Stronger UK market conditions have seen Premier Inn increase its maximum room rates, in a bid to profit from growing demand. The move was one reason for strong performance figures in a trading update from chain owner Whitbread.
Premier Inn pushed like for like sales up 8.3% in the final quarter, growing total sales 15.2%. Revpar grew 7% in London and 9.6% in the regions for the quarter, with a revpar growth of 5.1% for the year. Full year sales growth was 13.3%, of which like for like advanced 4.7% as overall occupancy improved 1.5% to 78%.
“We cap our prices because we’re very focused on maintaining Premier Inn’s value for money,” revealed chief executive Andy Harrison.
“Those caps bite in London (and that was much less of an issue in the fourth quarter), and they also bite on the very busy days, out in the UK regions. We have raised those caps recently, reflecting the fact that the market prices have risen.” Occupancy in London rose to 76.5%, up 1.5% on the same quarter a year previously.
Harrison said that although the price cap had been raised, this did not conflict with the group’s philosophy of maintaining its value offer. “ARR is decided by the customer,” he insisted, but noted that Premier Inn appeared to have been trailing the sector in this measure.
“Where the midscale and economy sector has delivered ahead of us has been in ARR. Their ARR growth has been about 5% ahead of our ARR growth, and that equates to something like £2.30-40.”
There were two main reasons for this, said Harrison, one being the Premier Inn price cap. “My guess is that the biggest factor is Travelodge is still catching up from some of the weaknesses of its pricing policy in the past.”
Harrison said the outlook remained good, though the UK market was still prone to wobbles. In London, demand is growing robustly but unit growth was described as “challenging” due to the difficulties in finding suitable sites. “There are good reasons to think that we’ll see a continuing good revpar performance in London. In the UK regions, I think it will depend a lot on your view of the wider economic recovery. We’re still seeing quite a patchy recovery outside the M25,” he added, noting that many working people were still experiencing a real contraction in spending power. For Premier Inn, this meant maintaining a focus on expanding market share in a flat market.
Occupancy again edged up, and ended the year at close to 79%. Harrison sees scope for improvement – which he is factoring in.
“We’ve said before that we would aim to get occupancy in the low 80%s, and that’s still the right place to aim for. We like to see occupancy growing steadily, roughly 1% per annum.”
In addition to an ongoing refurbishment programme, Harrison said the group continues to actively consider what customers are going to want – while not trying to take the offering up-market. “We’re very conscious that customer expectations are rising, and will have risen significantly over the next 5-10 years, and we are planning our product over that timeframe.”
Air conditioning is now in half the estate: “It’s a very important thing, that’s valued by our customers,” said Harrison, but can be expensive to retrofit. “And we’re working on improving our wifi product, so we’ve got the bandwidth customers want.”
The group remains on target to open 3,500 rooms in 2014; London will remain a focus, with openings in the region representing 40% of the 2015 pipeline. Harrison promised full year figures would be at the upper end of expectations.
“The most important point is that these are really good numbers, when you combine our capacity growth with our revpar growth. If we can continue to do that, we’re going to generate a lot of value for our shareholders.”
HA Perspective [by Katherine Doggrell]: Harrison has continued to be cautious about the recovery outside London since this announcement and in March joined other leisure sector leaders in criticising the 3% increase in the minimum wage recommended by the Low Pay Commission.
Harrison said that the increase would add GBP10m to Whitbread’s wage bill and, along with other CEOs, including Andrew Page of the Restaurant Group, called for the wage to be tiered across the different areas of the UK. He said the increase was “at the top end of what the regional economy could bear at this early stage of the economic recovery”, adding: “There are real dangers to increasing the national minimum wage too fast too soon. It could damage the employment prospects for those people it is designed to protect.”
These are the words of a man who is watching his costs, as his shareholders would expect him to do and enthusiasm for the company’s stock remains high – its share price was up 74% on the year at the time of going to press.
With everything riding on London, Harrison will be keeping a close eye on the capital and its ability to deliver 40% of the group’s expansion target. This is yet another factor driving London’s seemingly relentless ascendance.
The ascendancy is expected to continue this year, with revpar in the capital forecast to rise by 3.8% to an all-time high of GBP117.10 according to PwC. Liz Hall, head of leisure research at PwC, said that while there were “plenty of events to draw in visitors, including the Farnborough International Airshow… London soaks up the new supply but off-peak it could be challenging.”