More brands to go in coffee shop shake-up

01 December 2004
More brands to go in coffee shop shake-up

For a nation of (supposedly) hardened tea-drinkers, the British sure do drink a lot of coffee.

There are now more than 8,000 espresso-based coffee shops in the UK, and the number of branded coffee chain units alone went from 778 in December 1999 to 2,299 in June 2004 to create a £1b market.

UK Branded coffee outlets market share November 2004
Market analyst Allegra Strategies expects the branded coffee sector to reach 2,965 outlets by December 2006, representing 32.4% of the total coffee shop market - compared with 25.8% in December 2001 - putting increased pressure on the independents. The latest assault has come from the low-end operators. Last month fast-food chain McDonald's teamed up with coffee supplier Kenco to improve its coffee as part of its breakfast menu revamp. And only last week the rapidly expanding sandwich chain Benjy's unveiled an improved range, including a 99p cappuccino and latte. Meanwhile, Costa, backed by a new-look store format and financial clout from owners Whitbread, has opened 41 bars in the past two months, with a further two due to open before Christmas. And German giant Tchibo, whose outlets sell consumer goods as well as coffee, has said it plans to be open in 100 Somerfield stores by Christmas. Competition is fierce. As well as the independents and branded operators, there are concession-based operations such as Caffé Ritazza, food-led operators such as Pret A Manger and Eat, and the self-serve players such as Coffee Nation, with its espresso-based machines and low overheads. Analyst Mintel also notes there has been a renewed challenge from in-store restaurants and caf‚s, such as Marks & Spencers' Café Revive, itself based on the coffee shop model. And even pub operator JD Wetherspoon has tried to get a slice of the market with its cut-price cappuccinos and early morning openings. Coffee outlets are cropping up everywhere, from mini supermarkets such as Tesco Metro to department stores and book shops, as non-specialists join forces with branded offerings, such as bookshop Borders' relationship with Starbucks. Allegra's managing director, Jeffrey Young, sees "a monster opportunity" in Tchibo's strategy and he expects to see more big tie-ups in the future as retailers such as Argos see the value in teaming up with a branded coffee shop operator. UK coffee consumers are also becoming increasingly demanding and sophisticated - and while this will raise costs for the operators, the smart ones will view it as an opportunity. Coffee Nation, for example, was struggling when it was using instant coffee in its self-serve units, based in supermarkets and service stations, but sales soon picked up when it changed to an espresso-based product with improved packaging and a higher price tag. As with the sandwich market, analysts point out UK consumers will pay more for a quality branded product they perceive as offering good value. Young expects the largest players to leverage their brands by selling accessories and coffee-related products in store to increase average spend, while launching branded products such as iced coffee and ice-cream in supermarkets. Acquisitions and consolidation are also on their cards, with the food-led operators most vulnerable. Since market leader Starbucks entered the UK market in 1998, casualties have included Aroma, Seattle Coffee Company (bought by Starbucks) and Madisons, which chose to leave the coffee market and enter the restaurant market under the name Gourmet Holdings. A recent victim has been early mover Coffee Republic, which has been forced to sell sites because of falling sales and develop a pared-down strategy based on a deli-bar style operation. As the big players continue to flex their muscles, it will not be the last company forced to adapt or die. Allegra's Project CaffE report (July 2004) - Dwell time has increased - 44.9% of 2004 consumers stay more than 30 minutes in coffee bars, compared with 38.5% in 2003. - Convenience of location is the most important factor for 64.6% of consumers in 2004. - 81.7% frequent coffee shops at least once a week, and 19.4% on a daily basis. - 33.9% of consumers purchase more take-away coffee, compared with 12 months ago. - Coffee-led operations are predicted to grow by 12.7% to 2,150 outlets by 2006, while the food-led chains are predicted to grow at a slower rate of 6% to 815 sites in 2006, led by O'Briens, EAT and Benjy's. - Starbucks and Costa were the most recognised brands (92.3% and 86.4% respectively).
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