadbury said.
Brittain said Whitbread has a very flexible business that benefitted from “sustainable cash flow, a very strong funding, a good balance sheet. … We’re less susceptible, for example, for gearing because we have a strong freehold backing, so there are a number of elements, I guess, that play out in our favor in whichever scenario happens next year.”
She said the hotels division bought little in dollars, but it is the coffee side of the business that will be hit by increases in commodity prices and foreign exchange movement.
Cadbury added any cost increases might come through in 2018 and 2019, and the firm’s main competition for sites in the U.K. come from office construction and use, not other hospitality concerns.
Its smaller brand, Hub by Premier Inn, currently has five hotels—four in London and one in Edinburgh, Scotland—and another 11 in its pipeline.
Brittain said the firm intends to expand in the U.K., where it already has 65,770 rooms.
In the earnings press release, Whitbread executives stated that the company opened 1,171 rooms in the first half of 2016 and expects a full-year total of approximately 3,700.
Despite the RevPAR drop in London, the firm desires to increase its foothold there, too, with a committed pipeline of approximately 6,000 rooms, and is on track to grow its London estate to approximately 18,000 to 20,000 rooms by 2020.
Total revenue for Premier Inn increased in the first six months of the year by 8.9% to approximately £699 million ($847 million), compared with the same period in 2015.
In regard to some of those headwinds blowing in increased costs, Brittain said at the conference some new hotel stock will be minutely analyzed to ascertain market viability.
“In the last few months, given the much higher thresholds, there are significantly higher hurdle rates. … we decided to up hurdle rates, but our assessment team might decide to say no to properties at the bottom end,” she said.
“We like the analogy that if you have a two-story house and want to add a third, you then have to see, well, is the boiler big enough? … do you need to shore up the foundations a little?” Brittain added.
Cadbury said it is not just the National Living Wage that will cause wage burdens to increase.
“It is not just the NLW going up, but everyone above that would have wages scaled, too,” Cadbury said. He added that government-imposed increases in business rates, set to begin 1 April, also will take a toll on operations. It is the first time in seven years the rate has increased.
With Whitbread having made the decision in July to exit India and South East Asia, the main thrust of its still very small international operations will fall on the Middle East and Germany, executives said.
“In Germany, we have an organic plan, and we are actively looking for ways to test quicker. … We would look at going to leasehold in the top five (German) cities, although going freehold would be better for other cities as it is a quicker get-out-of-jail card,” Brittain said.
She added that bolt-on growth might be achieved by adding independents or groups of independents.
That would enable a six- to nine-month opening period, as oppose to a build, where it is two to three years, she said.
Brittain also said Whitbread’s hotel division will consider online travel agency help in terms of filling its rooms in Germany. The press release stated for its hotel division’s entire portfolio around 87% of customers choose to book direct, which “gives us a tremendous competitive advantage.”
Direct distribution will be the favored route in Germany, too, but Brittain said she is “watching that and will decide whether we need to turn on any alternative channels.”