Costa owner Whitbread has said profits dropped by 10 percent at its coffee business in its first-half, due to more expensive coffee imports, higher staff costs, and rising business rates.
The UK’s biggest coffee chain’s half-year results show a fall in pre-tax profits to £59m, with underlying operating profit growth flat at £65m.
Despite expanding its breakfast and lunch ranges, Costa’s like-for-like sales slowed further to just 0.6 percent, down from 1.1 per cent in the first quarter.
However, Whitbread saw group pre-tax profits increase by 20 percent to £316m owing to successes from its Premier Inn hotel business.
Benefiting from the impact of the weak pound on tourist numbers, Premier Inn added 2,000 new rooms across its UK locations in the six months to 31 August.
Although Whitbread also expanded its Costa coffee outlets over the same period by opening 108 more stores, analysts at Citi said that Costa as well as Caffe Nero and Starbucks would see muted growth.
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They double downgraded Whitbread shares from “buy” to “sell”. It is too much to ask consumers to pay £2.20 for an Americano at Costa, they added.
Whitbread’s chief executive Alison Brittain told the BBC that Costa had no plans to further increase its coffee prices.
Whitbread pointed to “significant structural growth opportunities in the UK and internationally” despite “well known short-term economic uncertainty”.
The company said in a statement:
Although we remain cautious on the current environment, we are confident that ongoing disciplined allocation of capital and focus on executing our plans will deliver sustainable growth in earnings and dividends and a strong return on capital.
Analysts at Deutsche Bank have recommended that Whitbread split Costa off from its Premier Inns business.
However, Costa’s international segment offered investors reason to be optimistic, with sales growing by 15.4 percent.
Neil Wilson, a senior analyst at finance broker ETX Capital, said:
There is a bright spot for Costa as international sales are picking up, which might keep any talk of a breakup quiet for the time being.
UK coffee chains will see growth of between five percent and six percent each year over the next few years, according to Allegra, a coffee industry body.