Whitbread eyes German scale as UK numbers wobble
Whitbread eyes German scale as UK numbers wobble
30 APRIL 2019 8:54 AM

Whitbread PLC, the parent firm of Premier Inn, believes it is sailing a clear course during turbulent times of Brexit uncertainty and sees Germany as a strong counterweight to economic instability in the U.K.

DUNSTABLE, England—With its second German property opening in Hamburg in February, Whitbread PLC is on a decided push to reach scale in its second major market, according to executives.

Speaking at the presentation of Whitbread’s latest earnings numbers, CEO Alison Brittain said that scale will be realized with a combination of leasehold, freeholds and acquired assets.

Growth in Germany would come as a welcome boost considering revenue in Whitbread’s main market of the United Kingdom is expected to be weaker in the 2020 calendar year. Brittain said this is due to a combination of uncertainty including Brexit and heightened competition from domestic brands such as Travelodge, international ones such as Oyo Hotels & Homes and alternative-accommodations platforms such as Airbnb.

In a news release to coincide with the numbers, Brittain said, “In the fourth quarter, (Whitbread) saw a decline in business and leisure confidence (in the U.K.), leading to weaker domestic hotel demand. This weakness has increased into March and April particularly in the regional business market.”

The company saw a 38.7% drop in full-year profit to £211 million ($274.7 million) year over year, a decline that Whitbread executives said is indicative of financial and political worries and turns in the U.K.

Whitbread’s group finance director Nicholas Cadbury said the company sees great opportunity in further moving into the space currently enjoyed by independents in the U.K., which still make up 50% of the market, he said.

Brittain said as the cycle continues, independents will increasingly struggle to survive.

She said the two open hotels in Germany are seeing 100% direct bookings, but she added for some other hotels in the German pipeline there will be selective use of online travel agencies.

In Germany, the company’s two open hotels comprise 390 rooms, but Whitbread’s pipeline has an additional 17 hotels with approximately 3,600 rooms. That organic pipeline added to acquisitions currently in negotiation will total 38 hotels with approximately 7,100 rooms.

Brittain said the return on capital employed for the German portfolio will be between 10% and 14%, which she added indicates a rapidly maturing portfolio.

Uncertain times
Whitbread is making sure it is running the right race—a marathon, not a sprint, according to Brittain.

“Originally, it was all about maintaining price, not occupancy, but that was the world before online travel agencies,” she said. “Now, our focus is on occupancy above rate. It is about loyalty.”

Year-over-year occupancy dropped 1% to 79%, although average rate increased by 0.1% to £62.91 ($81.96).

“We will target 80% occupancy, and we will be planning our marketing, distribution tools and platforms to see that loss of 1% last year come back,” Brittain said.

“We’re pretty confident it will come back,” Cadbury added.

Brittain said Whitbread is confident in its investment decision-making.

“We invest 25 to 50 years out when we put capital into one of our hotels … you will have three to four times when you see cyclicality during that period. … Investments we make today will go into the (profit-and-loss account) in three to five years’ time,” Brittain said, who added Whitbread will continue to invest throughout what remains of this current cycle.

Revenue per available room dipped 1.7% in the U.K. to £48.99 ($63.82).

Brittain said in regards to U.K. openings, the firm has continued its policy of setting up the upcoming year with sensible weighting. She added that in most years that works, but when openings are weighted more toward leaseholds, some slippage does occur.

“Last year was the biggest opening program we’ve ever had, and we have a very clear line of sight as to future openings. In Germany we’d like to accelerate, and if that is via bolt-on acquisitions that would be great,” Brittain said. “We are not seeing constraint in any way on growing in both markets, but bolt-ons are very hard to come by. You do not control them in any way.”

Cadbury said Whitbread’s brand power with Premier Inn gives it plenty of flexibility.

“And remember that 50% of the market is independent and having a far harder time than we are,” he said. “We can get caught up in the short term, but the long-term growth is very exciting.
We’re continuing to add capacity, and (the fourth quarter) is always the lowest-demand quarter. That quarter is interesting, as it was skewed to the regions. In London, we’re seeing customers holding back.”

Brittain said the firm’s chief rival, Travelodge, stepped up its game of late.

“It is doing some very interesting things with its super rooms, business rooms, executive rooms, whatever they call them, and we might look at how that is doing and how we might be able to do that, too,” Brittain said.

Whitbread also has plenty of room to expand in its home market in the U.K.

“We are still the bulk of the supply coming into the (U.K.) market,” Brittain said. “We’ve added in the last two or three years the same capacity as whole hotel groups. In planning, we do get down to postcode level. We look at forward statements to see where others are going. We do all of this at a very granular level so see what our runway is likely to be.”

The firm has approximately 76,000 rooms in the U.K., which Brittain said was approximately 30,000 more than its nearest competitor, Travelodge.

A new intended rooms count of 110,000 in the U.K. is the goal, executives said.

Bits and bobs
Whitbread looks to continue to be busy in additional endeavors in 2019.

In terms of business transactions, the news around Whitbread has been dominated by the £3.9-billion ($5.1 billion) sale of its Costa Coffee division to Coca-Cola that was completed in January.

A tender offer is to be launched in June to return up to £2 billion ($2.6 billion) of those proceeds.

Approximately £383 million ($500 million) has been spent in share buybacks, with the full total of £500 million ($652 million) expected to be completed very soon.

Other business goals include a new, £220-million ($287 million) cost-saving initiative to be realized by the end of 2022, which is above Whitbread’s previous five-year goal of £150 million ($195 million) on savings that Brittain said had been achieved in three years.

As of press time, Whitbread PLC stock was trading at £4,559 ($5,942.81) a share, up 0.2% year to date. The Baird/STR Hotel Stock Index is up 16.1% for the same period.

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