A City analyst has urged Whitbread to realise the true value of Costa Coffee, as speculation continues as to whether it should demerge from the group.

Simon French of Panmure Gordon explained the coffee chain, now the biggest operator in Britain with a 40% share of the market, is not “accurately captured” in the Whitbread group.

French said: “Whitbread has helped Costa to grow considerably since acquiring the business back in 1995 for £20m. However, the group is primarily a hotels business. So it could prosper without its parent company, particularly abroad in regions such as China, where it is doing particularly well.

“I can see Costa remaining within Whitbread for the next 18 to 24 months, but the question needs to be asked as to whether it is better served on its own after that period.”

He added that Costa Coffee, which could be worth around £700m as a standalone business, needs to be careful when it comes to brand saturation, following Whitbread’s move to buy out the Coffee Nation vending machine company for £60m last year. Since relaunching the self-service coffee machines under the name Costa Express, the group has has seen an 20% increase in sales.

“With the Costa brand now appearing everywhere, it could suffer in the same way as Starbucks has. So the Whitbread group needs to assess this carefully and decide what this could mean in terms of Costa Coffee’s future,” added French.

Costa Coffee reported positive like-for-like sales back in December, showing an 3.8% increase in the 13 weeks to 1 December 2011, and total sales up in the same period by more than a quarter (25.2%).

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