Strategy: Organic Growth Powers Whitbread’s Success

Expect lots of coverage this week about the growth strategy being pursued by Whitbread plc.Whitbread used to have a pretty diverse product portfolio including the brewing of beer and the operation of David Lloyd health clubs. However, in recent years Whitbread had rationalised its portfolio of businesses to focus on two markets where it believes it can achieve sustainable and high sales and profit growth. And it has backed that strategic focus with heavy investment. If only other UK firms would do that!

The two markets in question are budget hotels and coffee retailing. Whitbread owns Costa Coffee and Premier Inn - two brands that have performed exceptionally well despite the economic downturn.

In 2011 Whitbread announced some ambitious corporate objectives for these two brands. The objectives were to almost double the size of Costa (reaching an annual operating profit of £100m) and to add around 50% more capacity to the Premier Inn business (a target of 65,000 rooms by 2016).

However, it looks like these objectives may be achieved much earlier than expected, so well have Costa Coffee and Premier Inn performed recently.

For example, look at the budget hotel market in the UK. The two leading budget brands (Premier Inn and Travelodge) have managed to increase their share of the overall hotel market and look well-placed to enjoy continued growth. Budget branded hotels are forecast to account for 25% of the UK hotel market in 2016, up from 13% in 2007.

Why are the branded hotel chains doing so well during the long economic downturn?

One reason must be business travellers deciding to trim their travel costs by trading down from the traditional business hotel chains.

Another must be the investment in new budget hotel capacity, particularly in major cities and towns, which has made it easier to find a suitable branded budget hotel option.

The product itself is increasingly appealing. You know exactly what kind of hotel room you are going to experience when you book a Premier Inn, wherever you are staying. The quality is generally good; certainly consistent.

And a further reason? The ease of booking branded budget hotels online or using mobile devices.

The traditional independent hoteliers and bed and breakfast establishments have struggled to compete with this powerful combination of competitive advantages.

Whitbread shareholders will also be delighted with the performance of Costa Coffee which now trades from more than 1,240 stores and thousands more Costa Express machines. Costa has pursued an aggressive organic growth strategy opening many new locations. It also benefitted from the problems experienced by Starbucks over claims that Starbucks UK was avoiding paying corporation tax.

However, Costa is now a truly international business and brand. It trades in 28 countries, including China where it already has 246 stores. It seems even the Chinese are now buying into the coffee cafe culture that has taken the UK and similar markets by storm in recent years.

A key point for students t remember about Whitbread is that the firm's growth is essentially based on a strategy of organic growth. Admittedly, the Costa Express business was originally opened after Whitbread acquired a business called Coffee Nation (and rebranded their outlets as Costa express). However, the success of Premier Inn and Costa Coffee is most closely linked to the investment that Whitbread has made in both businesses. For example, Premier Inn has spent an average of 5k per new room added. The scale of investment is significant and it appears to be paying off!