Consumer

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

Britain is showing signs of getting over-caffeinated, and the shakes and tremors in Whitbread's earnings are the early symptoms. While the British conglomerate posted fiscal first-half profit on Tuesday that beast analyst estimates, sales growth at Costa coffee showed signs of petering out.

Growth at outlets open more than a year slowed to 2 percent in the three months through Sept. 1 from 2.6 percent in the preceding three months. Operating profit for the first half fell by 4 percent from the year-earlier period.

Costa Cooling
Costa is still enjoying strong growth -- but the pace is decelerating
Source: Bloomberg

Whitbread CEO Alison Brittain pinned the blame on an increase in the minimum wage and spending on IT that squeezed margins by 1.8 percentage points.

Costa's Domination
The Whitbread chain has more U.K. outlets than any of its competitors
Source: Allegra World Coffee Panel

She's also investing in new concepts such as Costa Pronto quick service coffee bars, and cafes offering more food, and in some cases, late night opening and alcohol. This might be a plausible explanation for the profit dip, but it should raise a red flag.

The market is getting increasingly crowded. From hipster hang-outs to the more down-to-earth Greggs, Costa has competition on all fronts. It has no choice but to invest, particularly if it wants to meet an ambitious goal of increasing Costa's sales by more than 50 percent to 2.5 billion pounds by 2020.

Life is about to get tougher still. Whitbread pays for Costa's coffee in dollars. Hedging is only in place until the end of February. If the pound stays weak, Costa will face more expense -- even if Brittain plans to offset this with cost savings.

If inflation returns to Britain and starts squeezing household incomes, that latte on the shopping trip, or even that weekend away at one of Whitbread's Premier Inns could be sacrificed.

There's a lesson for the wider consumer industry in all this: from retailers to fast-expanding casual dining chains, British companies face an unpleasant mix of rising sourcing costs -- thanks to the weak pound -- and higher wage bills. If consumer spending power is squeezed too by inflation, that could curb future growth. Whitbread is a bellwether in this regard.

The conglomerate's larger hotels business should offer some protection, but even here there are concerns. At Premier Inn, Whitbread is changing the phasing of new hotel room openings, so that they aren't all concentrated in the final quarter of the year. Some will open in the first quarter of next year instead. Consequently, the number of new U.K. room openings will be 3,700 this year, down from the 4,000 to 4,500 previously expected. That's sensible given Brexit could slow demand for business travel. But it runs the risk that growth from the hotels business might slow.

Whitbread wobble
Shares have fallen this year on concerns about the consumer economy
Source: Bloomberg

Brittain, who took the helm just under a year ago, missed a trick by not using her arrival to overhaul Whitbread's conglomerate structure and focus on the hotels. The shares, which have dropped 11 percent since the start of September to about 37 pounds, are falling further below Whitbread's estimated break-up value of about 44 pounds. There's little on the horizon to reverse that slide.

With the coffee market past its zenith, the time to extract the maximum value from Costa has probably passed too. Still, Brittain has made her hotel bed. Now she must lie in it.

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:
Edward Evans at eevans3@bloomberg.net