Business

Costa Coffee helps boost Whitbread profits

A Costa coffee cup with chocolate powder stencil of coffee beans Image copyright Newscast

Whitbread, the owner of the Costa Coffee chain and Premier Inn hotels, has seen pre-tax profits rise to £546.3m, up about 12% from last year.

Underlying profits at Costa rose £21m to £153.5m, though coffee sales grew less than analysts expected.

New chief executive Alison Brittain said the results reflected a "successful" year, that demonstrated "the strength of our businesses".

Whitbread has faced calls recently to split up its various brands.

Falling share price

The company has lost almost a third of its share price since December when Ms Brittain replaced Andy Harrison as chief executive.

Last year, a new managing director was put in charge of the company's hotels and restaurants division, which also includes the Brewers Fayre and Beefeater Grill chains.

And last week, Whitbread announced that Christopher Rogers, the head of the Costa division, would step down to be replaced by Dominic Paul from cruise giant Royal Caribbean International.

The UK's frothy coffee market has been expanding, with branded outlets such as Costa, Starbucks and Caffe Nero accounting for a 15% rise in sales over 2015, according to research firm Allegra.

"Costa is busily slaking the nation's never ending thirst for caffeine," says Steve Clayton, head of equity research at Hargreaves Lansdown. "Think of it as an investment play on the UK's long hours work culture."

Rising coffee prices

This period of continued growth - with some analysts saying "peak coffee" has been reached - has prompted some investors to call for Whitbread to sell Costa now, to get as much value from the brand as possible.

High Street competitors such as Greggs are trying to move in to this profitable market, by significantly undercutting Costa's coffee prices.

Ms Brittain insisted that Whitbread did not need to raise coffee prices to fund improved pay for staff and increased investment in IT infrastructure.

"I think there are other ways of us achieving this," she told the BBC, and that it was "really important" to continue to offer, "a lower price point for coffee than our competitors".

The company has already installed 5,000+ stand-alone coffee machines, and is planning another roughly 3,000, while also expanding its franchises in the 24 countries where it currently operates.

Whitbread aims to almost double Costa's annual sales to about £2.5bn by 2020.

The company also wants to expand its Premier Inn chain further, and is targeting about 85,000 rooms by 2020.