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Whitbread PLC
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Ladies and gentlemen, thank you for standing by, and welcome to Trading Update Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 18th of January 2018. I would now like to turn the conference over to your speaker today, Alison Brittain. Thank you, ma'am, please go ahead.
Good morning, everyone. And thanks for dialing in this morning to discuss Whitbread's Third Quarter Trading Update. I'm joined here by our Group Finance Director, Nicholas Cadbury.Overall, we've continued to deliver good growth, with total sales being up 6.8% year-to-date and 5.6% for the third quarter. In the U.K., our like-for-like sales growth was 1.8% for the year-to-date and 0.3% in the quarter. We're continuing to make good progress on our group-wide efficiency program, which is helping offset the significant inflationary pressures in our sector. And the combination of our growth, along with the results from the efficiency program means that we are on the track to meet this year's profit expectations.We're pleased to have made further progress in the strategic investment program that we set out on 18 months ago, mainly to grow and innovate in our core U.K. market, to leverage our strength to grow in a more focused manner internationally, especially in Germany and China on Costa Express, and to build the shared capability and efficient infrastructure required to underpin the business in the future.Let's start with Premier Inn. Premier Inn in the U.K. has continued to gain market share with total hotel sales growth of 7.3% year-to-date and 5.5% in the quarter as we invest in new hotels and extensions. Our openings this year were weighted more to the front of the year than previously, with over 3,000 rooms opened so far. And that'll give us good benefit as they mature with good returns over the next few years. Our performance in the quarter moderated compared to the first half with flat like-for-like, as the budget hotel market weakened, particularly in London, and Premier Inn also had more challenging October where we didn't optimize our pricing as well as we'd hoped.The London market continues to be a strong one, although recently, performance has been impacted by 2 factors. Firstly, by the level of new hotel supply opened in the last 12 months. We expect that to moderate in the year ahead. And secondly, the London market has annualized the surge of inbound demand following the fall in the pound in June a year ago. Within that new market supply, of course, Premier Inn has opened 2,500 new rooms in London over the last 2 years, increasing our capacity by over 25%. And it's worth noting that despite opening so many new hotels, we've managed to maintain our occupancy at over 85%. Across the estate, we've opened 10,000 new rooms in the last 2 years. And we're confident in increasing our rooms to 85,000 by 2020, with the 71,000 rooms opened today and the remaining 14,000 rooms already in our pipeline. December and early January, as you all know, are hard months to read because of the timing of holiday and return-to-work schedules. But performance so far in the fourth quarter has been positive and indicates a return to our year-to-date performance. We'll have more insight on the outlook for the next year as the forward book becomes clearer over the next few weeks.Our Restaurants, which were integral to the Premier Inn hotel offer, performed well. Like-for-like sales grew 1.8% in the quarter, with total sales growth of 3.5%. And in Germany, we secured another hotel site in Dortmund, which now brings the committed pipeline to 10 hotels. And in the year ahead, we expect 3 of those hotels to open in Munich, Leipzig and Hamburg to complement our Frankfurt hotel. And that Frankfurt Hotel continued to perform well. Our property team in Germany remain very active in looking at all opportunity to accelerate and extend our pipeline further.So moving on to Costa. I hope that you've noticed that we've given a little more disclosure this quarter. Whilst we provided the sales growth of our U.K. equity stores in the usual manner, we've also provided sales growth figures for Costa Express to give a fuller explanation of our overall performance in the U.K. and to show how our channel strategy is working. You'll see that higher growth in convenient channels are offsetting negative like-for-like stores, and that's resulting in flat like-for-like overall. In total, we're gaining market share, and more customers are drinking more of our coffee than ever before.Important to note that total sales growth for Costa in the U.K. in the quarter was 7.2% and 7.9% year-to-date. We continue to pursue our strategy to re-rate our estates towards high footfall in convenient locations such as drive-through, travel locations and Costa Express. And we were particularly pleased with the performance in Costa Express, which grew sales by just over 20% in the quarter with like-for-like location sales increasing by 6.7%.The tough retail conditions on the High Street and the low footfall have been well-documented recently. And these negative impacted the like-for-like sales of our U.K. equity stores, which declined by 1.5% in the quarter. We do expect these weaker conditions to persist into the new financial year. But notwithstanding the more difficult trading environment, it is worth to remember that our High Street stores do remain profitable and deliver a strong return on capital. We continue to review the returns of the stores and we have been actively managing the short tail of underperforming stores over the last 2 years and we will continue to do that, facilitated by our very flexible lease structure. Turning now to the investment program in Costa. Given the overall coffee consumption -- that overall coffee consumption continues to increase and that we can deploy capital at attractive returns, we've continued to invest in new stores, principally targeted at growth channels and new machines at Costa Express. We've also invested in improving the overall customer proposition across the estate. During the quarter, we launched a range of new hot food for lunch, and that range has been well-received by customers and resulted in a good increase in the proportion of customers buying food with their coffee.Following from this successful introduction, we've extended further the range in January with items such as roast chicken and chorizo rice and then egg muffin for breakfast. And, of course, is that we've not forgotten about our core coffee range. We had good feedback from our