Brittain Needs to Shrink the Whitbread Empire, and Soon: Gadfly

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Brittain Needs to Shrink the Whitbread Empire, and Soon: Gadfly

Alison Brittain faces a storm in a coffee cup.

The new CEO of Whitbread is grappling with a 25 per cent decline in the bars-to-hotels conglomerate's shares over the past year and the threat of slowing sales.

Brittain can't be blamed. She only took over from Andy Harrison in December. But she needs to take action - and before the share price slips further.

Exploring a sale of Whitbread's Costa coffee, and Premier Inn hotel chains, as press reports suggest some shareholders are demanding, looks sensible.

The coffee market is frothy, judging by the rate at which cafes are expanding across Britain's town centers. If the UK hasn't already reached peak coffee, it's getting close. According to Allegra, a research firm, sales at branded coffee outlets increased 15.2 per cent in 2015, but the number of outlets expanded by 12.4 per cent, implying same-store sales growth is slowing.

So it would be the right time for Whitbread to try to extract the maximum value from Costa, the UK's biggest coffee chain by outlets.

Whitbread has successfully expanded Costa over the past 20 years. But sales from cafes open at least 12 months stalled in the final quarter of last year, increasing by just 0.5 per cent.

Whitbread put this down to fewer shoppers on the British high street. But competitors, such as Greggs and JD Wetherspoon, are trying to grab a slice of Costa's muffin and latte sales for themselves. Greggs, a down-to-earth bakery chain, is selling the hipster's favorite flat white for as little as £1.75. At Costa, it's £2.40 - almost 40 per cent more.

JPMorgan analysts put the break-up value of Whitbread at £44 a share, 10 per cent more than the current price. That doesn't look like huge upside, but a separation could pave the way for greater value creation through mergers and acquisitions.

Private equity groups are awash with cash and keen on catering as consumer spending switches from shopping to "buying experiences" like days out or restaurant meals. That helps explain a recent spate of takeovers in causal-dining, including TPG's purchase of Prezzo.

While same-store sales at Costa's UK business are stalling, private equity buyers might be tempted by the prospect of expanding its overseas business. Only a third of its 3,262 stores are outside Britain.

Selling Costa, which the JPMorgan analysts estimate has an enterprise value of as much as £4 billion, would free up cash. Whitbread could return this to shareholders, or use it to take part in the current round of hotel consolidation.

Alternatively, Whitbread's hotel arm could be a target for an international operator looking to add its budget Premier Inns to their more upmarket brands.

There are recent precedents, such as Autogrill's split of its catering and duty-free arms. The duty free business was later snapped up by Switzerland's Dufry. Accor spun off its voucher business in 2010. China's Jin Jiang has since taken a stake in its hotel operations.

Just this week, shares in Metro jumped 12 per cent after the German retailer said it would split its food and consumer electronics arm. Part of this was the conglomerate discount disappearing, but it also reflected investor expectations of a possible sale.

No new CEO likes to take an ax to their empire, particularly a British institution established in the 1700s. But Brittain should examine her options. She has a prime opportunity when the company reports full-year results this month. She needs to make a move before the coffee market gets cold.

News by Bloomberg, edited by Hospitality Ireland
(This column does not necessarily reflect the opinion of Bloomberg LP and its owners)