Costa reacts to tougher UK with self-help and eye for abroad

Comment Martin Flanagan

It can seem carping to question the performance of Whitbread, in particular its Costa Coffee business, when the company has made such a good fist of transforming itself from a somewhat tired looking if centuriesold brewing business into a fast-moving coffee shops to Premier Inn budget hotels operation. In its well-established new guise, it has been one of the nippiest, cash flow-reliable retail/leisure outfits on the block, its main problem being the rod it has created for its own back by ever-better like-for-like sales to outrun.

Its shares were off 5 per cent yesterday as Whitbread revealed that Costa’s UK likefor-like sales rose just 0.6 per cent in the six months to August, down from 2.3 per cent in the same period of 2016, and with sales growth slowing further to 0.1 per cent in the second trading quarter.

I’m not going to call the peak for Costa, or indeed its main coffee chain rivals, because I was one of those who got it wrong in believing store-bought coffee would be one of the most exposed littleluxury sectors in the 2008-9 recession and ensuing perennial austerity. It didn’t happen – Costa and its rivals proved highly resilient.

But, while Premier Inns continues to fly the flag with more rooms, more revenues and more profits, Costa has hit headwinds. The subsidiary has a major high street presence so is exposed to high business rates; it is quite labour intensive so the living wage has taken a toll; the cost of raw coffee has gone up, as has the cost of living for most consumers.

Whitbread chief Alison Brittain, like many UK bosses before her, has identified faster overseas expansion to counteract the slowdown in UK growth. China, in particular, where the coffee market is expected to double in size by 2020, is firmly on her radar.

New Costa breakfast and lunch ranges have been launched. New coffees and cold drinks are on the shelves, with Brittain believing people will pay more for something a bit more sophisticated, and maybe boost profit margins in so doing.

Costa coffee has been rolled out to shopping malls, drive-thru stores and offices. Costa Express machines have been boosted by 25 per cent to nearly 6,700 in the first trading half.

In short, Whitbread is taking the headwinds head-on.