Organic growth or acquisition: which is better?

And there is plenty in the news about potential M&A in our sector at the moment.

At Premier Inn, we’re doing both and still working out the optimum mix. What are the risks versus the benefits of each? When might one be a better option than the other? How can we all maximise results?

Speed is a big part of the equation and there is more than a hint of the tortoise and the hare here. Conventional thinking has it that organic growth is steady, sure and dependable - you know what you’re getting because you specify it and build it for purpose. Site acquisition, planning and construction may take time, but you get a bespoke product at the end. And if you are in a brand-based business like ours, that’s important.

Alternatively, acquisition gives you an immediately available asset, existing patronage and, hopefully, a cash-generating entity that you can then adapt and improve. By buying a portfolio of hotels, restaurants, cafés or any other leisure use, you can go from A to B on expansion pretty quickly.

So what have we learned since we started buying going-concern hotels in the past few years? I think there are three key lessons:

1. Location - establishing a presence in any target location means understanding the dynamics of that micromarket, using intelligence to inform strategy and calculating whether organic or acquisition will work best. In some locations, taking on a trading asset (which has a proportion of existing market share) will offer better returns than trying to build a new market entrant. Scrutinise every target location and tune your strategy accordingly.
2. Risk - generating a return on capital is fundamental for any successful development. We have bought major office sites in London this year and are converting them into hotels - this takes time, but the asset’s value and its trading potential are significant once the refurb is completed. It is all about patient money versus speed of generating returns. Buy a going concern and you can typically convert to brand standard and have it open in 30%-50% of the time it takes for a new build. You might even be able to stay trading through a refurb if you can phase construction. Either way, the asset is generating cashflow more quickly than a new build. Choose options that match your business’s overall financial capability and requirements.
3. Flexibility - be open-minded and innovative. Going-concern sites may have hidden potential and actually perform better via knock-down and rebuild rather than conversion. Existing assets may be extendable. Look at each opportunity in the round to identify how it can best fit your requirements - you may find value in unexpected areas.

Whichever route and mix is selected, the long-term objectives must be focused on keeping the customer at the heart of decision-making to have the best possible chance of success. You can then bring together buildings, budget and brand, plus all of the other elements of the growth story, but you will always come back to what matters most - is this new site going to deliver for and appeal to the customer?

Mark Anderson is managing director - property, commercial and Premier Inn Germany at Whitbread Hotels & Restaurants