Big brands such as Starbucks, Costa and Caffè Nero are dominating the coffee shop market. So why are they doing so well – and can the medium-sized franchises ever hope to threaten their primacy?
Over the last decade, the UK has become increasingly thirsty for big-brand coffee culture. Just over 10 years ago there were 1,600 branded coffee outlets across the country, of which Starbucks, Caffè Nero and Costa Coffee were the market leaders. Now, according to Project Café2016 UK, a report by Allegra World Coffee Portal, Costa has 1,992 outlets, Starbucks has 849 and Caffè Nero has 620 — and a combined 53% share of the branded-chain market.
Jeffrey Young, Allegra World Coffee Portal’s CEO, believes that part of the reason for the big chains’ success is their ability to build brand trust. “They are an efficient way for the consumer to make a choice and not to have to think too much,” he says. “They offer consistency.”
The big brands also offer a space that customers feel comfortable in. “They invest in their environment, whereas independents can sometimes cut corners,” says Young. “Plus there are operational efficiencies that chains achieve. They have systems and structures in place. Again, that brings consistency but it also gives a level of professionalism to a brand.”
In fact, they are doing it so well that the branded coffee chain market in Britain is now worth £3.3bn. Costa, the market leader, sold an estimated 169 million cups of speciality coffee in 2015, driving up sales by 16.2% to £514.6m in the first half of its financial year. Starbucks, meanwhile, made record profits of £34.2m in the UK last year, although it was still facing a barrage of criticism over its tax contributions revealed in 2012 (it handed over more than £8m in tax in 2015). Caffè Nero, which made a profit of £23.6m in 2015, has received similar bad press over its tax affairs.
Despite this backlash, Young believes that we haven’t yet reached “peak big brand” in the UK: Costa, Starbucks and Caffè Nero have more growth left to achieve, he says. Take Costa: it added 171 UK outlets in 2015 and enjoyed sales growth of 14%. And you only have to look at the number of towns across the UK with more than one big coffee brand on their high street to realise that this is a thriving market. In fact, the Project Café2016 UK report believes the worth of the branded coffee shop segment will exceed £5.7bn with more than 8,500 outlets by 2020.
Scott Bentley, creative director and founder of Caffeine Magazine, doesn’t have any time for the major coffee players. In his opinion, the only chains serving anything like a quality product are smaller names such as Department of Coffee and Social Affairs, and Taylor St Baristas. Yet he points out that – whatever the quality of their roast – medium-sized franchises can have a problem with expansion.
Part of that problem, of course, is the ubiquity of coffee itself. The non-specialist sector – outlets, such as pubs and casual restaurants, that serve coffee alongside their core offerings – actually represents 39% of the total market. Branded chains possess 31% and independents have 30%.
“We’re finding more and more that we need to get in healthier products – such as veggie smoothies and matcha lattes – to attract that millennial audience”
- Kerry Noble, marketing manager, Esquires Coffee
“I think this is down to training in a lot of situations,” he says. “At the moment, being a barista is not really a path of career progression, so people flit in and out of the industry. Head baristas are well trained and know how to serve coffee in the proper way. But when they leave for whatever reason, quality tends to take a back seat.”
For Young, the medium-sized franchises don’t threaten the primacy of the big players. “Their growth hasn’t been very big and certainly not threatening bigger chains,” he says, pointing out that Coffee Republic went into administration in 2009, before being bought out. “It lost its way for many years – but has made a comeback.”
By contrast, Bentley believes – and hopes – that the dominance of the big brands is on the wane because people are becoming quality aware. “It’s partly down to people having a little bit more confidence in saying: ‘I don’t actually like this. And I’m not prepared to continue to pay a corporation that dodges its taxes.’”
Even so, for now, the power seems to be with the Costas of the world. So can the medium-sized franchises really take them on? “We’re not always aiming to ‘take them on’,” says Kerry Noble, marketing manager at Esquires Coffee. “But we’re always looking to show our point of difference against them.”
For Esquires, this includes listening to – and then fulfilling – the demands of Generation Y customers, usually defined as those born from the early 1980s to around 2000. Noble says that Gen Y tastes greatly inform Esquires’ menus. “We’re finding more and more that we need to get in healthier products, which is why we’re offering a range of veggie smoothies as opposed to clear fruit, which contain a lot of sugar,” she says. “Matcha lattes [concentrated green tea powder, steamed milk and vanilla] have also been very popular with our younger customers. These are things that are generally healthier and seen as a bit more ‘cool’ to attract that millennial audience.”
To the coffee connoisseur, healthy products and seasonal products might not be so important. But to the casual coffee-lover who picks up a latte on the way to work it’s an exciting draw, which is why Starbucks brings out its gingerbread lattes at Christmas and Costa has released a summer range of SuperDay Smoothies. Gemma Sandells, marketing manager for Foodco UK, whose franchise coffee business is Muffin Break, says that being one step head of coffee-drinking trends is also key for success, and then refreshing products to reflect the demands of the market. “In Australia, we’ve seen customers ordering smaller coffees – cortados and piccolos – so we’re extending our range later in the year to make sure we’re catering for those people [in the UK].”
We might even see craft beers in coffee outlets before too long. New research from the Society of Independent Brewers (SIBA) has shown that a fifth of people in the UK would visit coffee shops more often if they sold British craft beers. Many of the larger chains have already begun to look to increase the number of outlets with alcohol licences; and the idea of coffee shops as all-day venues is something they are taking extremely seriously, says Mike Benner, SIBA managing director.
But no brand in the coffee business, whatever its size, has a moat around it, protecting it from failure. So it’s essential for them to protect their revenues by picking the right location for outlets. “If you haven’t done that and you’re paying too much rent in a place where your business isn’t viable, you are destined to fail,” says Young. Even Starbucks admits that it has fallen foul of expensive leases in choice locations, such as Oxford Street in London.
Brands also need to study the potential footfall in a particular area and keep an eye on the competition nearby. Then they need a good manager who can motivate staff and put customer engagement at the top of the agenda. “Staff have to be ‘on it’,” says Young. “If they are lackadaisical, uninspirational and not building relationships with customers, that will make the brand vulnerable. Because a lot of people want to come to coffee shops to take time out of their busy lifestyles and be in a social environment. Coffee shops are a human experience.”