Whitbread PLC

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Whitbread PLC

Chiswell Street
London EC1Y 4SD
England
(0171) 606-4455
Fax: (0171) 615-1000

Public Company
Incorporated: 1889 as Whitbread and Company PLC
Employees: 75,000
Sales: £2.75 billion (US$4.20 billion) (1995/96)
Stock Exchanges: London
SICs: 2082 Malt Beverages; 2083 Malt; 5181 Beer & Ale; 5812 Eating Places; 5813 Drinking Places (Alcoholic Beverages); 5921 Liquor Stores; 7011 Hotels & Motels; 7991 Physical Fitness Facilities; 8299 Schools & Educational Services, Not Elsewhere Classified

Whitbread PLC is one of the leaders in the leisure industries of the United Kingdom. Founded as a single brewery, the company grew to become one of the most prestigious of London’s older breweries, with its history closely paralleling that of the Whitbread family, which retained continuous control of the company from 1742 to 1992. Whitbread began to diversify in the early 1960s, and by the mid-1990s only 31 percent of sales and 14 percent of total profits were derived from brewing operations, whose brands include Stella Artois, Murphy’s Irish Stout, Boddingtons Bitter, Heineken, Wad worth 6X, and Labatt Ice. The remainder of the revenues and profits came from Whitbread’s various retail sectors, which include pubs, restaurants, coffee shops, wine and liquor stores, hotels, health and fitness clubs, and children’s nurseries.

Samuel Whitbread Established Brewery in 1742

Samuel Whitbread, at the age of 14, was sent to London by his mother in 1734 to become an apprentice to a brewer. Whitbread, raised as a Puritan, proved to be an extremely hard worker. In 1742, eight years after coming to London, he established his own brewery with a £2,000 inheritance and additional underwriting from John Howard, the renowned prison reformer. As the brewery became successful, Howard’s investment became more lucrative—it even led to a reciprocation of financial support by Whitbread for Howard’s reform movement.

By 1750 Whitbread had acquired an additional brewery located on Chiswell Street. At this time there were over 50 breweries in London, but, despite intense competition, the Whitbread brewery expanded rapidly. By 1760 its annual output had reached 64,000 barrels, second only to Calvert and Company.

Whitbread was enthusiastic about new brewing methods. He employed several well-known engineers who helped to improve the quality and increase the production volume of the company’s stout and porter (a sweeter, weaker stout).

The Whitbread family had a long history of involvement in English politics. Samuel Whitbread’s forefathers fought with Oliver Cromwell’s Roundheads during the English Civil War and later developed a connection with the Bedfordshire preacher and author John Bunyan. Samuel Whitbread himself was elected to Parliament in 1768 as a representative of Bedford. His son, Samuel II, succeeded him in Parliament in 1790, and Whitbread descendants served in Parliament almost continuously until 1910.

Samuel Whitbread died in 1796. Samuel II assumed control of the brewery, but was so preoccupied with Parliament that by 1799 he was compelled to take on a partner. The partnership, however, was shortlived. The brewery entered into seven more partnerships over the next 70 years, only two of which were successful. Most notably, Whitbread’s 1812 partnership with the Martineau and Bland brewery resulted in a full merger of the two companies’ brewing operations. The Martineau and Bland facility at Lambeth, however, was later closed down and its equipment was moved to Chiswell Street.

During the early 19th century the bulk of Whitbread’s business was conducted with “free houses,” public houses—or pubs—neither owned by, nor bound to sell only the products of one brewer. These pubs numbered several hundred, and their business remained fairly stable. But when the Drury Lane Theatre burned down in 1809, Samuel II saw an opportunity to profit from its renovation. He led a committee to restore the theater, invested heavily in the project, and persuaded several friends to join him. The venture yielded only a small dividend when the theater was reopened, and cost Whitbread the friendship of many of his fellow investors. In Parliament, Whitbread opposed the resumption of war with Napoleon, a position that made him even more unpopular. In July 1815, shortly after Waterloo, Samuel Whitbread II committed suicide.