customers on the special Christmas range, which included a Billionaire Latte. And we've launched a new range of coconut milk-based coffees in January. Our digital team has also successfully launched the new app for Costa Club Loyalty Card Holders. And since its launch in November, we've already seen over 1 million customers download that app. As a result of the ongoing investment in customer proposition, we've been voted the Nation's Favorite Coffee Chain for the eighth consecutive year. And it's worth noting that our scores increased year-over-year in that survey. Of course, much work remains to be done in terms of investment in the product range, digital capabilities, operational excellence and further store network expansion, but we have very good momentum in delivering the plan. Our international business continues to grow with good momentum in China, delivering another quarter of positive like-for-like sales growth. In line with our strategy to build an international business of scale, we anticipate setting up investment in China and in Costa Express next year. As I mentioned at the start of the call, we continue to make good progress with our efficiency program and improving the capabilities across our shared digital procurement and supply chain teams. We remain confident on the delivery of our total sales target -- sorry, we remain confident on delivering our total savings target, and this is important as we do expect inflation in our sectors continue to pose challenges, probably at a similar level to this year where we saw around GBP 78 million to GBP 80 million of cost headwind in business. But I will provide a further update on our cost efficiency plan when we see you in April for the full year results.I'd like to sign off where I started. We remain committed to delivering our strategy to grow by investing in the structural opportunities in the budget hotel and coffee market, both in the U.K. and internationally. We have increased the momentum in executing the strategic plan we set out in November 2016. We continue to innovate and grow in our core U.K. markets for both Premier Inn and Costa. We've made good progress with Premier Inn in Germany, Costa in China and Costa Express, and our efficiency program and investment in strong shared capabilities and technology procurement, property and supply chain is ensuring that we can deliver our growth plans efficiently. And despite the short-term trading conditions in some of our markets, we remain on track to deliver full year results this year, in line with expectations.And with that, I'll hand it over to you for any questions that you have. Thank you. So Leigh, could we open the call up for some questions, please?
[Operator Instructions] And our first question comes from the line of Jamie Rollo.
Three questions, please. First, on Costa. You're sort of flagging you expect the High Street to remain tough. I guess, no surprise there given the latest BRC data. And you're also saying that the internal initiatives only provide some offsets. So the question is, is that minus 1.5% like-for-likes the sort of right runway -- correct run rate we should model? Or do you think given it's deteriorating, it could be sort of worse than that going forwards? Secondly, you're happy with this year's consensus, but obviously sales were a bit weaker than expected. So it's fair to say, I guess, you had accelerated the cost savings. Does that mean margins are better than the original guidance? And how should we think about FY '19 given you're flagging more investment in Express in China? And then finally, a sort of general question. I guess this is the first opportunity you've had to sort of publicly respond to the activist stake. How activist is this investor? If you could sort of talk about that. And also, you said before, the property is integral to your strategy, but Costa, you're sort of more open-minded. So sort of what signs of turnaround would we need to see for your mind to be open?
Right, okay. We might have to come back and recap on the questions because I've taken short notice on those.
So -- I can take the number one.
I counted 3a and 3b there, I think, but we'll come back to that. So I guess I'll start, and then Nicholas will pick up as well. In the High Street, yes, I mean, we all see in the same way the BRC data which helps you -- helps guide your thinking in the hotel intra-trading update. We also see BRC data. And we also see the retail folks giving their own performance, most of who noticed that even if their sales performance was up, their High Street was down and their online channels were the property growth areas. And so we don't have any particular sentiment that life on the High Street next year will be any better than it is currently. That's for sure. And it is why we have the channel strategy that we have that we've been executing now for a little while and what we're trying to show you, the data, is we're looking at this as a holistic channel shift. So we are using our short lease break opportunities to turn any High Street where we think that we have a negative -- a very negative position, but actually rather large numbers of the High Street are in very positive profit, good cash generation and give good returns, but are more muted in their total growth line and their like-for-likes. And that's being compensated for where we're investing in higher growth and higher footfall areas and in Costa Express, which offsets that negative position. The total is the important thing because convenience and value and quality of coffee taste are still the 3 top priorities in terms of coffee drinking. And so being in convenient locations means that we can put more Costa coffee into the hands of more customers in the U.K., which derives us more loyalty to our Costa business. And you see that in the total sales growth at over 7% and the gaining of market share, i.e., we have got more Costa coffee into the hands of more consumers than ever before. So that gives us our market share. And then leads on along with our investment in the proposition into having an increased vote for being the nation's favorite coffee shop, and you see we're 2 points up on that as well as retaining the top spot, and so it increases the lead against our competitors. So overall, yes, I agree with your opening hypothesis that I don't see that there will be much respite on High Street, but that our ongoing strategic investment will help us with the rebalancing over time of the estate and more introduction of innovative coffee and food will help us grow our AVT food capture rate. Do you want to talk about margins?
