1 Internationalisation dynamics

Despite the significant impact of COVID-19 on our markets our review of the market is written for the long term and we remain excited about the potential. It is especially important in times like this to operate a vertically integrated model like we do; by owning all of the value chain, from developing and building the hotels right through to managing the brand, the operations and the direct distribution, we are best positioned to access the structural growth opportunities and continue to create value for our shareholders over the longer term.

The UK Market

In the UK, we are focused on continuing to grow and innovate with growth delivered through our existing pipeline. With our strong brand and winning customer proposition, we are confident that we will be able to continue winning market share.

Furthermore, the budget market in which we operate experiences higher growth than other hotel sectors and tends to outperform those other sectors in downturns. During this current COVID-19 crisis budget branded hotels have outperformed the market in every year since 2008, including a material outperformance during and after the financial crisis, and we are seeing evidence of that once again.

In Germany, we are focused on replicating our UK success, with the ambition to be the number one budget hotel operator. We have significant headroom to grow, both organically and through careful and considered mergers and acquisitions (M&A) activity

Germany presents an exciting opportunity given it has remarkably similar characteristics to the UK. Both markets are characterised by long-term migration from independents to budget branded hotels, and we have seen clear signs of distress and a weak independent segment decline. The COVID-19 crisis will likely accelerate the pressures on independents through demand weakness and increased cost pressures, and we expect this to worsen as Government support schemes are reduced. We also expect a decrease in new branded hotel supply, leaving an opportunity for Premier Inn to grow market share further.

The actions we have taken over the course of the year to protect our team, our guests and our business as a whole mean we are well placed to exit the COVID-19 crisis in a position of strength. The structural characteristics of the UK market remain, and we have ensured that Premier Inn is able to capitalise on the opportunities as a result of structural market changes, particularly the distress felt by smaller operations in the market as a result of the COVID-19 pandemic. There will inevitably be a constrained competitor set where there will be less opportunity for others to invest.

The UK is densely populated, which drives domestic short-stay travel, and post COVID-19, we expect the overall market to continue growing over the long term. Over the last decade, we have seen all consumer indices show an increasing expectation for value for money. We are seeing a generational impact, as younger people have a greater demand for leisure and travel in general. As a result, the UK travel market is a great core market for us to be in and Premier Inn is the clear market leader on every important measure.

The UK market remains highly fragmented from both a demand and supply standpoint, with around 48% of the supply provided by the independent sector. Whilst Premier Inn achieves high occupancy levels, we still represent a relatively low share of supply.

The vast majority of our rooms are sold to domestic travellers, compared to around 60% for the total market. Domestic short-stay travellers have a higher frequency of visit and, as a result, a greater likelihood of wanting to stay with us again if we meet their needs. This domestic skew also means we are better protected from any structural changes and effects on international travel that will arise as a result of COVID-19.

We also have a good mix of business and leisure travellers. This balance ensures, in a non-pandemic world, that we achieve consistently high levels of occupancy at around 76%. Furthermore, our business customers include a significant proportion of manual trades workers (those that need to be physically present to perform their jobs), while our office-based workers are from a wide variety of sectors. This means we are less exposed to potential structural shifts in working patterns, such as permanent flexible working. Premier Inn also under-indexes on group business bookings and we have very limited conference facilities so we believe we are less exposed to those areas of business travel that may see a structural shift to virtual meetings.

Since 2010 we have increased our market share of rooms from 6% to 11%, achieved through an ambitious network expansion programme. The rest of the budget branded sector has increased its market share by a similar amount to Premier Inn. However, the budget branded sector growth has been fragmented, with a long tail of smaller competitors.

We see an attractive ongoing opportunity to continue investing in new capacity and win further market share gains. This means that we can continue to grow our total sales ahead of the market and our plans are not wholly contingent on short-term conditions.

With our strong network and value for money, only 1% of our customers book using online travel agents, reducing the cost of customer acquisition vs the rest of the market. We can also leverage our scale to find ways to improve our efficiency to partially offset the inflationary cost increases, whilst smaller operators will, of course, struggle to do that. Post COVID-19, the pressure on the independents will only grow, creating an ongoing structural opportunity, which we are best placed to capture. We expect our additional new, efficient and superior hotel capacity to continue to provide domestic short-stay guests with a superior mix of quality, service and price, therefore allowing Premier Inn to win share in the UK.

The German Market

We have materially grown our pipeline in Germany over the year, with 30 operational hotels and an open and committed pipeline of 72 hotels. This network now gives us a national footprint, with a presence in many major German cities.

The German market is around 42% larger than the UK, at almost one million hotel rooms. Pre COVID-19, RevPAR in the budget branded sector in Germany had also been growing at a faster rate to the UK, at around 2.3% CAGR between 2015 and 2019 vs 1.3% in the UK.

Furthermore, the German market is even more fragmented than the UK, with independent hotels making up around 72% of the supply, and more domestic travel-oriented than the UK at around 77% of the total. This high proportion of domestic travel is a long-term output of Germany’s geography and history.

Germany is significantly more regionally dispersed than the UK due to its history and federalised political and industrial structure. This geographic dispersion drives greater demand for short-stay travel, particularly business-led. Therefore, there is a greater frequency of travel by the type of customer that Premier Inn excels at serving.

