Derek Pain: Whitbread could suffer if coffee is no longer our cup of tea

Whitbread's Costa Coffee division suffered a stinging sales slowdown in the last 11 weeks of its trading period

Derek Pain
Friday 11 March 2016 21:22
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The weather was blamed for upsetting the coffee cups
The weather was blamed for upsetting the coffee cups

Is Whitbread's coffee pot beginning to cool? Its Costa Coffee division, which helped transform the group from a traditional brewery into a highly successful leisure operation, suffered a stinging sales slowdown in the last 11 weeks of its trading period.

As is often the case in leisure and retail when results come in below expectations, it was the weather that was blamed for upsetting the coffee cups. Milder temperatures followed by rain and storms were apparently the cause of a 0.5 per cent sales advance in the 11 weeks to 11 February, compared with growth of more than 3 per cent over the rest of the company's financial year.

Perhaps the market is becoming saturated. On my local high street, coffee parlours abound and various other outlets, such as the baker Greggs, are targeting coffee lovers.

Experienced analyst Mark Brumby at the adviser Langton Capital wonders whether the business is "more mature than it was".

Some Whitbread followers have for some time worried that the phenomenal growth at Costa Coffee is being blunted by fierce competition. Whitbread dismiss such fears. And it points out that sales over the year, including new openings, advanced more than 14 per cent and that us Brits still drink much less coffee than continentals. Even so, Whitbread is keen to experiment with new concepts for its parlours.

Still, the group's sales growth was not unimpressive at 10.4 per cent, with Premier Inn, the budget hotel chain that has also contributed to Whitbread's growth, achieving an 8.2 per cent gain.

The shares have suffered amid the overall stock market retreat, accentuated by the belief that the glory days of Costa Coffee are over, but I think it is too early to take such a view. Costa Coffee is strong – and growing – and Premier is also expanding.

That said, there is no getting away from the simple fact that the decline in the shares has been dramatic.

From a peak of 5,500p, they bump along, as I write, at around 3,700p – although the No Pain, No Gain portfolio is still quids in as Whitbread was enlisted at 1,105p. But just in case the coffee bubble really has burst, I have decided to put a 3,000p "sell" price on the shares – and it could be that I depart before such a level is reached. After all, the name of the game is preserving profits and the shares' behaviour since reaching their peak is rather disconcerting.

SnackTime is one share I cannot sell. The stock remains suspended although I was hopeful the freeze would have been removed by now.

It seems the results for the 12 months to the end of March last year could be published in a week or so, indicating that share trading could then resume. In the meantime, SnackTime has said in a trading update that the loss last year was £4.4m, against an £8.5m loss in the previous year.

The vending group, which once promised so much, was suspended at 8p; my buying price was 119p.

SnackTime is not the worst-performing share the portfolio has ever embraced – after all, a few have gone bust – and the little group is prepared to soldier on thanks to the arrival of Russian businessman Boris Belotserkovsky, who now controls the business.

Mr Belotserkovsky's tolerance and wealth, together with chairman Jeremy Hamer's persistence, have rescued the group and perhaps the future could be brighter after so many dark days.

Finally to the troubled outsourcing group Serco, which I mentioned last week. Analyst Joe Brent at the broker Liberum thinks the shares could double in price over the next three to four years.

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