The second question was about margins. And what we said is that for this year that we're still in line with full year expectations. And I guess sales were a little bit softer in Q3, and therefore, we made up with the kind of good premise in the cost efficiency and cost savings, which should mean that margins were marginally better overall this year. We're not giving guidance into next year on margins. I guess the kind of things that we're pointing to, things to think about, which are going to our options internally, I guess this thing to think about is RevPAR tends to trend in the direction of GDP. We pull out in the statement that we still think that High Street will continue to be tough for next year, as Alison just talked about overall. We also talk about actually kind of next year's -- the inflation for next year, our sector has some high inflation. We've had about GBP 70 million to GBP 80 million worth of inflation this year across national living range FX and business rates. And that continues into next year, and that splits about GBP 20 million into Costa and about GBP 50 million, GBP 55 million into Premier Inn. The efficiency program that we have kind of does a good job of offsetting most of those, kind of those headwinds. But what we do pull out in the statement as well is although it may be a bit tougher out there that we are going to keep investing in this business to make sure that we kind of build our kind of customer loyalty and long-term shareholder value over time. And we're particularly making notes to investing in China and into Express International next year as well.
Right. And the third question, and I can't say I got -- Jamie, you asked [indiscernible] it was basically -- this is our first opportunity to say something post the session head position, which is going over 3%. And we've not really got a lot we can say. We -- as you all know, we have very open and regular conversations with our shareholders, and those conversations, the content of which remain confidential. But last October, I think in the results presentation, if my memory serves me right, somebody did ask me this question from the floor. And I don't think the reply to that question changed since then, which is that we have a broad and a management team, which is very open, and openly discusses the structure of the group on a regular basis. We are absolutely in step with all of our shareholders who look to us to increase shareholder value over, not just the short term, but the medium and long term as well. And so we are always open to debates and discussions about what is the best way of doing that. But nothing else has changed in our thinking at this stage. We are about halfway through a transformation program in Costa that will deliver significant shareholder value and a very much more efficient underpinned platform for that business to go forward and which will also deliver the foundation within international business of scale. And so we are not wanting a management team to deviate from delivery of that program, which delivers great value, or to actually to be distracted from trading through a challenging environment and enabling those international strategies in China and in Express to gain the momentum that they need to.
And our next question comes from the line of Tim Ramskill.
Three questions, please. The first is just around Premier Inn, and how you think about the near-term sort of cannibalization effect of new openings on existing hotels versus the long-term returns that you can generate? That's become sort of a much hotter topic amongst investors. Second question is around the cost-efficiency plan. As you already mentioned, you've clearly got greater success there to ensure that you can hit the full year expectations. I think back at the interim, you talked about potentially increasing the size of the overall efficiency plan. I also appreciate you said you'd come back with more detail later. Just wonder if you could comment on whether that's still applicable. And then my final question is around Costa. Again, Alison, in your prepared remarks, you talked about good returns on new openings. I guess one could look at the returns Costa generates as having historically been exceptionally high. So I just wondered if you sort of would talk about what returns you're still targeting for Costa because I guess there's a risk over time you could still generate very good returns, and they could be a lot lower than they have been in the past. I just wondered how you thought about that.
Why don't I just start with the cost efficiency, and then I'll turn over to Nicholas. We'll do the usual sandwich approach, Nicholas and I. And yes, whether we're -- what I inferred and what -- or what you implied, I think that's the right way around it, I'm not quite sure what's in the year-end, but what it is true to say about our cost-efficiency program is that it has got good momentum. So we started on – it's early actually, almost as soon as I arrived and certainly when we look at our core strategy agreed, that was before things got -- the environment got tough. So actually we really got some good momentum before we faced in some more challenging headwinds. And that carried us through quite well this year. From a standing start, Costa's program has delivered this year. Premier Inn had already started their program, and that's continued. So we are very confident about the statements we made about the cost efficiency plan. And I think we have announced a target of GBP 150 million over the last 5 years when we talked at the Capital Markets Day on November 16. And yes, we're enormously confident about that, as you will see from the numbers that we've generated in the first half of the program. We will come back in April and give some more color both on that program and how we anticipate improving the program. And we'll give you some more detail as we come into April. But no, we are -- you were right to infer our confidence in it.
Yes. Your first question was about Premier Inn and near-term cannibalization. And I guess that's particularly relevant for the year-to-date. As you know, we front-loaded the opening of our hotels. We have opened 3,200 rooms in the first 9 months. I think we usually do that in the last couple of...
Couple of weeks.
Couple of weeks of the year usually, so it's a complete reverse around of how we do it. And, of course, that has an effect on us. We attempted to pull out of that, that if you look at the supplementary information we provided last year, we said that actually extensions in new space had about kind of 1.5% kind of the drag on our like-for-like RevPAR and like-for-like sales last year. And I expect over the full year that will be roughly about the same amount for this year. What we showed in the Capital Market Day back in November 2016, actually with the demand, actually that matures fairly quickly. Now in a tougher market that may take a little bit longer. But actually still, we still think actually with our low market share, we think that that will give us good returns going forwards and mature quite nicely over time, over time so. But, on the last -- were you going to say something?
