Whitbread now needs to pick up the restaurant bill

Deciding to sell Marriott has to be the toughest decision of Alan Parker’s corporate life. The Whitbread chief executive has put personal sentiment to one side to draw up a bold plan that will see the sell off of 46 upscale hotels sites and the running of Marriott hotels in Britain handed back to the brand’s US parent. In the process around £700m will be returned to Whitbread’s shareholders. Parker is a hotel man through and through so it can’t have been easy to walk away from the market he knows best. But he has recognised that running other people’s brands is not the best focus for the company. He will be left with a leaner Whitbread able to concentrate on three potentially market leading businesses – Premier Travel Inn lodges, David Lloyd sport and fitness clubs and its restaurant portfolio. Premier Travel Inn, now fully integrated after the purchase of the Premier Lodge estate from Spirit and with a new corporate identity and advertising campaign, is already the backbone of new-look Whitbread. It’s a confirmed market leader. Its 450 sites leave it twice the size of nearest rival Travelodge, and by 2006 Deutsche Bank analyst Geof Collyer expects it to provide around 45% of group earnings. David Lloyd, with its emphasis on participation sports like tennis as well as fitness, also holds a market leading position, albeit in a smaller market. It is in restaurants that Whitbread has its biggest challenge. It is undoubtedly one of the big hitters in the UK eating out market with its Pizza Hut, Costa, Beefeater and Brewers Fayre brands. But claims for market leadership are harder to justify. The pub restaurant portfolio offers great potential. As we know from TNS research, apart from fast food, pub restaurants are Britain’s most popular eating-out choice. Last year, Whitbread’s pub restaurants produced £84m of earnings (ebitda), against £28m from the high street brands. They are second only in importance to Premier Travel Inn in generating group profit. But, the feeling is that big rival Mitchells & Butlers has recently started to pull away as the pub restaurant sector’s pace-setter. Whitbread’s pub portfolio and M&B’s restaurant division, which includes its Vintage Inn, Harvester and Toby operations, are remarkably similar businesses, each with around 600 sites generating around £1m of sales each. But while Whitbread has been working out its future plans, M&B has been forging ahead at both ends of the "casual dining" market. It has developed Toby into a budget-priced "category killer" with an almost ruthless focus on operating systems and leveraging purchasing power to provide a value-for-money product that McDonald’s and the supermarkets would be proud of. At the other extreme, it has continued to roll-out its more stylish, middle-class focussed full-service Project Orange refurbishments. Although it modestly plays down the importance of this "trial" brand, it is clear it is becoming the blueprint for its pub restaurants of the future. In contrast, Whitbread has seen a reduction in like-for-like sales growth and the folding of its family-oriented Brewsters, sub-brand back into the Brewers Fayre. To be fair, new boss of pub restaurants Phil Urban is only just settling into the role, having moved from Spirit, and the results of the repositioning of Beefeater are only just beginning to filter through, but the challenge is nonetheless pretty clear. What to do? The bold option would be an acquisition, with Spirit’s pub restaurant business an obvious target. Urban knows it well, having run brands such as Chef & Brewer in his Scottish & Newcastle days. Adding Chef & Brewer and the likes of Two For One to the existing Whitbread stalwarts would both add balance and give M&B something to think about. Many of those sites already have Whitbread Premier Travel Inns alongside. Spirit maintains it has no intention of breaking-up its business and that it is focussing on its planned IPO. Nevertheless, if the price was right its shareholders could not ignore the option, especially has any Whitbread interest would surely prompt a reaction even from the normally deal averse M&B. An auction could be a mouth-watering prospect all round. For either Whitbread or M&B gaining Spirit’s brands would certainly settle the market leader argument. Which one could afford to lose out? This could shape up to be Alan Parker’s second toughest decision.