Eat, drink and be healthy

SHARES Whitbread's expansion from its brewing roots to a triad of consumer markets could be a wise move
Season's greetings are in order to David Thomas, who last week was appointed chief executive of Whitbread, the leisure to brewing group, having joined the company in 1984.

Noises from the City were favourable, although the shares lost pounds 70m on the news. This reaction was perhaps more to do with the departure of Peter Jarvis, seen as a steady hand at the tiller, who leaves in the summer, than fears about where Mr Thomas may take the company.

Nevertheless, doubts remain over the wisdom of the group's flight away from its roots in brewing, to pizza restaurants, hotels and other leisure pursuits - a strategy largely implemented by Mr Thomas.

It is a far cry from the glory days of the Beerage, of which Whitbread was a leading constituent. Although the sector rarely raised City pulses, it was safe and reliable, founded on solid defensive characteristics.

The revolution ushered in by the 1989 Beer Orders - which ended the brewers' ownership of huge tied estates - brought added urgency to the sector's quest for growth. But Whitbread had been quietly building up its food business. Its Pizza Hut operation got off the ground in 1982. The TGI Friday franchise was added to the group during 1985.

There is a case for Whitbread to leave brewing entirely, given Bass and Scottish & Newcastle's now near duopoly. Its beer business accounts for only 13 per cent of profits, and these are likely to diminish to 10 per cent over the next couple of years.

The company, however, is adamant it will remain in brewing and pubs. David Richardson, the director responsible for strategic planning, says the two businesses feed off each other. "It's a good cash generator, and there is plenty of synergy between the tied estate and the brewing, which benefits everybody," he says.

Nevertheless, there has been a touch of the go-go stock to its act over the past two years. In the past 18 months, it has made three large acquisitions, most of them for top dollar prices.There was the purchase of 16 Marriott hotels in the UK costing pounds 180m; the David Lloyd Leisure Clubs, both in August of last year, for pounds 200m; and, last August, pounds 133m to buy the Pelican Group of city centre restaurants, best known for its Dome and Cafe Rouge brands.

Continuing its spending spree, Whitbread ratcheted up another pounds 46m bill in November for BrightReasons, owner of the Pizzaland and Bella Pasta restaurants, with 180 outlets. The deal complements Whitbread's 200-plus Pizza Hut restaurants it runs in a joint venture with Pepsi.

Some are worried that together all these deals mean the company is biting off more than it can chew, although the market was pleased by the lower than expected price for BrightReasons. Of course, perceptions change: the pounds 55,000 a room it paid for Marriott, now looks cheap against some of the more recent prices achieved for hotel rooms in the UK.

Analysts at Merrill Lynch predict Whitbread will spend a further pounds 600m through to February 1998 as it rolls out its new brands around the country. At present, the shares are on something of a roll. They have outperformed the market by a comfortable 8 per cent in the past three months, although they have slipped back from their all-time highs of 781p in the past couple of weeks.

But over five years, the shares have been no more than a proxy for the market - worthy, but hardly scintillating. Optimists bet that the revolution in the group's businesses heralds an exciting new era for Whitbread, which will bear fruit in higher growth rates. Most analysts expect profits to grow by up to 15 per cent a year over the next couple of years.

Recent results bear out this prognosis. Interim figures in November showed the group motoring ahead on all fronts. Much of the impetus has come from the surge in consumer spending. Such advances may well continue for another year or more, before consumer demand once again fizzles. But sceptics probably require firmer evidence that the business, if it is to commit itself to the new-style group, can bear such a downturn without too much of a squeeze on its margins.

The decision to buy David Lloyd's health and fitness club business was an imaginative one. And it has presented several opportunities for expansion. For one thing, the UK is light years behind the US in this field, and health clubs have yet to establish themselves as part of the fabric of British society. But all the trends suggest that such a view will prevail over the next decade.

David Lloyd, as a business, also has the all-important expertise that is needed for working alongside local authorities on such issues as planning consent. Whitbread plans to open up to six clubs a year, and has already opened another four since the deal to add to the original dozen sites it bought.

The dilemma at Whitbread is whether the margin on its return on capital will exceed its cost of capital. However, as one analyst pointed out: "It will take three or four years to see the full effect of Whitbread's acquisition drive, and of the brands being rolled out. Anyone who tells you otherwise is misguided."

Whitbread is convinced of the validity of its moves. Against Bass and Scottish & Newcastle, its shares look cheap, and the trade roughly in line with the market - which admittedly still looks toppy.

If the case for buying remains somewhat speculative, the downside is limited. Time then, to toast Mr Thomas's arrival with some Christmas purchases.