I was going -- on Costa? [indiscernible]
No, just on Costa in terms of -- just in terms of the new openings, it is, as you know, we are focused on the high footfall locations, and those are good returns. You're right that our return on capital, kind of, if you go back kind of 4 years ago, it was 35%, and it's gone up enough to kind of mid-40%. And we've kind of signaled that actually still mid-30s to high -- to 40% is still a good place to be. Good return on capital, just remind you, it is a fairly capital-light business as well. And that's kind of where we're positioning the new kind of openings as well.
Yes. And just to slash that out, Nicholas was right, back in 2012/'13, the returns were bottom end of the 30%, coming up to about 34%, 35%. And then we went through that very spiky period for a few years where we spiked up to the top end of the 40% range. But probably haven't invested in the business in those 3 years in a way that we think we would like to have. So we are, to some extent, seeing that investment going in now and so the return's returning to that more normalized 35%, 40% range that Nicholas just mentioned. And added to that, when we got the investments in the U.K. and some chunky investments in there like the roastery and ongoing commitment to store refurbishment, which will start this year coming, and will run over 2- or 3-year time horizon. We've got a new store format that we like [indiscernible] which we think will drive better usage of our space and better throughput for customers. But actually, more importantly, with a degree more certainty about our international aspiration and potentially we have 2 or 3 years ago and the real commitment to driving the business of scale internationally that will take some capital investment into both Express and China to make sure that those businesses become the growth engines of the future. So I think that's the way you should think about it. And we will try and start to give you some more color between the international side and the U.K. side so that you can differentiate between the 2.
Yes.
Can I just have one very quick follow-up on a related topic? So I guess you've obviously flagged an inflationary environment, but then the High Street being challenged at same time. I just wonder if how the dynamics around rent inflation are playing out or whether you see opportunity there? You talked about a little bit of churn in the edges. I just wonder if you could talk to that.
I think as you said, we got fairly short lease commitments in the High Streets. And we do have the opportunity to churn our estate to kind of optimize where we are. I don't necessarily think it's about you reducing rent going forward, but you're not seeing much rent inflation on the High Street overall. I think it's about you getting better locations, getting better spaces.
And our next question comes from the line of Vicki Stern.
Just few questions on hotels. So it sounds like Q4 is trading a little bit better than Q3, albeit obviously volatile. Can you just shape out your thinking into the rest of 2018? You commented that you think the supply growth headwind in London may abate a little bit, but just sort of more color potentially on the supply growth outlook as you see it both in London and I guess the regions and how that may play into RevPAR. And then just on sort of more bigger picture, broad thinking, you're thinking at this stage beyond the 85,000 room target in the U.K., how should we think about the pace of net unit growth continuing? Or should there be a deceleration at that stage, albeit, obviously, much more openings?
Okay. I'll leave Nicholas to give you some more color around London supply growth. Just in terms of the way that we think about things, we're not guiding too much today into next year. You know like more than everybody – the analysts know that it's quite volatile, period, and it's quite hard to read right now just in terms of the booking profile, given Christmas where order booking finishes and have to restart again in the New Year. But what we said is for the quarter-to-date, we've seen an improved performance. But the -- we normally just guide to GDP, really, as being still the best correlation to growth in the market. And although that's a muted a bit, it's still looking stronger at 1.5%, 1.6% GDP growth, so that's normally how we think about it. I'll just cover off beyond 85,000. We have very good network planning tools. And I think one of the reasons that our hotels mature so rapidly, there were a number of reasons why the maturity happens rapidly and having increased its rapidity over the last 2 years. One of them is that refresh network planning model that we did about 18 months ago to establish what we thought the long-term pipeline would be. Those 2 things gives us a real sense about where the growth can come from, and it also pinpoints very specific almost too tight locations where we need to put space in and the number of rooms and capacity that, that space should encompass. And being very targeted and specific on space acquisition in terms of those locations, is what is driving this very fast and rapid maturity for hotel space for us. And what that model entails is, is that there's quite a long runway of growth in the U.K. still available beyond 85,000. And we've said 100,000-plus rooms within that modeling a conservative position when we compare that in the external market. How fast we choose to tap into that space is entirely dependent on circumstances. We're not -- we don't have a milestone plan for it like historically the company did, and so having a target and the time line in front of those because that drives a degree of lack of optionality for the management team. So I prefer it that we look at what those opportunities are and that we don't just drive for a number, but we drive for maximizing returns. And what you need to add into the equation is our wish over time to generate more hotel rooms in Germany, and to further the international expansion. And so I think what you're going to see over many years to come is the continued expansion of the hotel business, whether that expansion takes place in the U.K., Germany or combination of the 2. And how we choose to take those opportunities will depend on the returns we can generate and getting the maximum value for shareholders. And...
