LONDON—Whitbread PLC, the United Kingdom operator of the Premier Inn and Hub by Premier brands, is developing plans to adopt the new National Living Wage, which recently was announced by the United Kingdom government and is due to begin in April 2016. The 70 pence increase to £7.20 an hour ($1.08 to $11.07) would see the company's wage bill rise between 3% and 4%.
Andy Harrison, Whitbread’s CEO, who is stepping down from the post next February, said in a conference call accompanying its second quarter 2015 earnings results on 8 September, that the publicly listed company would “mitigate this substantial cost increase over time with a combination of productivity improvements, boosted by investment in systems and training, efficiency savings and some selective price increases.”
The introduction of the compulsory NLW has left some hoteliers worried the new pay guidelines would put increased pressure on operating margins.
With more than 700 properties, Premier Inn is the U.K.’s largest hotel chain. The company has approximately 45,000 U.K. employees across its hotel and food-and-beverage outlets, such as Costa coffee. The company intends to create a further 15,000 jobs in the U.K. by 2020.
Harrison said the company would announce more details of how it would implement measures to offset the increased costs in October.
The NLW will ensure those aged 25 and over will receive an increased hourly wage to begin at £7.20 ($11.07) and rise to more than £9 ($13.84) by 2020. The initial NLW increase constitutes a 10.8% increase on the minimum hourly wage of £6.50 ($10.00). The minimum wage per hour for those aged younger than 25 years will rise to £6.70 ($10.31) in October.
Harrison said Whitbread employs 42,000 hourly-paid employees with an annual wage bill of £460 million ($707.6 million). Of that number, 34,000 were currently paid below the NLW.
The increased wage bill, Harrison added, would cost an “additional 3 to 4% per annum, an annualized incremental cost of between £15 million ($23.1 million) and £20 million ($30.8 million) per annum.”
Harrison said he would prefer a system of salary increases linked to employee competency following skills improvements and training.
“We spent £12 million ($18.5 million) in training last year, and we will spend more. The reaction from competitors will be interesting. There might be differences between how smaller independents look at this and how larger corporates do,” Harrison said, who added one downside might be how employees aged 24 and under and those aged 25 and over were distributed through companies’ employment structures.
Numbers
Whitbread’s Q2 revenue per available room came in at 3.9%, below the 5% Harrison said was necessary to secure necessary operating margins—a point analysts were quick to mention.
“We still see full-year RevPAR of between 4% to 5%. We think that is reasonable,” Harrison said.
He added he was buoyed by strong U.K. economic fundamentals and the U.K. hosting the Rugby World Cup in September and October.
He added August performance, the last month of Q2, was important in this regard.
“August is not a good indicator of trading across the other 11 months, especially in light of comparatives. (Q2) was so strong with the Farnborough Air Show (July) and Commonwealth Games (July and August),” Harrison said, adding August’s unsettled U.K. weather and changing vacation patterns also put pressure on results.
“Last August we saw 11.3% like-for-like growth. This August it was 1.6%,” Harrison said.
Nicholas Cadbury, Whitbread’s group finance director, told analysts those two events boosted performance in 2014 by approximately 1%.
He also remained confident in Whitbread’s full-year predictions.
“Shareholder value remains driven by total sales growth backed with good return on capital,” Cadbury said.
For the first half of 2015 until 13 August, Whitbread’s hotel division increased like-for-like sales by 5.3% and total sales by 12.9%. Occupancy remained high, at 83.5%, across all of its hotel estate, while in London it grew 0.3 percentage points to 92.2%.
In those two quarters, the company increased rooms supply by 8.1% but saw a rise in roomnights sold of 8% to 8.3 million.
Foreign excursions
Harrison said Premier Inn was on track to open approximately 5,500 rooms by the end of the year, which included one of its nine international properties, the 168-key Premier Inn Sharjah King Faisal Street in Sharjah, United Arab Emirates, which opened in August in a management contract agreement with Dubai-based Action Hotels.
Whitbread and Action plan three more hotels in the Middle East—in Bahrain, Dubai and Jeddah, Saudi Arabia. Whitbread previously announced a pipeline of 50 total international hotels by the end of 2018.
Harrison remained confident here, too, saying its opening program has a long gestation but that 2015 might see one more UAE hotel to open.
“In Germany, we have a number of bids on sites, and the new German team is settling down,” Harrison said.
“We’re also very happy with Hub by Premier, which is performing brilliantly,” Harrison added. Hub currently has four U.K. properties.
At press time, Whitbread’s stock had fallen 1.61% in the day’s trading on the London Stock Exchange FTSE 100, of which it is part. Overall, for the same time period, the FTSE 100 was up 1.35%.