Whitbread said that it had a “line of sight” to 100,000 rooms for its Premier Inn brand, with extensions the lowest-risk route to growth.
The company is looking to Germany for international expansion, with the comments coming as Motel One described “restraint” in city break tourism as the result of terrorism and Brexit.
Commenting at Whitbread’s capital market day, CEO Alison Brittain said that the company’s 2020 target of 85,000 was “secure”, with “only 2,000 rooms still to find”. She added: “Whitbread has a strong pipeline of new growth opportunities in both of its core businesses.
“We have the largest network and the most compelling value-for-money offering. Premier Inn has opened around 4,000 years over the past five years. The independent segment is in structural decline. Proprietors must operate to ever-higher standards and must now be digital entrepreneurs, competing with Booking and Airbnb.”
The company around half of the growth beyond the current pipeline would be in new catchments, with 3,000 rooms in new markets. The group said that it would also look at new formats, including joint sites.
Brittain said that extensions were the lowest-rise route for expansion, but added that London, while currently difficult, was still seen as having potential, with the group more likely to look to leaseholds in the capital.
As she did earlier this year, Brittain acknowledged the role which disruptors such as Airbnb play in the market, forecasting that they could take around 3% of the market by 2020. The company said that it had “explicitly factored-in Airbnb’s growth” and described what it saw as its points of differentiation: service and F&B.
Countering this is the expected increase in the branded budget sector, which it said was around 18% of the market today (with Premier Inn having 9% of the total UK market), expected to grow to around 29% by 2020 (with Premier Inn moving up to 11% of the total market) as the total UK market moves up from 700,000 rooms to 740,000 rooms.
The group will continue to lean on its Hub by Premier Inn brand in higher-cost areas, with the flag currently running at around 94% occupancy. For the core Premier Inn brand, hotels are taking three years to mature in the provinces and one in London.
The group outlined details of its efficiency programme to cut GBP150m in costs over the next five years. Along with organic growth, it is intended to help mitigate ongoing headwinds, including the National Living Wage, business rates and foreign exchange, encompassing a range of areas, including: procurement, supply chain, labour management and process improvements.
Under its property strategy, Whitbread plans to maintain a balance of freehold and leasehold properties, with an objective for the Premier Inn and restaurants estate to remain majority freehold – the company said that the 63% of the estate was freehold, expected to fall to around 60% factoring in the leaseholds in the current pipeline. It said that it would continue to pursue “active asset management”, with sale and leasebacks recycling capital on, CFO Nicholas Cadbury said, an “opportunistic” basis.
Whitbread said that the market value of its freehold properties across the estate was estimated at between GBP4.20bn and GBP5.10bn. Brittain highlighted the “above-hurdle” returns on both freehold and leasehold, with a 13.3% return on capital for the UK and Germany estate combined.
Looking to growth in Germany, the CEO said that there was an “opportunity to create a scale budget brand” in a “structurally attractive market”, adding: “The German customer appreciates a high-quality sleep experience at a great price. The market’s in steady growth, currently dominated by independents and with the largest brands at a fraction of their UK scale”.
She added: “We had gone into Germany on a totally freehold model, we are pretty comfortable with leasehold acquisition in the top markets in Germany, so there will be a mix and, over time, opportunities [for sale and leaseback] will emerge.” The company said that it expected to be in profit in the country by around six to eight sites, depending on a more freehold mix.
The Germany market is already familiar to Motel One, which reported that its development pipeline had reached 25 hotels, five more than the same period last year. It added that it had the contractual security to grow to 80 hotels. The proportion of hotels owned by Motel One is 29%, up from 24%. Outside Germany the network has grown to 23 hotels, from 22 in the previous year, with a pipeline of 15 properties.
The group said that the third quarter had seen a “tangible impact” of recent terror attacks and the decision by the UK to leave the EU and was cautious looking ahead, the group said: “Where market performance is concerned, we can see a certain restraint in city break tourism, not just in Brussels and Paris. It is also likely that Brexit will continue to have a negative impact on the Euro-pean economy.”
HA Perspective [by Katherine Doggrell]: Whitbread has been criticised of late for not being as exciting as it could be, with Brittain causing some consternation at the last results when she commented that growth would be more measured than in previous years, not being tied to quarterly opening targets. At the capital market day she was quick to reassure analysts that the 2020 target was secure and that she had eyes on the opportunity past that, with the mention of 100,000 rooms.
But, as Barclays pointed out in its note, this was “more of the same” with the bank continuing to like much “about the structural growth opportunities” but cautioning that it believed Whitbread was also “one of the most exposed leisure companies to lower UK business investment projections” – although much of this concern was around Costa.
Whitbread made much of how it planned to thrill shareholders with its ongoing estate expansion and said that it would not be tempted to leverage customers’ enthusiasm for its brand by raising prices, pointing to the importance of being viewed as a value offering to driving growth.
The brand did highlight other levers, announcing a new dedicated platform for business guests – ‘Business Booker’ – shifting the mix further towards higher-margin business travellers, who it said pay around GBP10 per night more than leisure customers. While the group has not yet spoken ‘loyalty’ it has said that there might be preferential rates for business clients and, down the line, the chance to choose specific rooms or floors.
Mark Brumby, analyst, Langton Capital, told us that he felt, in any case, raising prices would be difficult in the medium term. He said that, with operators commenting on increased supply and competition, it did not feel like the kind of environment where price rises would be easy.
Much was made of “the next investible platform” in Germany, described as being 15 years behind the branding times and ripe for exploitation. No doubt mindful of the current competition in the popular market, the group said it would look at freeholds and leaseholds, with conversions as well as new-builds planned to accelerate growth and test the market all the harder.
This acceleration cannot happen too quickly, with the brand already talking about comparable returns to the UK business, despite not yet having the UK’s scale. Brittain said that she could “articulate a number of Plan Bs and Cs” should Germany not work out. The company said that it was seeing around 50% of bookings of German origin. The message is, so far, getting out there.