Structural barriers to entry exist as a result of the nature of the property market. With limited large property financing structures, such as Real Estate Investment Trusts (REITs), and greater opportunities in the four- and five-star sector for asset-light models, there has been limited new capacity added in the budget sector, which is considered to be the hardest sector in which to earn a return. This has meant that the international asset-light operators have struggled to find franchisees to operate appropriate new hotel sites. In fact, the only hotel businesses that have delivered meaningful growth adopt a similar owner-operator model to Premier Inn. In order to add sufficient capacity in the budget sector, an operator needs to be willing to develop freehold, sign long leases or buy out existing operators.

Post COVID-19, these structural elements make the opportunity even more attractive to us over the longer term. Even in the depths of the pandemic, we have seen opportunities come our way. We announced an acquisition in December, where we were able to select 13 hotels in key German cities at an attractive price. Our ability to very carefully deploy capital, when others will be constrained, provides an opportunity for us to continue investing in or acquiring assets with attractive long-term returns. We are seeing real signs of distress in the German market and expect the independents to continue to fall out of the market, creating an opportunity for Premier Inn to fill the gap.

Source: Whitbread (2021, pp. 12-15).

2 History of Whitbread

For an overview of the History of Whitbread see TMA1 Materials Part1.

(Source: Whitbread, 2022d).

3 Business model and strategy

Our unique ownership business model provides us with a competitive advantage in a challenging market, and has enabled us to become the number one hotel operator in the UK, and to expand our presence in Germany.

Our unique vertically integrated model sets us apart 

Our vertically integrated model, which combines the ownership of property, hotel operations, brand, and inventory distribution has enabled Premier Inn to grow at a significantly faster pace than competitors, deliver a consistently superior customer experience and generate a strong return on capital for shareholders over the last 15 years.

We have a proven strategy which is highly compelling

Whilst the impact of COVID-19 will be material on the hospitality sector, our strategic priorities are consistent with our proven plan to create sustainable shareholder value over the long-term. We expect to achieve long-term growth in earnings and dividends, combined with strong return on capital through disciplined execution in three key areas:


We will continue to grow and innovate Premier Inn, by leveraging the competitive advantages of the Whitbread operating model, including the strength and the Premier Inn brand and market-leading direct distribution and capitalising on enhanced structural opportunities.


The German market has the same characteristics as the UK, making it a highly attractive market for Premier Inn’s international expansion. In a market with high levels of fragmentation and no market leading budget hotel brand, Premier Inn has the opportunity to replicate the success of the UK model here.


Property backing and a successful efficiency programme help provide financial flexibility and the ability to invest in growth when others will be constrained

Source: Whitbread (2022c).

4 Focusing corporate strategy with a demerger

Whitbread’s £3.9bn sale of coffee chain Costa is a double triumph. The price vindicates chief executive Alison Brittain after two years that left investors uninvigorated. And it proves the UK can sell consumer products to Americans more mainstream than trenchcoats and Peter Rabbit tea towels.

British coffee might once have described a brew made from dandelion roots. No longer. Costa is a mass market café chain and coffee brand that has bested Starbucks in the UK.

It is a good buy for Coca-Cola. Health campaigners are squeezing the market for sugary drinks. Coffee is a prudent diversification. In the US, Coke can put Costa dispensers into sites already hosting its vending machines. The Atlanta giant has the muscle to help the café chain succeed in Asia.

Ms Brittain struck the sale directly with Coke boss James Quincey. News of the talks therefore did not leak. The shares leapt 16 per cent on Friday. Even so, there should be upside.

Activist investor Elliott chivvied Ms Brittain, a wisecracking Northerner, into announcing a demerger in April. Back then, Lex estimated Costa’s enterprise value at £2.4bn. Coke is paying a 62 per cent control premium, by that measure. The multiple of 2018 ebitda is a zingy 16.4 times.

Premier Inn, the budget hotel chain that will become Whitbread’s only business, should be worth £6bn-£7bn. Whitbread’s market worth on Friday of £8.5bn looked correspondingly low. Shareholders should expect a payout of about £2.8bn, after Whitbread has covered a pensions deficit and repaid some debt.

Ms Brittain even has a post-sale growth strategy to promote: a push into Germany’s fragmented budget hotel industry by Premier Inn. After lengthy deal negotiations, only one thing may stand between her and the good night’s sleep that is Premier Inn’s signature promise: any demand for a higher price from Elliott.

Source: Financial Times (2018)

References for Part 1

Financial Times (2018) ‘Whitbread/Coca-Cola: best of Britain’, Financial Times, 31 August 2018. Available at: https://www-ft-com.libezproxy.open.ac.uk/ content/ a9f796a6-ad25-11e8-89a1-e5de165fa619 (Accessed: 24 March 2022)

Whitbread (2021) Whitbread PLC: Annual report and accounts 2020/2021. Available at: https://cdn.whitbread.co.uk/ media/ 2021/ 05/ 05141427/ 23076_Whitbread_AR2020_web.pdf (Accessed: 6 April 2022)

Whitbread (2022c) Our business model and strategy. Available at: https://www.whitbread.co.uk/ about-us/ our-business-model/ (Accessed: 6 April 2022)

Whitbread (2022d) History of Whitbread.Available at: https://www.whitbread.co.uk/ about-us/ our-history/ (Accessed: 22 March 2022) 

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