Just looking at the -- you asked about the supply to the hotel market. We think in this current year, we think London has had kind of an increase in supply coming into the market. So we think we got roughly about 4.5% this year. And I think the regions was fairly typical at kind of 1.5% to 2%. Of course, that's gross costs, we got the independent market continuing to decline, on top of that, by about 1% to 1.5% next year. I think the kind of regions next year will probably be similar sort of levels next year, but we're expecting London to moderate. And that's through our own kind of increasing plan to commission. But we would expect it to moderate for about 4.5%, down to about 3%, 3.5% increase in supply overall. What we're also seeing, it's not necessarily the main brands who are opening hotels. I mean if you look at Holiday Inn Express, I think they added 400 rooms last year and Ibis added about 200 rooms last year. So it's not the big brands. It's kind of maybe probably brands that we -- aren't particularly well-known to consumer.
And our next question comes from the line of Jaafar Mestari.
Two questions, please. The first one on margins and cost efficiencies. You've quantified the cost inflation at about GBP 70 million for the full year, if I heard correctly. And just as of H1, you are already delivering GBP 60 million of efficiencies. I think you also said Q3 margins were slightly better year-on-year. So could you maybe update your margin guidance for each division for full year? And in particular, at Premier Inn, would you still expect the investments to be weighted to the end of the year, and as a result, full year margins to be flat? And secondly, on pricing at Costa. Over the past 2 years, you've increased prices, I think in January '16 and then in February '17. What are your plans for this year? And does a tougher High Street environment make price increases more difficult? Or does it make them even more essential at this stage?
You take the first and second.
Well, second question on the margin guidance. Just to kind of remind people, the margin guidance we have given previously was the Premier Inn restaurants' margins will be flat to minus 20 basis points. And for the Costa, we said we would invest 200 basis points over this last 2 years and 120 basis points this year. Just as we said, we're in line with expectations. So I guess sales were a little bit softer, and the cost efficiency is a little bit better, which kind of indicate that margins were up marginally, and I mean, marginally, just better than that overall. So that's all I was going to say on that.
Yes, on cost of pricing, we do -- we continuously look at price in a competitive context. And I always say it's never the first lever that we pull. And indeed, it keeps us, as a management team, it keeps us very focused where we don't just used to pull that lever as the first thing. It keeps us focused and disciplined, really, on being as efficient as we can because we don't just pull a lever and say well, we'll just take a bit more revenue from the customers' pocket. We have to try to make the business work harder for every pound of revenue that we generate. So that's why just as a management ethos, it is the place to go. We are in a world where, still, we have pricing optionality. We are not the most expensive cup of coffee on the market. We are in no way in price points than our core competitors of Starbucks and Nero, pretty similar to Pret and we are higher priced than Craig's and McDonald's, so the value coffee operators at the bottom. So we fit in that sort of midpoint, and we're not uncomfortable with where we sit. We have pricing optionality, so we can pull that lever should we wish to. And you will know and one of the issues we used to think about when we think about like-for-likes is we will lap pricing rises in both the Costa Express business and the main Costa business. And that always, therefore, has an impact on lapping when you're thinking about like-for-like projecting and consider that. So if we don't pull the pricing lever, and we decide to maintain our pricing structure as it is, we will lap and see a negative position on that lapping. So we have the option. If we are not in a pricing place where we don't have the ability to pull the lever. But in a world where, at the moment, with a more difficult economic environment and with consumers focusing on the pound in their pocket and spending wisely, we know that for coffee and food, the combination of convenience, quality and value are the 3 keys. And we want to make sure that we are increasing our quality as we innovate, increasing our convenience as we manage our channel strategy to be more convenient and managing that value proposition. And so we will want to do some more interesting things with pricing as we go through the year, so things like value bundles for lunch time or breakfast are things that we will be interested in launching this year.
[Operator Instructions] And our next question comes from the line of Jeffrey Harwood.
Just one question left. This incremental investment in Costa Express and Costa China, what is it, just a couple million pounds?
Yes, [indiscernible].
I guess we're -- probably to give the guidance, I think for both of those, the Costa International Express and the China, I think are kind of mid-single-digit investments.
Okay. What -- in total each?
Each.
And our next question comes from the line of Angus Tweedie.
It's actually a slightly different one. I was wondering about IFRS 16, if you had any early thoughts on what the earnings impact that could be next year and perhaps when you might give us an idea on that.
Yes, thank you. Good question. We'll probably give you an update probably in the interim next year, actually I think is probably the time when we're going to go out there. As you know, the accounting profession is still looking at how it is implemented across the board, particularly around do you apply it retrospectively or just looking forward to what discount rates. So we're still going through the process of doing that. So we'll give you an update in probably just under a year's time. I guess, one of the benefits we've got is, we've got a large freehold portfolio. [indiscernible] remind you which kind of, of course, does help you.
Any more questions? Do we have any more questions?
Our next question comes from the line of Monique Pollard.
