Sector Insight: Coffee shops - Cafe culture takes firm grip

The sector is flourishing as outlet locations widen and the choice of products grows, writes Jane Bainbridge.

THE BACKGROUND

The rude health of the coffee-shop market is reflected in the performance of its three main players. Starbucks' profits rose 18% for the fourth quarter of 2006; last year, Caffe Nero reported a 44% jump in its pre-tax annual profits to £7.3m; and Costa Coffee posted a 21% rise in sales for the six months to 31 August 2006. Having established their dominance on the high street, branded coffee shops are now making their presence felt in new environments such as supermarkets and estate agents as they seek to capitalise on predictions of continued prodigious growth.

UK consumers looking for a tall, skinny cappuccino do not have to look too far for their daily caffeine fix. The Brits have embraced the US coffee-shop culture and made it their own. In London, for example, there are more than 150 Starbucks outlets within a five-mile radius.

The rise of the coffee shop since the 90s has changed the look of our high streets, as the market has grown rapidly to reach unprecedented levels. This means that the major players in the sector will have to diversify to keep up the momentum, as well as address issues such as the level of food they offer and competition from other catering outlets serving hot drinks.

The range of coffee-based drinks on offer is enormous and the consumption occasions and locations are ever-widening. Sales through branded coffee shops rose 11% in 2006 to reach £675m, according to Mintel, but there is still room for expansion as there are swathes of society that never visit these outlets.

About a third of adults used branded coffee shops regularly (at least once every three months) last year, a proportion that has remained fairly constant for the past couple of years, according to TGI. On the downside, the proportion of people who say they never drink coffee increased from 13% to 20% between 2004 and 2006. In addition, very few people consider themselves to be regular users, with the majority viewing coffee as an occasional treat.

Coffee shops are predominantly the domain of the affluent masses, attracting ABC1s across the age ranges. They have proved especially popular among single women looking for a safe and comfortable environment to take a break or meet friends. They are seen as less threatening than pubs and more comfortable than a 'greasy-spoon' cafe.

Big names dominate the market. Starbucks, Costa and Caffe Nero account for almost 60% of the UK's coffee shops. Having saturated most high streets, they are now opening concessions in supermarkets, bookshops, transport hubs and hospitals.

Starbucks has come in for a significant amount of flak from anti-globalisation protesters, but this has failed to diminish its expansion strategy. It recently announced extensive growth plans for the UK, focused on London, that will see it add more outlets fortnightly for the next 10 years. While the lack of distance between some of its stores means it sometimes cannibalises its own market, the long-term aim is to build share.

Last November the company introduced a pre-payment card for customers that can hold between £2 and £150 and is aimed at building loyalty.

Whitbread has focused its energy and resources on its Costa brand to establish it as one of its three main divisions. Both Costa and Starbucks have, until now, been opening about 50 branches a year. The company aims to increase its store portfolio to 800 in the UK by 2010.

Following a successful trial, Costa, too, rolled out a loyalty scheme in all its branches toward the end of last year. It offered a £2 incentive to customers who signed up to it online. Costa claims that one in 10 customers have signed up, with more than a third of those using the card on a daily basis.

The third of the big players, Caffe Nero, announced it was going private last December. Under the guidance of its founder, Gerry Ford, the company's intention is to expand and raise money without shareholder pressure.

Although it is some way behind Starbucks and Costa, Caffe Nero has doubled in size since 2003 and posted strong financial performances. It is looking to develop its food options, especially in the baked-goods area. This includes a low-fat, low-calorie Lighter Choice range.

The rest of the market is widely fragmented. It includes coffee shops such as Puccino's, based mainly in the South-East, BB's Coffee & Muffins, Coffee Republic and AMT Espresso, which has established a niche at major transport termini and positions itself on its 100% Fairtrade positioning.

Ethical concerns have dogged the industry and although the issue is of above-average importance to coffee-shop users, they remain more interested in price and convenience.

The prognosis is good, with sales set to grow 52% by 2010 to reach a value of £1.02bn, according to Mintel.

COFFEE-SHOP CHAINS BY NUMBER OF BRANCHES

Total Stand-alone Concessions
(%) (%)

Starbucks 535 84 16
Costa 510 75 25
Caffe Nero 290 90 10
Puccino's* 122 100 -
BB's Coffee & Muffins* 105 100 -
Tchibo 60 80 20
Coffee Republic* 60 100 -
Cafe Nescafe/Nescafe To Go 50 60 40
AMT Espresso** 50 - -
Others 418 - -

Source: Mintel
* Franchised branches (approx no): Puccino's 120, BB's 50, Coffee
Republic Deli 10
** mainly in railway stations


COFFEE SHOPS BY CONSUMER VISITS OVER THREE-MONTH PERIOD (%)

2006 2004

Any specialist/branded coffee shop 33 32
Starbucks 19 19
Costa Coffee 17 14
Caffe Nero 9 8
Coffee Republic 2 3
Others 3 5
Any in-store cafe 21 25
Department stores/variety stores* 14 15
Supermarkets 11 17

Source: Gfk NOP/Mintel
Base: adults aged 15-plus
* eg bookstores, Marks & Spencer


REASON FOR VISITING BRANDED/SPECIALIST COFFEE SHOPS, NOVEMBER 2006 (%)

All Visited
in past
3 months

Wide range of non-coffee drinks 15 19
Wider range of meals 12 19
Entertainment 9 16
Ethical produce 9 12
Creche or children's area 9 12
Later opening 7 13
Deli/specialist foods to eat in or take away 5 9
Alcoholic drinks 4 4
Merchandise (eg coffee beans, mugs) 2 4
Prepaid, cashless payment or loyalty cards 2 3
Meeting/mini conference booth 2 4
Mobile phone/MP3 player-charging facilities 1 2

Source: GfK NOP/Mintel Base: adults aged 15-plus

ANALYST COMMENT - SAMANTHA THORBURN EUROMONITOR INTERNATIONAL

Britain's adoption of the Starbucks-bred 'third space' has led to a boom in coffee shops. Euromonitor International expects sales in coffee-shop chains to have grown by more than 54% by the end of the decade.

The market is not yet at saturation point. For instance, it is estimated that only one in 10 consumers regularly visits supermarket cafes, which presents a big opportunity for growth. Sainsbury's, for example, is opening Starbucks outlets on its sites to improve the tired canteen cafe experience of the past.

IKEA has already got the model right by providing a place for its customers to recharge their batteries without leaving their premises. In addition, estate agents, libraries and even bookmakers are entering the arena. Ladbrokes, for example, has made a somewhat strange bedfellow of ethical coffee brand Cafedirect.

Expanding is one thing, but building loyalty is another. Caffe Nero offers regular customers their 10th coffee on the house. Starbucks and Costa, meanwhile, have introduced a system already popular in the US - the prepay card. These can be loaded with credit, making transactions cash-free and, therefore, quicker at the till.

Many coffee shops also offer free wi-fi access, encouraging customers to spend more time there and further blurring the lines governing the kind of space that cafes are.

The impending smoking ban in England is unlikely to have much of an effect on cafes; many are already smoke-free and take-away is always an option. So the future looks rosy - but it should also look green. Cafes will have to make bolder moves into organic and fair trade as well as looking at how to reduce waste so that the mark they make on the high street is the only footprint they leave.

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