I lived in London for five years, between 2008 and 2013. It was a time that I thoroughly enjoyed and I made the most of what the UK had to offer, including great pubs and easy access to Europe. While the pubs haven’t changed, the UK’s relationship with other European countries certainly has with Brexit.
I was recently back in London meeting with the management of a number of UK companies. A couple of things stood out. Firstly, the amount of construction underway in London. The skyline at Liverpool St, where I previously worked, has completely changed and is now dominated by glass covered skyscrapers. The number of cranes in the skies is not dissimilar to Auckland, and certainly not representative of a country meant to be facing economic hardship upon exit from the EU as numerous economists predict.
Secondly, the topic of Brexit was missing from conversation. In my opinion, the average Brit seems bored by the subject, worn down by the complexity, political bickering, and the lack of a clear path forward even as the March 2019 deadline quickly approaches.
On my trip, I met a wide range of British companies like food delivery platform Just Eat, share broking platform Hargraves Lansdowne and video game service provider, Keyword Studios. While we don’t currently own any companies in the UK, we are taking a closer look at firms with strong and durable business models, which should continue to deliver growth over the long term, even in the face of sluggish economic growth, and that are currently being offered at attractive prices because of uncertainty created by Brexit.
One company I met with, where Brexit is particularly relevant, is Whitbread. The company owns the Costa Coffee chain, which has just been acquired by Coca-Cola for £3.9 billion, and Premier Inn Hotels. Premier Inn consists of 800 odd hotels across the UK and one in Germany, largely catering to British business and domestic tourists. The hotel is well positioned with its prime locations, consistent offering and excellent value. Premier Inn has identified four things that hotel guests really care about: cleanliness; a comfortable bed; big TV; and a good breakfast. Speaking from experience, the company excels in each area, especially the breakfast! As Premier Inn is so well known for quality, consistency and value they don't have to rely on intermediaries, like Booking.com and Expedia for hotel bookings. By not paying a commission for bookings, Premier Inn makes more profit per room, which they reinvest to ensure a superior quality versus competition, which drives market share gains.
Premier Inn has a decent growth runway ahead. The company has increased its market share in the UK from 6% in 2010 to 9% currently and has laid out a pathway to 12% market share by 2020. Even though the company only has one hotel in Germany, early results have been promising and the German hotel market has similar characteristics to the UK hotel market.
We are now just starting more detailed research on Whitbread and other businesses I met on the trip to see if any of them meet the high bar we have for the portfolio. My initial feeling is that following a few years of underperforming the US market, the UK market is starting to throw up some opportunities that are being neglected as investors fret about politics.
