Premier Inn Sees Upsides for Itself With Economic Headwinds

Inflation and an energy crisis in Europe present opportunities, not just problems, for Whitbread, the owner of the Premier Inn brand. The company expects rising economic strains to pressure travelers into favoring its budget hotels over pricier rivals. It also expects economic headwinds will prompt many independent hoteliers to sell properties at a higher-than-usual pace.

Europe’s independent hotel sector contracted by around 12 percent between 2010 and 2019, Whitbread estimated. Today’s rising bills for energy and workers’ wages — coming after the strains of two years of pandemic-related restrictions — will lead to a rising rate of independent hoteliers selling their properties, the company’s executives predicted.

“Even for those independents that have come through the pandemic, fresh operational challenges created by labor shortages and cost inflation may accelerate the decline further and we expect total hotel supply to remain below 2019 levels until 2026,” said Alison Brittain, CEO and executive director. “Such market dynamics create structural opportunities for Premier Inn to take more market share across both the UK and Ireland.”

Shrinking Pool of Independent Hotels

Premier Inn said on Tuesday it had increased its long-term network target in the UK and Ireland from 110,000 rooms to 125,000 rooms, equalling about 17 percent market share versus around 12 percent share today.

Parent company Whitbread isn’t immune to inflation pressures, though, as it runs roughly 890 hotels in Britain, Germany, and the Middle East, and about 400 restaurants, mostly in the UK.

It forecasted about $67 million (£60 million) of extra costs in the financial year 2023 because of rising costs for supplies and labor. The company has fully hedged its energy bills for 2023, but it only has 70 percent of their costs hedged in 2024, offering a crack for rising costs to eat away at profits if macroeconomic trends aren’t tamed. The company is seeking to cut about $115 million in costs over three years.

Solid Quarter

The pandemic recovery in travel continues. Whitbread swung to a pretax profit of $346.7 million (£307.4 million) in the six months that ended September 1 — 40 percent higher than the comparable pre-pandemic period of 2019. It reported revenue of $1.52 billion (£1.35 billion) in the period, up 25 percent versus the comparable pre-pandemic period of 2019.

The UK-based company said on Tuesday that its UK revenue per available room — a key metric in the industry — nearly doubled to about $70 (£62.39) from a year earlier.

The company’s expansion into German had run into headwinds during the pandemic. But in the half year to September 1, the company said demand in Germany had recovered for its 42 hotels there.

Looking ahead in Germany, it forecasted a lower reduced adjusted pretax loss than it had previously expected. It forecasted that the Premier Inn brand in Germany — which is expanding in a capital-intensive way — would lose only about $45 million and $55 million in the fiscal year 2023.

Across Europe, Premier Inn’s hotel pipeline looked robust. It opened a net 487 new rooms in the UK during the half year to September 1, and it reported a pipeline of 8,875 rooms. It’s rolling out 65,000 new beds.

So far, for seven weeks to October 20, total UK hotel sales were up 37 percent on the same period in 2019, suggesting that the post-pandemic travel boom still had some momentum in it.

“We see Premier Inn as a structural winner, well positioned in the current macro environment,” wrote JP Morgan analysts Estelle Weingrod and Karan Puri in a recent note that named the company its “top pick” among publicly held European Union hotel companies.

Looking back at what happened during the 2008 great financial crisis, Premier Inns’s revenue per available room went down 6 to 7 percent in 2009 and fully recovered within a year, the analysts wrote. The same metric dropped more at IHG and Accor and took four to five years to recover because of those companies having different brand mixes and geographic exposures.

CEO Brittain is retiring in February, to be replaced by Dominic Paul, CEO of Domino’s Pizza Group.