Whitbread to ‘Zip’ onward despite demand instability
 
Whitbread to ‘Zip’ onward despite demand instability
23 OCTOBER 2018 8:17 AM

Whitbread PLC executives see good runway ahead in both the U.K. and Germany, despite some weakening of weekend demand. Also fueling optimism is the company’s launch of its “super-budget” brand Zip by Premier Inn, and its pending sale of Costa Coffee.

DUNSTABLE, England—Despite a dip in weekend leisure business, executives of Whitbread PLC—parent company of Premier Inn—are confident the company will meet full-year expectations.

Top executives said the proposed sale announced on 31 August of the company’s Costa Coffee division to Coca-Cola in a deal worth £3.9 billion ($5.1 billion); and a new brand, Zip by Premier Inn, announced Monday, are further indications of the British company’s health.

“The highlight of the year was the agreement to sell Costa … for a sum that is 15.4 times (the) multiple of (earnings before interest, tax, depreciation and amortization). Costa is now being treated as a discontinued business,” said CEO Alison Brittain during a presentation of the firm’s half-year 2018 earnings.

Brittain also shared a few details about Zip, calling it a “super-budget, no-frills brand serving a customer who does not stay at a Premier Inn or any other branded hotel.”

Zip’s only announced property is a 138-room asset in the Roath district of Cardiff, Wales, which will open in early 2019. A news release stated rates would begin at £19 ($24.71), and Brittain said pre-opening sales would begin soon.

Brittain said another Zip property will soon be signed, and that the brand will focus on city suburbs, not central locations.

The remarks were made during a conference call to announce Whitbread’s interim 2018 earnings and performance, which were led by stating shareholders on 4 October had approved the sale of Costa.

The deal with Coca-Cola still needs to be approved by European Union and Chinese competition market authorities, but Brittain said she expects them to sign off in the first quarter of 2019.

Nicholas Cadbury, group finance director, reiterated that the “majority (of proceeds) will be returned to shareholders.”

The sale marks a new era for the company, which was founded in 1742 as a brewing company. Now with the sale of its Costa Coffee division, Whitbread finds itself outside of the beverage business for the first time in its 276 years.

Brittain said 2018 had been a “momentous year for Whitbread … (and it) will become a focused hotel business,” but that the board has not talked about changing the company’s name to reflect its new status.

“We’ve no wish to change. We’re rather fond of it after 276 years,” Brittain said.

Committed to growth
Although Brittain and Cadbury said the majority of proceeds from the Costa sale will be returned to shareholders, the company still has plenty of capital runway to grow its estate, notably in the U.K. and increasingly in Germany.

Its U.K. network of rooms, mostly in Premier Inn, has increased to more than 74,000 rooms, with a committed pipeline of more than 13,000 rooms. In Germany, Brittain said the plan was for approximately 6,000 rooms to be delivered by 2021.

“Our solid financial performance is supported by tight cost controls and maintaining a strong return on capital. We are on plan to deliver full-year results from continuing operations,” Brittain said. “Whitbread remains highly cash-generative. In the U.K. there is still runway for growth. Occupancy remains at around 80%.”

Whitbread’s third brand, Hub by Premier Inn, is a tech- and design-focused brand, which Brittain called the company’s first real innovation.

“It’s been around for the best part of three years, but it caters to a slightly different subsection of the market. (Hubs) are very much about the location, super locations by nature in London and Edinburgh and thus they have high asset prices,” Brittain said.

Cadbury said there were 10 Hub hotels open, including two so far this year—one each in London and Edinburgh.

“Five or six are coming in the pipeline,” Cadbury said.

Headwinds
Cadbury said currently there were signs of weekend weakness, underscored by weaker consumer demand.

“Weekends have been a little softer. The (U.K.) consumer is being a little more cautious. If you read the papers, you will see how they feel at the moment. Filling your car at the petrol pump is a little more expensive, so they are being more cautious than they were a year ago,” said Cadbury, who would not be drawn into speculating as to whether the upcoming Brexit is a factor in this.

Brittain also warned not to read too much into the numbers.

“In the first half of the year, London was a little weaker, but it has come through strongly,” she said. “The opposite happened in the regions, so I would not make huge predictions on the back of singular occurrences. Even in softness, we take great comfort from our strong occupancy.”

Cadbury said approximately 4,000 rooms were opened in London in the last three years.

Two new hotels are to open in Germany soon, in Frankfurt and Hamburg.

Brittain said the goal in Germany was for 6,000 rooms in 35 hotels.

“That would make us a major player with a set of head-office functions,” she said. “We’ve no plans to invest anywhere else, but we will always look at new markets. To have a dozen cities with two or more properties in Germany will provide a much easier position in which to broaden out from.”

The firm is nudging toward the 100,000-room mark, but both Brittain and Cadbury said there was no mania to sprint toward that number.

“More important is to make sure market conditions and returns profiles are right … but we do expect significant growth over the two territories. In the U.K. another focus is looking at format extensions,” Brittain said.

Increasing costs still present a major challenge, Cadbury said.

Business rates have risen in the last two years as they have for everybody else, Brittain said.

“(Rates do) impact the hotel business, and we are working hard to offset these costs,” she said. “It has dominated talk. Any relief would be welcome.”

In the firm’s half-year earnings results, revenue increased 2.6% to £1.08 billion ($1.4 billion), while total U.K. accommodation sales growth rose 4.8%. Like-for-like accommodations sales grew only by 0.2%, due to those signs of weekend weakness, according to Cadbury.

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