Mac & Cheese Can't Cure the Consumer Blues - Bloomberg Gadfly

Whitbread needs more than comfort food to ride out the consumer storm.

Mac & Cheese is proving a hit with customers of its Costa Coffee. The chain owned by Whitbread Plc is selling about 20,000 of the dishes a week.

It's all part of the focus on innovation and investment -- backed by cost savings -- at the chain. That sounds sensible. But it's not enough to offset the pressures in the cafe market.

Whitbread on Tuesday reported like-for-like sales growth at both Costa and its Premier Inn hotel chain that fell short of the consensus of first-half analysts expectations. Costa's U.K. underlying operating profit also fell almost 5 percent to 61 million pounds ($80.4 million), hit by food price inflation as well as higher labor costs and business rates.

Extra shot needed

Whitbread's two biggest divisions missed analysts expectations for sales growth

Source: Company reports, Bloomberg

The slowdown in the coffee chain's underlying expansion is worrying on two fronts. Firstly, it has been the main engine of growth at Whitbread, so any sign that it is running out of steam is a concern. Costa's total U.K. sales were up 8.3 percent in the first half, so its overall performance is still being boosted by new openings. But with its market looking increasingly saturated, and competition from cheaper upstarts such as Greggs Plc, there's a question mark over whether that can be sustained.

Caffeine Boost

Costa's sales have grown strongly in recent years

Source: Bloomberg

Secondly, Costa accounts for a good chunk of Whitbread's value. It could be worth 2.5 billion pounds, based on an average of the enterprise value to Ebitda multiples of Restaurant Group Plc and Starbucks Corp, and 3.4 billion pounds based on Starbucks' multiple alone, according to an Oct. 11 Credit Suisse report. That is between 30 percent and 41 percent of the group enterprise value, the analysts said at the time. Any sustained weakness in performance could mean a lower valuation.

Chief executive officer Alison Brittain ruled out a break up when she announced the results of a strategic review in April 2016. Her approach has been to continue to invest in both Costa and the hotels arm, underpinned by efficiency gains, and she confirmed this strategy. Putting new ovens into Costa -- to cook all those Mac & Cheese dishes -- was made possible by savings of 60 million pounds over the past two years.

But the shares are not responding. They have fallen 29 percent since April 2015, when Brittain's predecessor, Andy Harrison, announced his retirement.

Losing Steam

Whitbread shares are down almost 30 percent since former CEO Andy Harrison announced his retirement

Source: Bloomberg

With an almost 5 percent fall on Tuesday they trade at about 37.50 pounds each, a discount to Credit Suisse's break-up value of 51.57 pounds.

Brittain took over in December 2015 at what was a delicate time for Whitbread. The group had grown strongly, but faced headwinds. That wasn't of her making. Deciding not to pursue a separation of Costa and the hotels arm was.

The company has an "open brief" on its structure and discusses it regularly, Brittain says. The trouble is, with underlying growth slowing at two key divisions, the optimum time for action may have passed.

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

To contact the editor responsible for this story:

Jennifer Ryan at