Whitbread’s sons, William Henry and Samuel Charles, inherited their father’s interest in the brewery. Whitbread family control, however, had been greatly diminished by the company’s nine partners. It was not until 1819 that the Whitbread brothers were able to reestablish direct family control over the operation. The number of partners was reduced, and the brewery remained under Whitbread control for many years.

In 1834 Whitbread introduced ale to its product line. The ale gained immediate popularity and resulted in a substantial increase in turnover for the brewery. Whitbread expanded even more dramatically after 1869, when the family established its last partnership.

Went Public in 1889

During the 1880s, a sudden and significant decline in demand for beer caused many “free houses” to sell their leases to breweries (and thereby become “tied houses”). Breweries such as Whitbread, which had established numerous tied houses, were forced to extend loans to public house operators so that they could remain in business. The capital required to purchase free house leases and to extend loans could only be satisfied by the public through share flotations. Therefore, when Whit-bread’s partnership agreement expired in 1889, the partners decided to transform the brewery into a public company.

An attempt by brewers to raise the profitability of tied houses by reducing beer prices backfired; their tenants competed on price and went even further into debt. A recession in 1900 forced Whitbread to write down the value of its tied house properties—a move which may have saved the company. Demand for beer recovered steadily and permitted Whitbread to increase its production every year from 1899 to 1912. Accordingly, the value of tied houses recovered as they became profitable. Just prior to World War I, however, the government raised its license duty on tied houses, rendering many of them financial liabilities. Whitbread stopped buying tied houses, and instead concentrated on expanding its bottled beer trade.

While Whitbread weathered this difficult period virtually intact, many competitors were forced to close. Whitbread’s ability to survive was attributed to three factors: the maintenance of a harmonious relationship between the brewer and the publican (public house operator), sustaining a good public image of the brand, and keeping influence in government.

Francis Pelham Whitbread, the director of the brewery at the time, devoted his energies to maintaining a stable atmosphere for profitable brewing; as chairman of the Brewers Society, he promoted better brewer-vendor relations. Later, as chairman and treasurer of the politically active National Trade Defence Association, he lobbied against the temperance movement in Parliament. After World War I he played a major role in the formation of policies within the brewing industry, and was particularly opposed to the proliferation of tied houses.

During the interwar period Whitbread took over the Jude Hanbury brewery. As its situation with vendors remained unsettled, Whitbread concentrated further on the expansion of bottled beer sales. Whitbread beer had become available throughout the world. Francis Whitbread, however, became increasingly divorced from the everyday operation of the brewery; his position as a spokesman for the industry and his dedication to philanthropic activities occupied most of his time.

On December 29, 1940, German incendiary bombs landed in five separate areas of the brewery. Each of the fires was put out by the company fire brigade, with the exception of a malt fire which, like burning coal dust, is very difficult to extinguish. It was finally doused a week later. Damage to the brewery and the surrounding area was great. Nevertheless, Whitbread resumed brewing almost immediately.

Francis Pelham Whitbread died in 1941. His leadership of the brewery was highly conservative—especially when compared to the policies of his successors. Francis was in many ways a popular figurehead for the company. Much of the actual burden of management fell on the shoulders of Samuel Howard Whitbread, who served with the company from 1915 until his death in 1944. William Henry Whitbread assumed leadership of the company that year, but was forced to postpone his plans for the rehabilitation of the brewery until after the war.

Postwar Era Brought Wave of Amalgamations

Though the war ended less than a year later, the British economy continued to suffer from aftereffects for many years. Conditions were so grave that Whitbread was unable to begin its modernization until 1950. At that time Whitbread undertook a sweeping rationalization program which included the concentration of human resources and retooling of machinery.

Company Perspectives:

At the heart of Whitbread’s strategy is the drive to provide products and services which customers enjoy, appreciate and consider good value for money.

It is this strategy which has taken the company from brewing, into pubs, pub food, restaurants, hotels and leisure and also into high street retailing. Whitbread’s future depends on broadening the appeal of these businesses to an ever widening range of consumers, in growing their scale both organically and through well chosen acquisitions and in expanding into new areas which build on its existing skills and experience.

