Andy Harrison, Whitbread's new CEO, saw his first bold act in his new role take 5% off the company's share price, as the City reacted badly to the company's £59.5m purchase of self-service coffee group Coffee Nation.
Objections were raised to the price – at 14 times Ebitda – although Harrison pointed to extensive expansion plans. The new boss was given an additional headache by the group's Premier Inn business, which saw a slowing rate of sales growth in the fourth-quarter.
An additional point of concern was that the deal worked out at around £66,000 a machine, compared with a cost of £15,000 for a new machine. The news of the Coffee Nation deal was more welcome at Deutsche Bank, one of Whitbread's brokers, with analyst Geof Collyer estimating that the Ebitda multiple would drop to four times by year five of the takeover, as Harrison planned to take the group from 900 to 3,000 sites as Costa Express over the next five years.
Harrison's interest in the coffee business was also backed by Morgan Stanley analyst Jamie Rollo, who said: "Whitbread has reported an in-line quarter for this trading update, with slower sales growth in hotels (as expected) and at Costa, but a strong restaurants performance and an attractive acquisition. Whitbread is one of the fastest-growing, property-rich and yet cheapest hotel stocks."
In keeping with the new CEO's heritage at Easyjet, and in line with the group's increasing use of a price-based competition strategy, the group trialled £19 rooms, as a "test of elasticity", during the fourth quarter, which has historically been a weak trading period.
Harrison said: "It was a small test, but was successful and we're looking to add that to the commercial mix going forward, to use for different customers and at different times of the year."
Despite the Costa Express launch, expansion at Premier Inn is continuing. Harrison said that the group still planned to add 20% of its estate, reaching 55,000 rooms by February 2014.
At Premier Inn, like-for-like sales growth fell to 5.1% for the quarter to 17 February, down from the 8.7% increase in the previous quarter. Harrison told an analysts call that London had seen "some softening" in the fourth quarter, with rates down half a percentage point, but was still growing, with occupancy up 4%. Performance in the provinces was unchanged from the third quarter. Total group sales in the last 11 weeks were up 12.4%.
The CEO pointed to falling consumer confidence as a possible explanation. He said: "Comparatives are distorted by the winter weather patterns. The rise in VAT is pretty recent. The rising oil price is beginning to feed through to the forecourt. From a consumer perspective there's more negative than positive news.
"Our businesses have traded well during the tough recessionary period and we're confident that we will continue to deliver a good relative performance. We are expecting a continuation of the difficult consumer environment that we saw last year."
The group said, however, that its balance sheet was "strong and remains underpinned by a significant freehold asset base" and it anticipated "that the outturn for the year will be in line with market expectations, demonstrating strong profit growth".
UK-specific concerns, such as the VAT rise, caused Panmure Gordon to reiterate its ‘hold' rating, with analyst Simon French commenting in a note: "Whilst not expensive relative to its hotel peers, Whitbread has almost 100% profit exposure to the UK consumer and, on this basis, is trading at a material premium to other freehold backed, UK-focused leisure companies such as Mitchells & Butlers."
There was no mention in the group's results as to whether the soon-to-be-rebranded Coffee Nation machines were likely to pop up in Premier Inn sites – the company is focusing on high-traffic areas such as hospitals, universities and train stations – but the new CEO's rapid expansion means there should be no difficulty finding one.
Reassuringly for Harrison, despite falling like-for-like sales at Costa, the wider coffee market looks strong. Last week Mintel said that there had been steady growth over the past five years in the number of coffee shop customers taking their purchases away and Harrison said: "There are 6bn cups of coffee sold through traditional vending machines. That tells us there's a huge customer demand for speed and convenience". His hope is that with his company controlling the only machines that currently use ground beans and fresh milk, he can lure these users his way.
HA Perspective: Former CEO Alan Parker told the International Hotel Investment Forum this week that Coffee Nation was one of a number of companies that had been identified as possible takeover targets during his time at the helm.
However, the glory or opprobrium for this deal will fall on the head of his replacement, Harrison.
The deal itself is not of great consequence for Whitbread's future, given that it represents just a fraction of the investment Whitbread makes annually into its hotel business.
Perhaps the share price drop was led by fears that Whitbread will start overpaying to deliver growth. Harrison needs to move swiftly to confound such worries.