Comment: Whitbread stays cautious on hotel expansion

13th Oct 2009 17:52

Having seen sales at Costa Coffee surge by more than 20% as it continues expanding at the expense of pricier rivals, expanding the coffee chain is surely a no-brainer for owner Whitbread.But at its Premier Inns, which like all hotel groups has been hit hard by the economic downturn, whether to keep preserving cash or to ramp up expansion in the hope of better times to come is a more finely balanced question.In its interim results today, Whitbread saw profit before tax and exceptional items fall to £110.5m in the six months ended 27 August, compared with £123.3m last time. Total revenue was up 3.1% to £703.3m. Total sales at Premier Inn increased by 0.4% to £312.1m with like for like sales down by 7.5%, due to a sharp fall in RevPar (revenue per available room) a key metric of how well hotel businesses are doing. Revenues from its restaurants, which include include Beefeater, Brewers Fayre, Table Table and Taybarns, fell to £236.7m from £244.1m, though they were 1.8% higher on a like-for-like basis. The discrepancy in figures was due to Whitbread swapping 44 pub restaurants for 21 'Express by Holiday Inn' hotels from the pub chain Mitchells and Butlers in September 2008.The Costa Coffee chain remained the brightest spot in the Whitbread portfolio. Total revenues were up by 20.6% at £155.4m and pre-exceptional operating profit up 72.6% at £12.6m. Like-for-like sales climbed by 2.5%.Looking at these figures, one might be tempted to say that Whitbread should just concentrate on coffee for now, continuing its strategy of opening coffee shops in the High Street, train stations, hospitals and just about every other corner of urban Britain. Weakness in the property market is throwing up new opportunities for Costa and has allowed it to reduce new build costs on new stores by about 10%.But Whitbread has also seen an 'improving trend' at Premier Inn in the nine weeks since August 27. The company says that 'We will be well prepared to increase the rate of expansion when the time is right.' Given the conflicting signals over the state of the economy just now, deciding when is the right time will not be easy.The firm still has the same long-term plans for expansion which means that the longer the company postpones stepping up its hotel opening rate, the faster that rate should be when it does eventually do so.Equity markets have soared since the depths of the downturn earlier this year and companies such as Whitbread have at least begun to talk about stabilisation (if not recovery) in markets that have been worst hit. But whether the brighter outlook is more than a false dawn brought about by massive fiscal stimulus measures remains to be seen. Unemployment is still rising, we are still in a deflationary environment and the prospect of a double-dip recession is very real, so, while remaining poised to step up expansion of Premier Inns when the recovery does come, Whitbread is right not to call the bottom just yet.