Other smaller breweries were in less stable condition, and many were threatened with bankruptcy. Whitbread, however, offered an amalgamation scheme to these breweries. Under this formula, called the “Whitbread Umbrella,” failing breweries agreed to coordinate their operations and distribution networks with Whitbread. Many of these arrangements resulted in Whit-bread’s eventual acquisition of the smaller brewers. In the period from 1951 to 1970 Whitbread took over 26 breweries and expanded its number of tied houses from less than 100 to 10,000.

Some of the breweries acquired by Whitbread were large well-established companies. Beginning with the Dutton brewery in 1964, Whitbread took over Rhymney in 1966, Threlfall and Fremlin in 1967, Strong in 1968, and Brickwood in 1971. These additions to Whitbread also gave the company greater geographical coverage—Threlfall’s was located in the northwest port of Liverpool, and Brickwood’s was in Portsmouth, on the south coast.

Streamlining and Beginnings of Diversification in the 1970s

The 1970s were characterized as a period of streamlining for Whitbread and also saw the beginning of a move toward diversification. The company disposed of many of its marginally profitable or outdated operations—even the Chiswell Street brewery was closed in 1976. Still, Whitbread suffered from the aftereffects of a serious economic recession during the mid-1970s, and the company came very close to bankruptcy. A gradual economic recovery led to improvements in the market which greatly strengthened Whitbread’s financial position.

Meanwhile, however, as popular demand shifted from ale to lager, total beer consumption began to fall. Whitbread started to deemphasize certain brewing assets and began to diversify outside brewing. The company had already gained a chain of wine retail outlets when it acquired Thresher in 1962. Along the way, Whitbread built up a wines and spirits division that included Beefeater Gin, Long John Scotch Whiskey, and Cutty Sark Scotch Whiskey. Food was added in 1974 with the opening of the first Beefeater Restaurant & Pub, which was in the casual dining sector, and with the 1979 debut of Brewers Fayre, a chain of pub food outlets.

Notwithstanding these nonbeer ventures, Whitbread did not abandon the brewing industry but in fact became more active in licensing non-U.K. brewer’s brands. In 1968 the company gained the right to brew Heineken lager under a license agreement and in 1976 the Stella Artois brand began to be brewed by Whitbread under a similar agreement.

Further Diversification in the 1980s

Whitbread continued to diversify in the 1980s under the guidance of new leadership. William Henry Whitbread had given up day-to-day control of the company during the 1970s, whereupon Samuel Whitbread (a fifth generation descendant of the company’s founder) became chief executive and eventually chairman, in 1984. He initially sought to bolster his company’s restaurant holdings. In 1982 a 50-50 joint venture with PepsiCo Inc. began, which went on to build a significant chain of Pizza Hut restaurants in the United Kingdom. T.G.I. Friday’s joined the company’s restaurant fold three years later, when Whitbread signed a franchise agreement to develop U.K.-based outlets of this chain, also in the casual dining sector. By the 1995/96 fiscal year, beer operations accounted for only 43 percent of profits, with wine and spirits accounting for 20 percent and retail operations 37 percent.

Next, Whitbread entered the hotel industry. The year 1987 marked the debut of the Travel Inn chain, budget hotels which were usually located next to another Whitbread property such as a Brewers Fayre, Beefeater, or T.G.I. Friday’s. Whitbread’s diversification program gained further momentum in 1989 when management announced that the company would focus on the leisure retailing industries in general, with a particular emphasis on areas, such as travel and eating out, that were projected to grow rapidly through the end of the century. Brewing was still to be included in the mix but would continue to account for smaller percentages of company profits, notwithstanding the 1989 acquisition of Boddingtons brewery. Another sector to be retained was the Thresher unit, which specialized in retail outlets for alcoholic beverages; Thresher was subsequently bolstered with the opening of the first Wine Rack in 1989 and the 1991 acquisition of Bottoms Up, a chain of wine superstores. On the divestment side was the company’s wine and spirits division, which included a distiller of such brands as Beefeater Gin and a U.S.-based importer and distributor of wines and spirits. The division was sold late in 1989 to Allied-Lyons PLC for £545 million (US$880.2 million).

