Whitbread has confirmed it will seek a demerger of Costa, which it expects to complete within the next two years.
In an update this morning the company said that the board had “for some time” been of the view that separating Costa and Premier Inn would optimise value for shareholders over the long-term and said it expected the announcement to provide clarity.
The company said the plan would be for Costa to operate as a separate listed entity and continue its strategy of growth domestically and internationally through stores and Costa Express.
It said the focus for Premier Inn would be to replicate in Germany its success in the UK.
The announcement came alongside the group’s full-year trading figures, which showed a 0.4% drop in like-for-like sales at Costa’s UK equity stores, although growth in Costa Express pushed overall like-for-like sales at Costa to 1.2% growth year-on-year.
Overall revenue growth across Whitbread was 6.1%, to £3.3bn, with underlying profit before tax up 4.5% to £591m, and statutory profit before tax up 6.4% to £548m.
On Costa, the company said that despite the “well-publicised level of external challenges from decreased footfall in traditional shopping locations and increased levels of inflation” the brand had made significant progress in its transformation.
Whitbread admitted that many of its stores in traditional shopping centres were experiencing declining like-for-like sales but that the company was seeking to limit the impact of this through enhancing the overall customer offer and increasing average transaction value.
It said significant progress in bolstering its food offer, with an uplift in the savoury food capture rate following the launch of a new breakfast offer in May. It said this uplift was sustained with an improved salad range available in stores from June and a new hot lunch range launched in September. The overall food capture rate for the Costa UK equity business increased by 1ppt to 42.6%.
The Costa point-of-sale terminal upgrade programme is now also substantially complete and has allowed a trial of mobile order & collect in 16 London stores. Costa will also begin to trial the use of targeted offers to the five million active Costa Club loyalty programme members and is trialling the connection of the loyalty programme to Express machines.
Chief executive Alison Brittain said: “Given the progress Whitbread is making, we are confident that both Premier Inn and Costa will soon be businesses of sufficient strength, scale and capability to enable them to thrive as independent companies. The Board, therefore, believes that it is in the best long-term interests of Whitbread’s many stakeholders to separate Premier Inn and Costa, via a demerger of Costa. We have carefully considered the optimal timing and concluded that it will be pursued as fast as practical and appropriate to optimise value for Whitbread’s shareholders and is expected to be completed within 24 months. This will allow both Premier Inn and Costa to maintain momentum, complete critical and complex transformation and infrastructure objectives, and drive international expansion. The management team and I are excited that the strategy we are executing will give us the opportunity to create two high-quality independent businesses that will create long-term value for our stakeholders.
“At the point of separation, both businesses will be able to take advantage of the structural growth opportunities available to them in the UK and internationally. Costa will become a listed entity in its own right and the clear market leader in the out-of-home coffee market in the UK. Costa will also be well positioned to build further on its strong international foundations with growth expected in China and Costa Express.
“Whitbread will remain the owner and operator of the UK’s most successful hotel business. A key priority will be continuing the development of Premier Inn by creating a business of scale in Germany to replicate the success we have in the UK.”
Chairman Adam Crozier said: “The Whitbread Board has conducted regular and rigorous reviews of its strategy and structure for a number of years. For some time, the Board has been of the view that at the right time Premier Inn and Costa should be independent companies. A separation will provide enhanced focus for each business and give shareholders an investment in two high-quality businesses. We will ensure that prior to separation each business is sufficiently developed and well-positioned to take advantage of the structural growth opportunities available to them in the UK and internationally. Announcing our intention now provides clarity of our strategic direction to our shareholders, team members and other stakeholders.
The management team have continued to deliver strong strategic and operational performance, whilst building momentum in growth, innovation, international expansion and development of technology and infrastructure. The team will now also be focused on ensuring the demerger of Costa is conducted as fast as practical and appropriate to optimise value for Whitbread’s shareholders. The Board fundamentally believes this is the best course of action to optimise value for shareholders over the longer term and will ensure both Premier Inn and Costa are positioned well to thrive as independent companies.”