Whitbread

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Why invest in Whitbread

From the Chief Executive

Introduction

Whitbread has made good financial and operational progress this year.  Our financial success is based on another year of strong growth in our two leading brands, Premier Inn, the UK's best economy hotel brand, and Costa, the UK's favourite coffee shop chain.  Behind these two strong brands lies our Customer Heartbeat model, which puts our customers at the centre of everything we do.

Critical to our success are our 50,000 team members, who do a great job in delivering a consistently good experience to the 27 million customers who visit Whitbread's outlets every month.  I would like to thank them for their continuing commitment and for their contribution to Whitbread's success.

Financial and operational performance

Whitbread had another good year in 2015/16, with a 12.0% growth in total revenue to £2.9 billion, an 11.9% growth in underlying profit before tax to £546.3 million and, with the proposed final dividend, an increase in the full year dividend of 10.0%.

Hotels & Restaurants underlying operating profit was up 11.3% to £446.9 million.  Premier Inn grew total sales by 12.9%, like for like sales by 4.2%, total revpar by 3.1% and the number of rooms available by 9.8%, with a record 5,461 new UK rooms opened in the year.  Total occupancy remained high as we finished the year at 80.9%.  Restaurants grew total sales by 3.5%, like for like sales by 0.8%, ahead of its competitors, and opened four net new sites. 

Costa's underlying operating profit was up 15.8% to £153.5 million, with total sales growth of 15.9%.  This was driven by UK like for like sales growth of 2.9%, 197 net new stores worldwide and 924 net new Costa Express machines.

Our good profit growth delivered strong cash from operations of £782.2 million, up 9.5%.  A strong operational cash flow supports our capital investment programme, as we maintain our market leading position through re-investment in our estate and by delivering organic growth to reach our milestones.  Our total cash capital investment for 2015/16, including business combinations, was £724.9 million and we expect to invest a similar amount this financial year.

Our disciplined financial management enabled us to deliver a good return on our investments of 15.3% in 2015/16.

The Board recommends a final dividend of 61.85 pence per share, making a total dividend for the year of 90.35 pence per share, an increase of 10.0%.  The final dividend will be paid on 1 July 2016 to shareholders on the register at the close of business on 27 May 2016.

It is only six weeks into our new financial year.  However, indications are that Costa UK has had a good start to the year and Premier Inn is growing share in a flat market. However, trading comparators have been impacted by the early timing of Easter and we will have a much better view on 21 June when we present our first quarter trading statement.  We remain confident of making good progress this year.

Strategic focus

Whitbread's success has been built on its unique brand strengths, significant structural market opportunities and disciplined capital management.  This has enabled profitable growth over a sustained period, which in turn has delivered strong shareholder value.

Significant structural market opportunities

Premier Inn and Costa both continue to benefit from significant structural market opportunities. The budget hotel market is continuing to grow as the independent sector declines, and there is an increasing demand for great coffee.  Whitbread continues to be uniquely positioned to capitalise on both of these growing segments which provides us with confidence that we will achieve our ambitious 2020 milestones of c.85,000 Premier Inn UK rooms and c.£2.5 billion of systems sales for Costa.

Brand strength

At Premier Inn, we deliver a market leading experience for business and leisure customers alike.  We offer customers the widest choice of locations in the UK, the best value for money and, by continually investing in our sites and our teams, a great product in the market place.  This drives brand loyalty and high occupancy of over 80%, meaning that our hotels are regularly full.

At Costa, we offer customers a great cup of coffee in a warm and welcoming environment and, with the widest choice of locations, we are responding to increasing customer demand for coffee anytime, anywhere.

Disciplined capital management

Whitbread has maintained a disciplined approach to capital management, with a well-funded, strong balance sheet and a keen focus on returns.  This has enabled the Board to set out a clear strategy for profitable growth, including the 2020 milestones.

Long-term growth and shareholder value

The environment in which we operate is evolving and we must evolve with it. Customers are demanding more, both in terms of the traditional service offering and in terms of a digital experience.  In addition, the competitor environment, cost structures and skills requirements are changing shape.  In order to continue to deliver sustainable shareholder value in the longer term, it is important that we meet the challenges of this evolving environment.  We must retain our core strengths, but we must also sharpen our customer focus and enhance our brands with new propositions to ensure that they remain market leading in the eye of the customer.  We must also build new capabilities to strengthen the business and deliver an efficient platform from which to grow.

