Costa Coffee owner progressing with demerger plans as UK sales cool

Costa Coffee owner Whitbread said it was making 'good progress' in preparing for the chain to be demerged as it unveiled a dip in sales at its UK coffee business.

The coffee shop chain is feeling the heat from the high street slowdown. Picture: Michael Gillen

Releasing a trading update for its first quarter, the firm said comparable sales at Costa fell by 2 per cent in the UK in the period, dragging down group like-for-like figures at Whitbread, which were 1.3 per cent lower.

Analysts said the fall reflected the tough conditions on the high street with retailers hit by rising costs and weak consumer confidence.

Total sales at Whitbread, including international, rose 3.2 per cent, with Costa up by 4.9 per cent. The total figure factors in store openings and overseas expansion. Total sales at the group’s hotels chain, Premier Inn, were up 2.2 per cent over the quarter.

Chief executive Alison Brittain told investors: “Both the budget hotel market and the coffee market present long-term structural growth opportunities, and, whilst we are cautious of shorter-term trading conditions in the UK, due to well-publicised consumer trends, we are confident that we have the right strategies in place to enhance our UK and international market positions and ensure each business is well-positioned to thrive as a separate entity.”

The group said earlier this year that it will split the Costa chain and list it as a separate entity, following pressure from activist shareholders.

It has since emerged that Costa is being circled by a clutch of private equity firms, opening the door to a potential multi-billion-pound sale of the business.

Costa, which Whitbread acquired in 1995 from founders Sergio and Bruno Costa, has more than 2,400 outlets and is embarking on overseas expansion. Under the de-merger plan, Premier Inn would stay with the group.

It said: “Constructive early steps have been taken in preparation for the demerger and good progress continues to be made on the core infrastructure and efficiency work that was already under way.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “There has been some speculation that a sale might be preferred to a demerger, however weak trading conditions suggest it’s not a great time to put a price tag on Costa.”

Emma-Lou Montgomery at Fidelity Personal Investing said: “Another day, another warning about a lack of consumer spending. Now it seems that Brits have woken up and smelt the coffee. All those tips on how to stop frittering money away have hit home – and hit Whitbread’s bottom line.”

John Moore, senior investment manager at Brewin Dolphin, said: “The main issue with Whitbread is that it has stopped innovating.

“From a business that 25 years ago was pubs and Pizza Hut, it bought and built Premier Inn and Costa, two iconic brands on the British high street.

“De-merging Costa is fine – it is a cash generative market-leading business – but it’s hard to see where growth will come from given its market penetration and rising costs.

“Costa could flourish on its own – it’s a nice, simply-framed brand with greater international expansion potential, which can be financed from the cash generation from the existing estate.”

Commenting on the high street in general, Calum Bruce, investment manager of the Ediston Property Investment Company, said: “The retail industry is going through an unprecedented transformation. With increasing operating costs on the high street, as well as more demand for digital shopping, many household names have struggled to stay afloat in the current stormy market.

“Whilst the entire retail sector is facing challenges, at Ediston we believe it is important to differentiate between the three main sub-sectors of the retail market, namely the high street, shopping centres and out of town retail warehouse parks.

“The greatest issues have been on the high street and in shopping centres with many of the store closures occurring in these locations. Some retailers are reducing their presence in town centres and are focusing their operations in the out-of-town market.”

He added: “We continue to see good tenant demand for retail parks which are well-located, have the right planning consents and are let off sensible rental levels. With a number of deals in the pipeline we don’t see this trend changing as the year progresses.”