Just a few questions for me on Costa. The first one, you said in your initial comment that you've rolled out a range of hot food for lunch, which is going quite well. And previously, you said the breakfast offer is working well. I was just wondering if you could give an update on how your food capture rate is going. And is it sort of more people who are buying coffee being upsold food, or people coming in purely for the purpose of food now? The second question was just on the Costa Express machines. Obviously, the like-for-likes in that business, really strong. Do you think that's a good guide for us to think about like-for-likes in the whole sort of travel and convenience store location, also for your shop? And then the final question was just on new concept, the Costa Fresco concept that you'd rolled out, I think, a year or 2 ago. I just wondered if you could give an update on that.
Great. Okay, good. The -- yes, food capture rate has improved since we've launched breakfast and the hot lunch ranges. The thing about all of these things is customers have to notice, and customers who don't think of you for those occasions because you haven't historically had an offer for them, have to be reminded and have to come back. But we've been really pleased with the food capture rate. Overall, between breakfast and lunch is a couple of percentage points up. We had a pretty good food capture rate in the first place. So to get to 2 more percentage points on that is good. It's slightly different for breakfast and lunch. Breakfast is higher, but they both are in the sort of 2% slop-ish ranges. So we're pleased with that. In respect of...
The Costa machines...
I wouldn't – yes, we don't tell you like-for-likes. I know we've got own static figure for one quarter. So I wouldn't want you modeling something which is the first time we've given you a number, particularly in Costa Express, given we will lap prices and aren't anticipating increasing the price on the lap. I think that's February that we've just lapped. So you would expect to see that come off in the next quarter to a more reasonable run rate, but still a very positive run rate.
I think just a couple things on Costa Express. First of all, the definition of what Costa Express like-for-like is. Costa Express definition of like-for-like is like-for-like for the locations. So where you may have it in a location 1 machine and you add 2, that is still 1 location overall. So it's not necessary like-for-like per machine, it's per location. So don't add 6.7% like-for-like across all of our machines.
Oh, yes. That's [indiscernible] new machines [indiscernible].
That's the first thing. The second thing I would just say is, actually, Costa Express has good return on capital. And we do not manage it from a like-for-like perspective. We manage it from total sales and manage it from a return on capital perspective. They are the 2 KPIs we are looking at. And actually, the more we can drive that kind of penetration of coffee in, the better rather than just drive the like-for-like per location.
And when we look at -- when we think about the business and we think about the channel strategy, we think about it in this holistic way because of the need for customers to be near to the provision of the coffee to want to buy it. So we talk definitely about if we don't put -- if we put a store in a station even though we have a High Street one, we may lose some business on the High Street. But people from the station were never going to walk up to the High Street. And if that was a Starbucks coffee place, then they would buy the Starbucks. We still have the cannibalization, but it would be to a competitor. So we have this holistic approach. So being ubiquitous is actually a good thing for coffee provisions because convenience is such a high priority for people. And if they have brand preference within a reasonable distance, they will express that preference by going to the brand of choice. But when it's a long way to the other brand, then people go with the convenient option. So we do need to look at it in the round. And therefore, I do get – the only time I sort of get cross is where I see a headline saying costs of sales are down because we've got a like-for-like that's down in the equity estate. When our total sales are up 7% or 8%, it's usually frustrating for people to misread the results more holistically, particularly out in the consumer environment. We are putting more coffee into the hands of more customers than we've ever done before. And we're increasing our market share by providing convenient locations. And we are slowly managing the estate to make sure that the estate is optimized for provision of coffee to consumers. In a growing market, there's still a long way to go, because the market is growing 5%, 6% every year, and we're growing 7%, 8%. We're gaining share in the market, and there is still plenty of coffee growth to go.
And an update, if you can, on Costa Fresco?
Oh, Fresco. You asked -- apologies. Yes, you had a question on Fresco. Fresco wasn't a concept we would ever have rolled out. It was -- the reasons we have a Fresco store in Tottenham Court Road, the whole thing about Fresco was to test food and to call it something different so that we could then test the food in a slightly different environment with consumers. And that particular store did enormously well from a food perspective to the point actually that it didn't make sense for us. We sold more food than coffee. Our food capture rate went to 120%, which [indiscernible]. And so what we used that particular store to do was to test the types of food that went well and complemented coffee, the types of food that we would have the brand reach to be able to offer sensibly to customers and test the way that we might lay out and format actually what did we need in terms of cooking facilities within stores to get the best food offer out there. And the results of it led to much of the food concept that's out there now led to us realizing we're absolutely going to have to put Merrychef ovens to cook the food into our stores, we're going to have to put microwaves in to -- and the things like hot soups and hot fishes were both things that consumers felt were the right things Costa should be offering and that they were prepared to buy from us. So it just -- it helped -- it was not a concept that we were going to roll out across the U.K., it was a concept that was allowing us to test and challenge ourselves in our food offer, and that it has been, therefore, instrumental in the then further rollout across the whole estate of food.
We have 4 more questions on the line. And our next question comes from the line of Tim Barrett.
