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A couple of years ago I needed to catch an early flight from Heathrow, so I decided to stay the night before at a Premier Inn near the airport.
The set-up was impressive - a new purpose-built hotel, pub, restaurant and Costa Coffee all within one large, mall-like building, a short complimentary bus away from the terminal. That’s convenient I thought, I don’t need to leave the premises for anything. That’s even smarter I thought the next day, when I realised all the brands on-site were entirely Whitbread-owned.
Whitbread has since sold the Costa Coffee chain to Coca-Cola for £2.9bn in 2019, maintaining its focus on Premier Inn budget hotels, placed next to Whitbread-owned pubs and restaurants in the centre of cities or on the outskirts near to major road connections. It’s a strategy that has served the company well, until of course coronavirus struck and we were all told to stay at home.
Understandably sales for the hotel chain plummeted by 80% over the lockdown period, but, in a trading update today, Whitbread’s chief executive Alison Brittain, was upbeat on the outlook: “In the UK we currently have over 270 hotels open and expect the majority of the remainder of the estate to be open by the end of July… in traditional regional tourist destinations, we are seeing good demand for the summer months, whilst the rest of the regions and metropolitan areas, including London, remain subdued.”
As well as selling Costa Coffee last year, Whitbread successfully secured a £1 billion rights issue in June, which means it has sufficient funds to look ahead through the current uncertainty with a degree of confidence.
Brittain commented: “The successful completion of the £1 billion rights issue on 10 June will enable us to maintain our competitive advantage and financial flexibility, as we have both strengthened our balance sheet and secured the business so it can withstand a long period of low revenues.
“Our strong balance sheet, alongside both our leading operating model and the power of our brands, means that we are in the best possible position to take advantage of enhanced structural opportunities that we expect to become available in both the UK and Germany.”
Whitbread’s position is noticeably different from that of Pret a Manger which announced this week the closure of 30 branches and at least 1,000 jobs. Both companies have been severely affected by lockdown. While Premier Inn relies on budget-conscious business and leisure travellers, Pret is firmly focused on quality food on the go, aimed mainly at affluent office workers.
Whitbread appears confident short-break travellers will return, Pret on the other hand isn’t so sure its customer base will return as quickly. Its future is more challenging as companies across the land question the need for high-end, city centre office locations when more and more of their workforce can work just as effectively at home, without the cost in time and money of commuting to city centres.
With less footfall in shopping centres and airports too, it is easy to see why the outlook for Pret continues to look uncertain. Investors will equally be keeping an eye on rival Greggs with its focus on the budget food-on-the go market. Will they maintain their existing customer base and gain cost-conscious office workers who would have gone to Pret?
As ever, with uncertainty comes opportunity and for some companies, especially those with healthy balance sheets, the current environment will offer up opportunities to expand as city centres across the land change and evolve.
For investors, taking an active, stockpicking approach to find the winners in this environment is crucial. Whitbread’s shareholders will be keen to know what the “enhanced structural opportunities” may be for the company as life starts to gradually return to some sort of normality. But they will need some patience to be rewarded as Whitbread’s share price is still more than 40% less than it was in February when lockdown first began.
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Source: FE, total returns as at 6.7.20, in local currency
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