Compliance with MMC Orders Dominated Early 1990s

Nineteen eighty-nine was also important because it was the year that Whitbread began to plan for its compliance with new rules on tied houses set down by the British government’s Monopolies and Mergers Commission (MMC). After an investigation into the system of tied houses that had been created from the numerous mergers in the brewing industry in the 1960s and 1970s, in early 1990 the MMC ordered brewers with more than 2,000 pubs to sell or lease half of the number over 2,000, meaning that Whitbread would have to do so with about 2,300 pubs. And the MMC gave brewers a November 1, 1992, deadline to comply. Meanwhile, Peter Jarvis, who had joined Whitbread from Unilever in 1976, took over as chief executive in 1990. Later, in August 1992, Michael Angus, chairman of The Boots Company and former chairman of Unilever, became chairman of Whitbread as well. This management team— noticeably minus a Whitbread—led the company through the MMC compliance process.

Following the issue of the MMC orders, Whitbread first pulled its pubs out of its brewery division. It then sold about 1,300 of them by the deadline, and leased the remaining 1,000 on a short-term basis. At the time the United Kingdom had too many pubs, and property values had fallen sharply since the boom years of the early 1980s. Consequently, Whitbread’s profits took a large hit from the forced sales and squeezed its plans to expand its retail activities. A plan for Whitbread to take the Pizza Hut chain into continental Europe fell apart when the company could not afford to commit the initial £100 million needed.

A further consequence of the MMC orders was that Whitbread had to untangle itself from its complicated system of cross-holdings in regional brewers—held through Whitbread Investment Company—that it had developed during its acquisition spree. In November 1993 Whitbread acquired Whitbread Investment Company, then in March 1994 sold nearly all its regional brewery stakes, raising about £300 million in the process.

Renewed Spending Spree in Mid-1990s

Whitbread thus emerged from the MMC orders with some cash to spend on its retailing sectors. A new wave of activity began in 1994 with the acquisition of the Maredo steak restaurant chain located in Germany. In August 1995 Whitbread paid Canada-based Scott’s Hospitality Inc. £180 million (US$288.2 million) for 16 Marriott hotels and also signed an agreement with Marriott International to develop the brand name in the United Kingdom. That same month, the company acquired David Lloyd Leisure (DLL) for £200.7 million (US$321.3 million). DLL, named after tennis champion David Lloyd, operated 20 private sports and fitness clubs as well as 24 nursery schools through its Gatehouse Nursery Services subsidiary. In March 1997 DLL bought Curzon Management Associates and its five London gym sites.

Whithread’s restaurant holdings received further boosts in 1995 and 1996. The Costa Coffee chain of coffee shops was acquired in October 1995. In July of the following year, £133 million (US$208.8 million) was spent to purchase Pelican Group and its 110 restaurants spread throughout several chains, most notably Café Rouge, a French bistro/cafe; Dome, a bar/ cafe emphasizing beer, drinks, coffee, and cafe-style food; and Mamma Amalfi, a family-style Italian restaurant. In November 1996 Whitbread bought the BrightReasons group for £46 million (US$72.2 million). The key chain acquired therein was Bella Pasta, with 55 outlets, while the Pizza Piazza chain was subsequently sold to Passion For Food for £11.25 million and 102 Pizzaland restaurants were converted to Pizza Huts and other Whitbread restaurant brands. The acquired pizza chains were jettisoned to avoid a conflict with Pizza Hut.

In the summer of 1997 Jarvis stepped down as chief executive and was replaced by David Thomas, who had joined Whitbread in 1984 as a regional director of the Inns division. Thomas took over a company that had seen sales and profits rise throughout the 1990s, thanks in large part to Whitbread’s increasing emphasis on nonbeer activities. In the future, Whitbread was likely to aggressively grow the various leisure brands it had acquired in the 1980s and 1990s. Continuing to derive most of its revenue from its home market, Whitbread nonetheless seemed likely to pursue opportunities elsewhere in Europe as another channel for growth.