I'll just go for one, please. Restaurants, we haven't really talked about, but 1.8% growth looks good, particularly when you look at occupancy in the hotels of 1%. So can you talk about how that's been achieved? And is it simply price? Or is there more going on in Restaurants?
There's quite a lot going on in Restaurants. But the most important thing that's going on in Restaurants is our commitment to considering Restaurants, the F&B offer for our hotel business and taking a look at F&B more holistically within Premier Inn. So we have several different types of F&B offer. But what we do have for all 770 hotels is a hot breakfast and a dinner offer, which other budget hotels don't have. And we know how important it is to the customer loyalty that, that food offer is available to them. So however we provide that F&B, whether it be [indiscernible] restaurants, co-located partners or in our Solus restaurants within the hotel, we have to be -- make sure we manage that in a holistic way and over time making it more efficient and a better quality for the hotel guests. And that's where sometimes one of the reasons why we've concluded that, that sourcing all of it to another partner isn't good is that -- our worst performance falls in our partnerships with others that provide that breakfast and dinner experience where we don't really control the quality on the offer or the brands that the partner puts in. And certainly, from a breakfast perspective, they generally don't like doing the breakfast in the Premier Inn because it's a very early shift, and it's sort of out of the cycle of what they normally do, not very profitable for them. So the Restaurants business has done a lot of work this year on menus and creating value and improving footfall and getting -- and regenerating itself. And we are -- we have been testing concepts that will allow us over time to slim down the number of brands even further. We started that process this year, which is a more efficient way of running the business and making sure that the food offer is absolutely current and in line with current sort of fast casual dining expectations. So we've been testing a concept quite recently in a couple of our restaurants that sort of brings us to a new menu and a new food concept. But yes, I think the Restaurants business has done a good job this year of creating more excitement in the food offer and working more closely with our Premier Inn employees.
But have you been putting price up to try and capture the cost?
No.
Value for our customers has been kind of at the forefront.
Value has been at the forefront of all the decisions we've made this year.
And our next question comes from the line of Alex Brignall.
I just have 2 quick ones, I hope. Just on the outlook for next year, you've talked about your trading and cost during your expectations, but if we just think of Premier Inn, you've said that Q4 is returning to nearer to the like-for-likes you've seen for the year-to-date. So if I just try to think towards 2019, where should I be looking in terms of RevPAR and maybe that gap from RevPAR to like-for-like to get a bit of a hint on that? Because, clearly, London has been distorted by, as you talked about, the lapping of the Brexit impact. So is, I guess, the 0.9% RevPAR growth in the region a fair thing to kind of roll forward. And then what the guide would be to like-for-like. And I know you think about it slightly different, how industry bodies guide. So any help there would be appreciated. And then the second one is just on the investment that you're putting in, and you're accelerating some of your cost-cutting. Is there anything that you can say maybe for the full year in terms of incremental capital investment that is needed to achieve some of that?
Yes, [indiscernible]. I'm probably going to disappoint you a little bit here, Alex. Just in terms of the guidance we gave for how we're doing currently was a kind of December comment in terms of what we see in December is we're back up to what we saw is up to the year-to-date total run rate. I mean, I say we look at total sales there. So it was near the total 7% rather than 5.5% that we saw in Q3. But we do highlight that one of the things when it comes to the hotel industry, you come back from the Christmas holidays and your forward order book is empty, and you kind of say the next -- kind of this week and the next couple of weeks is kind of where you start to get your real insight in terms of how the Q4 trades. So I would kind of encourage you to keep an eye on kind of what the STR trends are over the next few weeks from that perspective overall. What we -- when you look through to next year, there's kind of a few moving parts. Hopefully, you get the maturity of our space with over this year and we've done some [indiscernible] quite interesting space in London overall. We also expect the maturity also from the marketplace as well, although we do expect kind of supply in the marketplace to moderate as well. But I think the kind of comment I made earlier as well is that the hope that RevPAR does trend in line with GDP. I think most speculators out there are expecting GDP to soften next year overall. And in terms of the impact between RevPAR and like-for-like is we expect to still open a good number of extensions next year. So you can still expect kind of roughly 1% to 1.5% dilution from the new space rental.
Capital?
Yes. Just in terms of capital, with the kind of -- capital would probably be in the same range. We've given the guidance of GBP 600 million to GBP 700 million next year -- for this year, sorry, and would likely to be in the same sort of region for the next year as well.
And our next question comes from the line of [ Rachel Fox ].
Just 2 questions from me. How many Costa Express machines are you planning on rolling out in FY '19? And secondly, what was the constant currency growth in Costa International in Q3?
We don't give [indiscernible].
Yes. The FX was about 2% tailwind overall [indiscernible] international -- headwind, sorry, for Costa International. Just in terms of Costa Express, we haven't given the guidance at the moment, so we'll probably give you that in April. But it would probably be – I'd probably be -- at this stage, we'd kind of say, though, probably about 1,000 machines, so I'd probably stick to that at the moment.
And we have our last question come from the line of Richard Clarke.
