Whitbread resists Costa demerger call

Costa has performed well but the UK market is becoming very competitive. Picture: PA
Costa has performed well but the UK market is becoming very competitive. Picture: PA
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WHITBREAD chief executive Andy Harrison will resist calls to spin off the group’s highly successful Costa coffee chain on to the stock market when he unveils resilient interim results this week.

Harrison is expected to counter the demerger calls from some in the City by stressing Whitbread’s plans to deepen the current overseas footprint of Costa, which runs from China and the Middle East to mainland Europe.

Despite the chain’s robust performance throughout the economic downturn, some investors believe the UK is now a highly competitive and mature market, and the engine of growth lies abroad.

Edmund Salvesen, a leisure analyst at broker Brewin Dolphin, said: “Costa will show interim like-for-like sales growth of 6 per cent. That shows it is still a good business in the UK.

“But Whitbread is trying to expand the brand, and the main interest now is what they are doing overseas, in the likes of China. Overseas will be more significant for growth; it will be where expansion is rolled out.

“By contrast, the coffee market in the UK is becoming competitive. There are large alternative brands out there.”

The City believes there is significant scope for Costa to grow abroad. Last year, the brand’s international revenues were £80 million compared with £592m in the UK.

Some analysts have urged Whitbread to demerge Costa from its other, slower-growing businesses – such as Premier Inn hotels and Beefeater restaurants – to release shareholder value.

But it is believed Harrison has told the board he favours keeping the company as a combined entity. One analyst said: “Personally, I am not in favour of demerging Costa, and I don’t think Harrison is.

“I like the combination with the hotels and restaurants. The latter are assets owned by the company, which keeps ­Costa’s average weighted cost of capital down.”

In a trading update last month, the Whitbread chief executive revealed that the exceptionally hot July hit sales growth at Costa.

“July this year was an absolute scorcher, whereas July 2012 was very wet and cool,” Harrison said. “When it is that hot people want a cold drink rather than a hot coffee.”

Same-floorspace sales growth more than halved to 3 per cent in the 11 weeks to mid-August from 8 per cent in the March-to-May quarter, when Britain suffered its coldest spring since 1962.

However, it is thought that lower wholesale coffee prices might slightly lift profit ­margins.

Whitbread reports half-time results on Tuesday, with Salvesen forecasting full-year pre-tax profits at the group of £390m, up from £355m.

The company is expected to say that Premier Inns, its budget hotel chain, has seen like-for-like sales growth of about 3 per cent over the six months, with London outlets performing particularly well, partly due to a continuing recovery in business ­clients.

Whitbread unveiled plans in the summer to open 40 “compact” hotels, including in Edinburgh, as it targets customers who want cheaper rooms.

The first “Hub by Premier Inn” establishment will open at St Martin’s Lane in London next summer.

Trade at its restaurants, which also include Brewers Fayre, is believed to have been flat in the latest period.