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Costa Coffee’s journey to become UK’s largest coffee shop chain
My colleague Nick Wyatt’s recent MarketLine blog paints a sombre picture of the UK high street, with bricks-and-mortar retail hit hard by the rise of online shopping and lack of consumer confidence. However, some high street outlets are experiencing a more positive performance: coffee shops, for example.
The UK coffee shop sector has seen strong expansion in revenue and outlet volume for several years. Chief beneficiary of this trend has been Costa, currently the largest branded chain in the UK as measured by the number of outlets.
It’s been around for a while. Established in 1971 by the Costa brothers as a roaster and wholesaler of their proprietary Mocha Italia coffee blend to London’s coffee shops, it integrated forwards in 1978 by opening its own coffee shop. By 1995, it was a significant enough presence on the high street to attract the attention of Whitbread, and was added to the company’s many other subsidiaries in the hospitality and food service business. By 2012, Whitbread had slimmed down this roster of companies, and made Costa a key reporting segment. At this point, there were almost 1,400 Costa outlets in the UK alone. Its main competitor, Starbucks, had just over 700 UK branches, and Caffe Nero had 528.
Although the UK market is growing at a healthy rate, there is no room for complacency. Coffee shops from different chains must compete for customers, often in very similar locations. Relatively low entry and exit costs mean that competing outlets can appear at any moment. There is little to lock consumers into loyalty to any one company. This means that a strong brand identity and loyalty schemes are important, while maintaining product quality is vital. Costa keeps its own coffee blend as a central pillar of its brand, while also coming up with new beverages based on it.
To maintain growth in revenue, Costa is diversifying in two ways. Its first coffee shop outside the UK was opened in 1999, and now almost 40% of its outlets are located beyond the domestic market. Also, it recently acquired Coffee Nation, which operates coffee vending machines in locations such as motorway service stations. These machines are unusual in serving beverages made from ground coffee rather than instant powder, aiming for improved quality. The network is being converted to Costa Express branding, and had expanded to around 2,500 machines by mid-2013.
Costa’s strategy seems to be working. In the financial year ending February 2013, the division posted revenues of £672.4m, an increase of 24% on the previous year, equating to 33% of Whitbread’s total revenues. Operating profit rose by 29.3% to £90m.
To learn more about Costa, read our Business Case Study Costa Coffee: UK’s largest branded coffee shop chain.