We have identified three key strategic themes, which will ensure that our brands get not only bigger, but better:

1.  Grow and innovate in our core UK businesses;

2.  Focus on our strengths to grow internationally; and

3.  Build capability and infrastructure to support long-term growth.

1.  Grow and innovate in our core UK businesses

Premier Inn UK

The structural growth opportunities in the hotel market remain strong and provide confidence in our c.85,000 room milestone.  In reaching this conclusion we have reviewed and retested our view of the UK hotel market by catchment and reflected the structural shift from independents to branded hotels.  We expect the UK hotel market to grow from c.700,000 rooms today to c.740,000 rooms in 2020, with the branded budget hotels growing from 24% to 29% of the total market.  We have assumed that hotel demand grows over the cycle in line with GDP growth at just over 2% and, for the first time, we have adjusted our forecasts to reflect an estimate of the share any market disruptors might gain.  This new network plan indicates that we have clear headroom to grow our business and gives us confidence that the current milestones are appropriate.

Our network strength gives customers the greatest choice of locations and we offer the best value for money through our continuous focus on the quality and consistency of our product and service.  These in turn result in a high occupancy of 80.9%, which means our hotels are regularly full, with 86% of bookings direct through our Premier Inn website. 

Network strength

In 2015/16, we opened 40 new hotels taking the total number in the UK to 737, around 200 more than our nearest competitor.  This network coverage is core to getting customers closer to their destination, a key consideration for both leisure and business customers.

Growth opportunities

With nearly 65,000 rooms today and a committed net pipeline of around 12,700 rooms we are making good progress towards achieving our 2020 ambition for c.85,000 UK rooms. Furthermore, we are not compromising on long-term returns, with returns for our committed UK pipeline by 2020 similar to those achieved today and growing as the hotels mature.

London remains a strong opportunity for us and, over the past three years, we have grown our rooms by 11.7% CAGR to over 11,000, and total sales by nearly £100 million to £260 million, while maintaining occupancy at around 86%.  Our share of the London hotel market remains relatively low at 7% and, with a committed pipeline of c.5,400 rooms, we are on track to grow our London estate to 18,000-20,000 rooms by 2020.

'hub by Premier Inn' is our exciting new compact city centre hotel concept.  It allows us to grow profitably in city centre locations with high property costs and to deliver a good return on capital, whilst offering customers great value, high quality rooms in great locations.

We now have four hub hotels open at St. Martin's Lane (November 2014), Tower Bridge (December 2015) and Brick Lane (February 2016) in London, and Royal Mile (February 2016) in Edinburgh.  Our hub hotel in St Martin's Lane has now been open for over a year and guest feedback has been extremely positive with a Trip Advisor score of 4.5 and high occupancy.  Although it is early days, the other three have begun on a similarly positive note.

The regional hotel market also continues to offer good growth opportunities, through both existing and new catchment areas.  Our unique freehold backing provides us with a significant opportunity from our low risk, good returning hotel extensions programme, which represents some 39% of our future regional growth.

Delivering a consistent quality product

We want Premier Inn to be at the forefront of our customers' minds when choosing a hotel, so it is important that we continue to invest in our existing hotels to improve our customer experience and reinforce our competitive position.  Our consistency drives customer loyalty and enables us to have a revpar premium to our direct competitors.

Value for money

We prioritise high occupancy and value for money to build long-term customer loyalty.  This approach has resulted in Premier Inn growing its occupancy by 5.1% pts since 2011/12 to 80.9%, compared to a 1.6% pts increase in the midscale and economy market to 78.6%. This focus has been evidenced by consistently high YouGov value for money scores.

Direct digital distribution

The benefit of offering a consistent quality room and value for money, combined with a good website, has enabled us to grow our direct digital distribution from 69% in 2011/12 to 86% in 2015/16.  Through this we are able to provide a better service to our customers, offering them the lowest price channel along with the most comprehensive information regarding their stay.  At the same time we benefit from a low cost booking channel and receiving greater customer insight.

