(Bloomberg Opinion) -- Coca Cola Co.’s swoop on Costa Coffee last year generated a lot of froth for Whitbread Plc. Once that subsides, the prospects for the company look as unexciting as a short stay in a small British town.
The sale of the group’s cafe division to the soft drink giant left Whitbread focused on its budget hotel unit, and here the recent performance has been disappointing. Uncertainty around Britain’s divorce from the European Union led to weaker demand at Premier Inn in the three months to February, and this worsened in March and April.
Business travel was a particular problem, though leisure stays held up, the company said Tuesday. It seems the Brexit delay may be encouraging consumers to spend. However, it also seems to be making companies more cautious.
Though the split from the EU was always going to pose a challenge to any U.K. hotel chain, Premier Inn looks particularly vulnerable. Its heavy exposure to the market outside of London limits its ability to participate in a boost to tourism from a weak pound. And, the group has been expanding its hotel rooms apace. It currently has 76,000 in the U.K., at least 30,000 more than its nearest competitor. There is a danger that those additions cannibalized existing properties, particularly in a weak market.
Whitbread points out that hotels are long-term businesses, so continuing to invest when conditions turn down, and smaller rivals are under pressure, will pay off when the market rebounds. But investors will have to take that on faith.
Some skepticism here could be forgiven. It is hard to escape the conclusion that Chief Executive Officer Alison Brittain should have pursued a break-up of Whitbread three years earlier.
She insists that if she had taken an ax to the empire when she arrived in the top role in December 2015, Costa Coffee wouldn’t have benefited from subsequent investments. Brittain says these helped entice Coca Cola, which paid the high price of 3.9 billion pounds ($5.1 billion) for the coffee chain.
But if she had acted more quickly, the hotel arm would not be starting life without the support of its coffee sibling just as conditions were turning down. It may even have attracted a bid, amid consolidation in the hotel industry. Now, it faces a hard slog while it waits for the market upturn to arrive.
There is the prospect that Premier Inn’s German division can eventually take some of the pressure off of the U.K. Though this business is small, and losses here will increase in the current fiscal year, it could benefit from Whitbread’s good track record in developing its businesses – just look at how it turbocharged Costa. But this will take time, and this is another thing investors will have to take on trust.
Shares in Whitbread have been bolstered by the sale of Costa and subsequent plans to return 2.5 billion pounds to investors. They trade at a 21 percent premium to their two year average price to earnings ratio, even after they fell as much as 4 percent on Tuesday.
Look past that windfall to the prospects for travelling businessmen and women in Britain. If the stalemate in the Brexit negotiations is anything to go by, there won’t be a turnaround for them anytime soon.
To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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