Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Whitbread has percolated a better-than-expected performance from its Costa Coffee arm.

That's given the shares a jolt of espresso, and they rose as much as 4 percent on Tuesday before cooling off to a 2 percent gain. Investors are right to check their enthusiasm -- new Chief Executive Alison Brittain has a lot of hard work ahead.

The company said sales from its cafes open at least a year rose 2.6 percent in the first quarter, well above the previous period's 0.5 percent. The faster-growing chain has helped propel Whitbread's sales and valuation higher over the past five years, so it's little wonder that the shares have frothed again on the performance.

Short Stay
Whitbread's sales from hotels and restaurants still dwarf those from fast-growing Costa
Source: Bloomberg

But the hotel division -- which also includes restaurants and accounts for about two-thirds of Whitbread's sales -- remains under pressure. Revenue per available room at Premier Inn, including new developments, dropped 1.2 percent in the quarter. The slowdown was evident in both business and leisure travel.

London has been particularly difficult after the terrorist attacks in Paris and Brussels, with revenue per available room falling 6 percent. 

A glut of rooms is also to blame -- Brittain's predecessor, Andy Harrison, had plans to reach 85,000 U.K. hotel rooms by 2020. That lead to 3,600 new rooms becoming available in the final three months of 2015, including 1,000 in London. 

Brittain can't be blamed for this. She only became chief executive in December. 

But what's curious is that she's adopted Harrison's targets without question. These included boosting revenue from Costa cafes, coffee machines and franchise royalties to 2.5 billion pounds ($3.7 billion), an increase of almost 1 billion pounds from today.

Deserved Discount
Whitbread's forward p/e ratio lags those of both European hotel rivals and Starbucks
Source: Bloomberg Intelligence

Brittain won't be drawn on whether she will amend these targets, particularly in the light of the outcome of the U.K.'s referendum on whether to leave the EU. At her first profit report in April, she reiterated Harrison's targets, and said little else on strategy.

The targets need to be changed. Unless there's a big bounce-back in travel soon, the hotel goal looks too aggressive. 

And Costa faces increased competition in what is probably close to a peak coffee market. Even relatively downmarket bakery chain Greggs is selling flat whites now. 

But as Gadfly has argued, Brittain should go one step further and examine a split of the hotels and coffee business. With both businesses at their peak, she could achieve decent valuations for either.

Whitbread shares, which had fallen as much as 17 percent this year before their recent bounce, trade on a forward price to earnings ratio of about 16 times. The discount to both European hotel rivals and Starbucks looks deserved, given the possibility that growth is petering out at both divisions.

It's difficult for any new chief executive to take an ax to the preceding empire. And Brittain has promised investors a "deep dive" into the business in November.

But that's a long time to ask them to wait for a strategy update. Prevaricating turns the problems of her predecessor into problems of her own.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net