Last, and hopefully not least. I try and have one question on each of the 3 businesses. So just on the Restaurants, just following up on the Tim's question earlier, you talked about this holistic offer. At the interims, you kind of hinted you're going to merge the kind of inbuilt restaurants with the kind of external restaurants. Has that been done? Has that happened to Q3? And if not, when are you planning on doing that to separate hotel wins out from all F&B? Second question on Costa. You talked a couple of times on this call about flexibility with the leaseholder state. Maybe you can just help us sort of understand what that might mean in terms of the number of stores you might look to close and whether that means you'll move away from your longer-term guidance on Costa at all or whether it's fairly immaterial. And then the third question on Premier Inn. You talk about the effects, the negative effects you're getting from new space and the temporary timing issues you have from that. You must also be getting a tailwind from the maturity you talk about, where you take that short-term hit to your like-for-like from opening a new space, then you say these things rapidly mature. So can you give us some kind of scale on what is that -- what tailwind is that providing to your like-for-like. So therefore, if I just take a generic hotel that had nothing opened anywhere near it at all or recently at all, how would that be performing on average?
Okay, let me start with the F&B. I'll take the first 2, and then Nicholas will finish up. There's 2 ways to think about the F&B. So yes, I would want to consider the F&B as the ancillary income to the hotel business rather than a sense that we build a restaurant business because we like running restaurants, and we would, for example, not therefore, strategically open stand-alone restaurants. We would open restaurants only and as much as it was the best model branded restaurants versus a Solus restaurant for that site. So we look at site returns. And when we're assessing a new hotel, for example, we will review within that site what the returns look like with and without a branded restaurant, whether a branded restaurant is the best thing or even feasible on that site and then how we go from there. So we have found that if we only apply a restaurant hurdle, we wouldn't sometimes put a branded restaurant into a hotel. But if you apply a site-by-site analysis, you can have a 1 point improvement in the site's return on capital by putting the branded restaurant in. So the key is, we do F&B site-by-site in terms of each hotel, but then we look at it as ancillary income and that we manage it overall. So rather than just managing restaurant profit and restaurant revenue, which is what we've historically looked at because it's in the public domain, but actually, we're very actively managing F&B revenue within all of our hotels and that we actively manage our co-location partners to deliver better experience for our Premier Inn customers. So that's what I mean by integration of F&B rather than separation of F&B, separate from the hotel, as more of an integration activity. And having the teams physically located under one managing director who is the managing director of both hotels and restaurants means that they are, therefore, incentivized and committed to be working together and getting a better outcome for the customer and the better outcome for the business. And that goes -- I mean, just to give you a sense of it strategically, it goes straight through the business. Historically, the restaurant team would decide to refurbish a restaurant in isolation of what would happen in a Premier Inn, or the Premier Inn would refurbish a Premier Inn and the restaurant would be untouched. So this integration is -- we're going to refurbish the hotel -- look at the hotel and restaurant refurbishment as one because it's all part of the same experience for the hotel guests. So and it's much more efficient to have builders on site in the 2 things together than to go one year with one and another year with the other. So that's kind of strategically we think about the F&B being part of the hotel business. On the second question you asked, it was about how many stores would you churn. Actually, in Costa, it was a low number. As I said, the thing about our High Street stores, where their growth might be commuted, so maybe the like-for-like might be going back 1% or 2%, they are still good performing stores. I mean, virtually -- we have virtually no, if any, unprofitable stores. Certainly, on a cash basis, absolutely really, really low number. Many of them -- even if they were not contributing to our overall growth, because we had our overall growth coming from more convenient locations or from Costa Express, they would be contributing well to our return on capital and to our cash and our absolute profit level. So the tail is very small. So you might be looking at 20 or 30 hotels that you might churn in any given year out of the U.K. estate.
Yes, yes. So [indiscernible].
Costas.
Yes. The churn would move out 30 to 40 Costas that can churn in the U.K.
Yes. We have closed a few -- we've been closing -- in terms of our China strategy, just on the China side, we have been a bit more rigorous about closing out unprofitable stores in China to give us a clean start in China now that we've got a model that works there. And we've taken ownership of our stores [indiscernible].
Yes. Richard, that's a good question about kind of maturity of our sites and how that gives us kind of -- how that helps us. I think we had some really good slides in the Capital Market Day on November 16 again, which and she laid some of that out. And obviously, it's going to probably compute it to us in terms of how we look at our like-for-like. Because the site has to be open for a full year before it's included in its food calendar year for us before it -- financial year before it's included in its like-for-like. So a site could be opened for nearly 2 years before it goes into our like-for-like calculation and a lot of them are. That means because our sites particularly tend to mature within 2 years, they're not included in our like-for-like calculation. So you don't see the benefit coming through in the kind of like-for-like.
In total.
You see it in the total in this new space for 2 years. And that's why we've got particularly that 5% that goes into that kind of 5% additional sales we get every year from the new space we're doing at the moment.
That was our last question. We've just run out of time. So thank you, everybody, for your attention this morning and for some good questions. And have a good day, everybody.
Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.