Food and beverage offering for Premier Inn customers

We have recently completed a thorough review of the importance of our restaurants and the value that they create for Premier Inn.  The key findings are as follows:

·    Breakfast and dinner form a vital part of our customer offering and it is clear that their provision produces higher occupancy.

·    Through our unique joint site model we are able to control the customer journey, guaranteeing the consistency of our product and service.  This generates higher guest scores and, critically, results in higher hotel revpar and profitability.

·    In addition, our joint site model produces operating and capital efficiencies and so delivers better returns than both our hotels adjoining co-located third-party restaurants and our solus sites.

There are also a number of additional benefits to our joint site model, these include the ability to exploit our freehold sites for extensions or site redevelopment and gain access to smaller markets through the improved total site returns when including the branded restaurant.

We continue to make good progress in rejuvenating our restaurant brands and have converted 62 sites to the new Beefeater brand proposition to date.  Furthermore, we have recently launched a contemporary Beefeater in Birmingham in March this year, Beefeater Bar + Block, serving all day breakfast, lunch and dinner.  This small format, new joint site model is designed to improve returns versus those of our solus sites in city and town centres and although early days, has already received great customer feedback.

Costa

UK Retail

Costa UK Retail has delivered another good performance, with UK retail sales growing by 15.7% and like for like sales in UK equity stores increasing by 2.9%.

Over the past two decades the UK coffee shop market has seen unprecedented growth and, according to coffee experts Allegra Strategies, UK branded chains' outlets have grown at around 6% CAGR over 2008-2014, with further growth expected over the next few years.  Nevertheless, UK coffee consumption remains relatively low in comparison to many other developed countries. 

While coffee venues continue to act as social and community hubs, customers' demands are evolving.  Convenience and coffee quality remain essential but customers are becoming more sophisticated with fresher food, faster service, better loyalty schemes and a greater digital experience becoming increasingly important to drive customer satisfaction and grow revenue.

As the UK's favourite coffee shop, Costa is well placed to capitalise on future market opportunities as we plan to grow to around 2,500 stores by 2020, largely underpinned by more diversified channel growth.

Our new Costa Fresco concept (launched in December 2015), is centred on fresh and healthy food and will provide a platform for us to broaden our food range and quality credentials.

Our 'fast format' Costa Pronto facilitates coffee on-the-go and is based on our ability to offer fast, friendly service in city locations where speed is of the essence.

We are also planning to further expand our food range to offer customers fresher, healthier options, and to introduce new tills and ovens to increase our speed of service. We will build on the taste of our great Mocha Italia coffee and continuously improve our coffee credentials so we can respond to customers' increasing demands for quality coffee anytime, anywhere.  This includes plans to expand our coffee range through the launch of single origin coffee and new brewing techniques.

Costa Enterprises

Costa Enterprises had a very successful year, growing system sales by 14.4% and installing 924 net new Costa Express machines, giving a total of 5,216 at year-end.  We plan to install around a further 1,000 machines in 2016/17.  This puts us well on track to achieve our target of c.8,000 machines by 2020 as we expand into new growth channels internationally and in the UK. 

2.  Focus on our strengths to grow internationally

Premier Inn International

In the Middle East we continue to see long-term growth through our successful, profitable joint venture. In India and South East Asia, although there is opportunity for growth, the market remains operationally challenging and we will assess the opportunities over the coming year.

Premier Inn Germany

We believe Germany provides an exciting growth opportunity for Premier Inn with a hotel market that is nearly a third larger than the UK.  It has a fragmented competitor set and a high percentage of independents which are in gradual decline.

Our first hotel opened in Frankfurt in February this year and the feedback has been excellent.  We have a committed pipeline of three more hotels with the aim of having six to eight hotels open by 2020.

We are looking to commit capital of some £60-100 million per annum over the next three years to gather pace in what we perceive as an attractive market for Premier Inn, and will continue to look for further opportunities to test the market more quickly.

Costa EMEI

We have a strong and profitable franchise business with a total of 696 stores across 24 countries.  Our franchise business has grown rapidly over a number of years and we have learnt a lot about what makes a successful business model, whether that be via the partnership model, logistics, localisation or customer demographic.  We intend to focus on growing our position in the best of these markets and will not be afraid to withdraw from markets where there is a structural issue.  This will allow us to focus our resources and people on the markets where there is an opportunity for us to grow profitably and win market share.

