• Staggering economy causes jitters for Whitbread

It has become something of received wisdom in Europe that the budget (or more accurately economy) hotel sector is resilient in the face of recession.

However, this has not, until now, been tested against the slow recovery which many global economies, the UK in particular, is seeing. Last week saw Whitbread's share price fall after a note from Barclays Capital warned that a "prolonged period of uncertainty" was likely to affect the group over the next six to 12 months.

Barclays Capital emphasised that it continues to believe in the "medium-term growth story" for Whitbread, but downgraded Premier Inn's owner from ‘overweight' to ‘equal weight' and reduced EPS forecasts by 6% for 2011/12. The decision was based on the likelihood of lower revpar growth and like-for-like sales growth.

The note, authored by analyst Vicki Lee, read: "We do not believe that 2011 can be viewed as a 'recovery year' for the UK. Recent macro data points suggest a slower recovery than was previously expected both for the consumer and small and medium-sized enterprises. We expect this to result in a more difficult trading environment for Premier Inn and Costa."

For Whitbread, which dropped 29p on the day the note was released to close at £15.52, the comments came as expansion has been increasing, in line with its budget compadres, in particular Travelodge, which announced its new Metro model, to take advantage of smaller sites, earlier this month.

At the end of April new Whitbread CEO Andy Harrison announced that the brand would accelerate its growth with a revised five-year plan to increase its UK capacity by 50% to at least 65,000 rooms, with a committed pipeline of 10,500 rooms.

When the announcement was made concerns over Harrison's comment that market conditions had become "progressively more challenging" since the start of the new financial year caused the group's share price to slip by 57p. Harrison told a conference call: "The consumer is under a lot of financial pressure at the moment, people are spending their money more carefully than ever before and our brands offer good value for money."

Harrison said he was confident that the group would "continue to outperform" and would focus on "winning market share and keeping a tight control of costs". Harrison announced that the group would speed up its expansion of Premier Inn, following "a thorough assessment" of its potential, which lead him to believe there was "opportunity to grow faster and further".

He said that the group anticipated that around 40% of its growth would come from new catchment areas and that a "significant" proportion of rooms would be via the joint site model. Harrison, like Travelodge, has also identified the potential of smaller sites and the brand is developing a smaller format of 60 to 80 rooms, larger that its rival's Metro model.

However, with smaller sites come smaller margins and with 60% of new openings being in existing catchment areas, at the time of the comments concerns were raised that returns would be hit.

Barclays Capital drew attention to the correlation between corporate capex (that is business investment rates by the wider business community) and regional revpar, with the former estimated to be down by 7.1% quarter-on-quarter in the first quarter, where consensus had expected it to increase at a rate closer to 2%. This had led to revpar also falling. The note said: "The question is whether this weakness in the current revpar data and corporate capex is just a short-term ‘blip'… we argue that it is not".

Looking forward, Barclays Capital changed its forecasts of revpar growth to 0.8% from 3% in 2011/12 and+3.5% from 5% in 2012/13, with Ebit estimated to be "broadly flat".

The group's downside case, which it favours due to issues around near-term consumer and SME spending, views revpar growth slowing by 3%. The note read: "If we were to believe that the UK regions could see 5% revpar growth (a typical recovery year expectation), this would give rise to a c.12% Ebit CAGR [compound annual growth rate] for the business."

The note acknowledged that Premier Inn had outperformed the industry over recent years in terms of year-on-year revpar growth, at an average of 2% to 3%, but added that this decreased during 2010 "as the benefits associated with the shift to dynamic pricing, increased investment in advertising and widening of the distribution network began to roll off". The group said it expected a small outperformance, but more in the range of 0.5% to 1% going forward.

The note is by no means a portent of doom for Whitbread, commenting: "For the medium to long term, we continue to believe that Whitbread represents one of the most attractive growth stories in the European leisure sector."


HA Perspective: Key factors aiding the resilience of the budget sector have been the comparative lack of supply and that the budget stock is all fairly recently built.

We are now entering a period of diminishing returns as budget hotels increasingly compete with each other rather than just an aging mid market and similarly under invested bed and breakfast industry.

The maturity in the market is also demonstrated by the big push in advertising with both Premier Inn and Travelodge airing campaigns on television. It is no longer a case of just building, differentiation now matters.

While Barclays are right to point to the correlation between business investment and revpar, budget hotels still have a distinct advantage over their mid market rivals in that budget hotels are perceived to offer better value for money.

With weakening leisure spend, which has been an essential support for hotels during the recession, business demand is going to be vital during the recovery. Premier Inn, already the biggest hotel brand in the UK by bedroom numbers, is in a strong position to grow market share at the expense of its competitors.

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