Why Whitbread is set to prosper from Brexit

It’s easy to look at Brexit and come to the conclusion that it will be bad for all UK-focused companies. After all, it brings uncertainty, change and a potentially negative impact on the UK’s overall economic performance.

However, as with any situation, there will be winners and losers. Some companies will see their sales and profitability fall if reduced spending and investment become a reality. However, other companies could record little change in their performance, while some will inevitably benefit from Brexit.

Among those companies which are well-placed to prosper from Brexit is Whitbread (LON:WTB). The Costa and Premier Inn owner has a loyal customer base, which means that its sales performance may be more akin to a consumer staple than a consumer discretionary. Further, Premier Inn in particular could benefit from consumers trading down to budget hotel options, while the company’s international growth potential remains high. Therefore, in my opinion Whitbread will prosper from Brexit.

A consumer staple

In theory, a cup of coffee is a discretionary item. Nobody has a requirement to drink coffee. However, for the 16% of British adults who visit coffee shops on a daily basis, it is more likely to be considered a must-have item as opposed to something they can do without. Therefore, whether their incomes rise at a faster or slower pace than inflation, coffee drinkers are unlikely to reduce the amount of coffee they consume.

This is highly relevant for Whitbread because its Costa division accounted for 37% of its revenue in the most recent financial year. The Bank of England forecasts that inflation will reach 2.7% in 2017, which is relatively likely to exceed the pace of wage growth for most UK workers. Therefore, the UK could experience a similar situation to that of the credit crunch, when disposable incomes fell in real terms. This caused consumers to either delay, reduce or end spending on discretionary items.


Since coffee is more akin to a consumer staple than a discretionary item, it seems likely that Costa’s sales will hold up well even if Brexit causes a squeeze on disposable incomes. In fact, Costa may be able to generate improved margins versus expectations, since if UK consumers are primed for higher levels of inflation then price increases may be more easily passed on.

Switching to budget brands

While Costa is viewed as a premium product by many consumers, Whitbread’s Premier Inn hotel chain is very much a budget brand. This could benefit Whitbread if Brexit negatively impacts on the economic performance of the UK, since consumers may decide to trade down to budget hotel chains such as Premier Inn.

Similarly, if business confidence declines and sales growth across the UK economy comes under pressure, Premier Inn may benefit from greater demand among business travellers. Typically, they spend more on their stay and also stay for longer periods than consumers, which could further enhance overall sales and profitability.

Premier Inn’s aim to increase its number of rooms by around 30% by 2020 seems like the right move.

During the credit crunch, Whitbread was at the centre of a new ‘budget consumer economy’ which included other budget brands such as Aldi, Lidl and B&M. These companies bucked the trend and were able to grab market share from higher priced alternatives. In my opinion, there is no reason why a similar situation will not exist if Brexit causes another period of economic challenges as well as a real-terms fall in wages. Therefore, Premier Inn’s aim to increase its number of rooms by around 30% by 2020 seems like the right move.

A sound strategy

Whitbread is also well-placed to record improved financial performance due to its strategy. Notably, it intends to further improve customer loyalty within its Costa division through a new range of fresh food, more innovative products and new concepts such as Costa Pronto and Drive-Thru stores.

Similarly, the Hub by Premier Inn concept should help Premier Inn to provide an innovative budget hotel offering by focusing on location over room size. The consolidation of its restaurant brands is also progressing and while it could prove to be the weak link during the Brexit process, the situation of restaurants within Premier Inn locations should boost LFL sales on a relative basis.


An international growth strategy also forms a key part of Whitbread’s future plans. For instance, in the last couple of years Premier Inn has opened hotels in Germany for the first time, as well as expanding its exposure to the Middle East. Similarly, Costa has a small base in China which could offer significant long-term growth prospects. Its major UK rival, Starbucks, plans to open 500 new stores in China every year for the next five years as demand for coffee is forecast to soar. This highlights the growth opportunity which is open to Costa over the medium to long term.

Outlook

Whitbread’s P/E ratio of 14.5 and forecast EPS growth rate of 6% for financial year 2018 may not scream ‘buy’ at this moment in time. However, over the medium term the company has the potential to grow its profitability.

High levels of customer loyalty at Costa should ensure that sales remain robust, while an innovative strategy should enhance the customer experience yet further. A switch to budget hotel brands by cash-strapped consumers and businesses could lead to growth for Premier Inn’s offering, while a rise in the size of the number of hotel rooms could do likewise. Further, international growth indicates a bright long-term future, particularly in markets such as China where demand for consumer items is forecast to rise by 7% per annum over the next four years.

Therefore, far from Brexit being bad news for Whitbread, it could prove to be a positive event for the company. Its performance during the credit crunch was exceptionally strong and economic challenges brought on by Brexit could cause a repeat performance. In my view, Whitbread could prove to be the right stock to own over the next few years.