• Whitbread calls cycle peak

Despite reporting bumper profits yesterday, Whitbread’s share price was down almost 1% as investors digested comments during the results presentation of a potential slight softening ahead.

While the main fears are around the restaurant business, it was also made clear that like-for-like sales growth within Premier Inn is likely to have peaked.

If the Whitbread budget hotel operation is compared with almost any other branded hotel chain, it would be hard to characterise the numbers coming out of the former as anything other than outstanding.

But chief executive Alan Parker admitted that the 10.9% improvement in like-for-likes seen in the first half of this year (the six months to August 30th) “may prove to be a demanding comparison”. He predicted a drift towards the historic like-for-like sales increases of between 7% and 8%.

The first-half like-for-likes were driven primarily by rate, which accounted for 5.6 percentage points of the 10.9% increase. Occupancy added another 1.5 pp, food and beverage 0.9 and extensions 2.9 pp.

The picture for total sales growth remains robust thanks to continued strong growth in rooms additions in the UK which are expected to hit more than 3,500 for the full-year having reached 2,000 in the first-half.

The addition of new Premier Inns added 3.5 pp to overall sales growth to hit 14.4% and reach £264.1m. But it is profit growth where PI is performing even better with a 21.6% rise in the UK to £95.6m. The division accounts for almost three-quarters of group profit (from operations).

Looking at the operating numbers within PI shows margins up 1.8 points to 35.9%. Occupancy was up 1.3 points to 82.1% and revpar was ahead by 7.6% to £41.34.

The success of the PI operation was also flagged up by comparing its occupancy performance against its peer group and the full UK branded hotel market. In London, PI was 86.7% full during the period, while its peers (comprising other branded budget players) were at 84.7% and the full market 84.2%.

The big difference is outside of the capital: here PI was 81.1% while its peers were 74.0% and the full market 73.4%. This bodes well for PI provided it can turn this higher level of occupancy into pricing power.

One factor that will help is a new approach to rooms inventory management which will see guests staying for periods that include a Sunday night or similar preferred over a Saturday night only stayer.

But dynamic pricing (hiking room rates as occupancy grows), a technique employed by arch-rival Travelodge, was ruled out by Parker.

To further boost demand, PI is embarking on its biggest ever advertising and marketing campaign. The aim is to significantly increase customer recognition and to differentiate PI from its rivals.

The demand picture over the next five years was portrayed as robust, with data from research consultancy BDRC used to show that leisure guests will overtake business guests as the biggest source of demand for UK hotels. PI is already ahead of this curve with more than 50% of its room night sales going to leisure guests.

A big play was also made of the potential for growth of budget hotels in the UK. TRI Hospitality Consulting figures were used to show that the branded budget sector with 91,865 rooms accounts for just 13% of the 710,000 hotel rooms in the UK. This was contrasted to the 23% share in France and the 25% share in the US.

Parker went on to state that Whitbread was currently conducting a city-by-city and roadside-by-roadside study of the potential for new PI sites that he promised would show how the aggressive PI expansion target of 45,000 rooms by 2010 was realistic and achievable. He said the study would be available by the spring.

The challenge in finding sites is not becoming any easier, however. The ex-Golden Tulip UK chief, the business Whitbread bought in September, has set up a company to find hotel sites. Peter Robert’s new business, Countrywide Hotel Acquisitions, has already teamed-up with Whitbread to find new spots for hotels.

Separately, Travelodge has this week announced it will pay up to £150,000 to anybody finding it a new site. It wants to add 500 hotels by 2020 and will pay £500 for each bedroom the hotel site can accommodate.

The finders’ fee initiative was launched by property director Paul Harvey, a board director who was poached from Hilton Group a year ago.
HA Perspective: Whitbread is proving there is life after being a bid target for the past couple of years. The collapse in the debt markets has made any bid for the company much more unlikely, although at the same time it has scuppered Whitbread’s own ambitions to leverage up by issuing £600m worth of securitised bonds.

The company said yesterday that it was no further forward with the process than it was in August when it announced it was postponing the move.

Sales forward momentum, however, looks set to be maintained at Whitbread, even as the rate of cyclical growth declines, thanks to its focus on secular growth.

As with many other operators and brand owners in the hotel space, it is the ability to meet the targets of this expansionary growth that will determine whether Whitbread once again is favoured prey when the debt markets return to full health.

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