Costa Coffee Sees Growth in China

Posted on: 2016-04-26 2:39 PM

The company is benefiting from Britain’s long hours work culture and seemingly never-ending thirst for caffeine, say analysts, after Whitbread reported a near-12% jump in underlying pretax profits to £546m.
 
But Costa faces rising competition from sandwich chains such as Pret a Manger and Greggs, while Premier Inn is up against the likes of AirBnB.
 
Overall like-for-like sales rose 3% in the 53 weeks to 3 March, down from 6.5% the previous year. Premier Inn sales increased by 4.2%, while Costa was up 2.9%.
 
Whitbread increased its full-year dividend by 10% to 90.35p to reassure shareholders. The shares have lost nearly 30% in the past 12 months, but rose 1.3% to £39.21 after the results.
 
Six weeks into its new financial year, Whitbread said the “indications are that Costa UK has had a good start to the year and Premier Inn is growing share in a flat market”.
 
Costa, which some investors would like to see spun out of Whitbread, raised its coffee prices by 10p in January, the first increase in five years. But it says it is still cheaper than rivals, with its medium cappuccino costing £2.50, compared with £2.60 at Starbucks and £2.75 at Caffè Nero.
 
The new chief executive, Alison Brittain, a former boss of Lloyds Banking Group’s retail arm, set out three themes: to grow and innovate in Whitbread’s core UK businesses, to focus on international expansion plans, and to build the infrastructure to support long-term growth.
 
Whitbread wants to nearly double the number of Costa outlets in China to 700 by 2020, tapping into the country’s growing coffee shop culture. It is targeting 2,500 Costa stores in the UK and £2.5bn sales at the coffee chain, from £1.6bn now. At Premier Inn, it wants to add 20,000 UK hotel rooms to take the total to 85,000 in that period. Neither chain is making much money internationally.
 
The company is trialing Costa Collect, a pay-and-collect app to reduce queues and increase sales, as well as Costa Fresco, where a kitchen prepares freshly baked products. Currently Costa mainly sells centrally produced paninis, pastries and other sweet treats. Costa Pronto offers coffee-on-the-go in city locations “where speed is of the essence”. There are also plans to expand the coffee range through new brewing techniques and the launch of single origin coffee.
 
Brittain will present another strategy update to investors at a capital markets day in November. She said: “The world around us is shifting, with rising customer expectations, an evolving competitor landscape, rapid technological developments and changing cost structures.”
 
Whitbread increased the pay of its 12,500 baristas in October, six months before the “national living wage” was introduced.
 
There have also been management changes, with the boss of Costa Coffee, Christopher Rogers, leaving. The Whitbread veteran, who missed out on the top job to Brittain, will be replaced by Dominic Paul, a senior vice-president at the cruise company Royal Caribbean International.