Our equity business in Poland has made good progress following the re-branding of the estate to Costa with the stores delivering positive like for like sales growth, and we anticipate this business will return to profitability in 2017.

It is still early days for Costa France and we continue to focus on developing both our equity and franchise stores in key locations.

Costa Asia

China remains an exciting opportunity for the Group.  We have targeted around 700 stores by 2020, underpinned by the growing coffee shop culture and status of western coffee brands as aspirational.  We have a new and experienced management team with a strong focus on retail and an ambition to enhance our brand awareness through investing in new store formats, offering better and more local food and beverage propositions and also enhancing our digital capability.  During the year we opened 39 net new stores in China giving us a total of 383 stores across 30 cities.  As we move forward we have decided to focus on disciplined profitable growth across 15 major cities.

3.  Build capability and infrastructure to support long-term growth

In order to build bigger and better brands that maintain their market leadership positions we need to develop the capability and platform from which we operate.  This will enable us to grow effectively towards our milestones and beyond.

To achieve this we will need to invest across both brands in a number of common areas: teams, IT infrastructure, digital and productivity and efficiency. 

Teams

We must employ, train and retain the best teams in higher labour cost environments, providing them with the optimum technology to do their jobs, so we can continue to differentiate our customer proposition through great service.  We will also continue to build on our core international capabilities and the quality and skills of our local teams.

IT infrastructure

We will upgrade our systems infrastructure to give us greater resilience as we grow, build faster networks, introduce better data analytic tools to improve insight and upgrade systems such as our tills and finance applications.  We will also look to build IT supplier partnerships to support us in developing new customer propositions and to get the right technology and service for our customers and teams at the best price.

Digital

As our customers' demand for a greater digital experience accelerates, we will improve our engagement with them by bringing more digital capabilities in-house so that we can work in a faster, more agile way, developing and continually enhancing our websites and loyalty platforms.

Productivity and efficiency

Alongside our investment plans we will also move productivity and efficiency up the agenda. Through investing in our infrastructure and systems we can build a better and more efficient platform for the future, with greater automation of processes including dynamic hotel pricing, product management and better labour management tools, to ensure our teams can deliver great service in the most efficient way.  We can see opportunities in procurement across the Group by simplifying our operations, being smarter at refurbishments and focusing our restaurant offering through fewer brands.  Finally, supply chain and logistics efficiencies will be reviewed given the size and scale of the business today and in the future.

To help us achieve this there will be a £15 million net P&L investment in 2016/17 across Whitbread.

Good Together

At Whitbread we have some of the UK's favourite and most trusted hospitality brands.    Keeping abreast of, or indeed ahead of, the trends and concerns which are important to our customers and communities is vital, whether that be how we look after our colleagues, how we protect the environment or how we support our communities.  As one of the UK's largest companies, we have the responsibility and the opportunity to act as a force for good.  This is not just the right thing to do, it is vital if we are to build a sustainable business for shareholders in the long-term.

We are committed to creating a great place to work and ensuring our 50,000 team members have development opportunities that will help them realise their potential.  We invest around £12 million annually in skills and development programmes including our WISE programme (Whitbread Investing in Skills and Employment) which is focused on supporting young people and those not in education, employment or training, into work.

We welcome the introduction of the new National Living Wage; indeed, in Costa we implemented it six months in advance of the Government's launch date.  In Costa and Premier Inn we have taken the decision to pay the new wage to all employees (including apprentices), regardless of whether they are over or under 25 years old.

In April 2015 we set out ambitious 2020 targets for our Good Together programme and we are making good progress towards achieving them.  Our teams are raising millions of pounds for our chosen charities of Great Ormond Street Hospital Children's Charity and the Costa Foundation, helping to improve the lives of children in the UK and coffee growing communities around the world.  We are also leading the hospitality industry in our innovative work to build sustainable buildings, so that as we grow we manage our environmental footprint.  A good example is Costa's new Eco Pod store in Telford which is the UK's first zero energy coffee shop.

Alison Brittain
Chief Executive
26 April 2016

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