Break up Whitbread and let Costa star in its own show

Elizabeth Fournier
IN a day peppered with corporate disappointments, Whitbread and its shareholders will have been more than happy to have seen their first-half results described as “outstanding” on more than one occasion.

The FTSE 100 leisure firm used the term itself in its results presentation, and analysts were also keen to heap praise on a close-to 30 per cent rise in profit and huge expansion plans.

It’s too bad then, that in both cases the superlative was only being applied to one part of the business – the Costa coffee chain that has continued to go from strength to strength despite a seemingly saturated UK market.

While underlying profit before tax at Whitbread grew by 10.6 per cent, Costa outshone the firm’s other brands with a 29.9 per cent rise. In a market where discretionary spend is getting tighter by the minute, that’s impressive, and polls suggest that as well as growth through expansion Costa is also grabbing market share from competitors.

Aside from mid-market hotel chain Premier Inn, none of Whitbread’s other brands – Beefeater, Brewer’s Fayre, Table Table – get so much as a namecheck in the update. Lumped together under the Hotels and Restaurants label, where total revenue grew 10 per cent, even the firm’s own update can’t find much to shout about beyond “menu management, margins and operating efficiencies”. And while Premier Inn (included under that header but also reported individually) had a decent first-half with revenues up 12.9 per cent compared to restaurants’ 5.3 per cent, the outlook acknowledges that the hotel sector’s Olympic shine will soon fade, leaving “more moderate” conditions for the rest of the year.

Costa, on the other hand, seems unstoppable. As the luxury crunch finally reaches China (see Mulberry, below) Whitbread is bulldozing into the country, which it has identified as its “biggest single market opportunity”. In the past six months alone it’s opened 37 Costa stores on the mainland, and even on a like-for-like basis sales are up 19.2 per cent.

And the bullish stance isn’t limited to overseas. Terrible weather in the UK – which apparently kept customers away from many leisure brands – seems to have driven them straight into Costa, and sales from the rebranded self-serve machines in service stations and supermarkets are up 86.8 per cent.

For long enough Whitbread has been a FTSE 100 safe haven, and there’s no doubt that its stable reputation is deserved – according to Hargreaves Lansdown its shares are up 39 per cent over the last year, massively outperforming the wider FTSE 100, which has grown just seven per cent.

But quarter after quarter of growth doesn’t seem to be enough for investors anymore, and shares dipped almost one per cent yesterday despite the upbeat results. Investec even has a “sell” rating on the stock, preferring Intercontinental Hotels Group, but the two shouldn’t have to be compared.

Instead, Whitbread needs to let Costa off the leash to plough its own domestic and international growth story. Chief executive Andy Harrison may have refused to rule out a split, but it’s about time he switched his passive stance to an active demerger plan.

Now that’d be outstanding.

Elizabeth Fournier is City A.M.’s news editor