UK’s Dynamic Coffee Market

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By Peter Keen

The tea-dominated culture of Britain, marked by stability and standardized brands, is now among the most dynamic coffee markets in the world, driven by specialty brewing and growth in locations. Consumption of coffee has increased from 70 to 95 million cups per day since 2007 and outlets from 10,000 to 24,000.

ALSO: Costa’s UK Sales Decline

There is still plenty of room for growth. While 6% drink six or more cups per day, a third of consumers surveyed do not drink coffee at all. The average per capita consumption of two cups a day remains among the lowest in Europe. Consumption in Scandinavia and Benelux are twice greater. Britain ranks around 40th among nations. The US, despite its image and Starbucks, is also not a heavy coffee drinking nation, ranking around 21st at three cups daily. Given the surge in demand and outlets, if the UK were to just match US per capita coffee drinking, the market would grow by 50%.

The UK market has expanded mainly through an emphasis on craft coffees and locating stores where shoppers concentrate: the High Street. That has been a key in the success of Costa, Caffèe Nero, and Pret a Manger, the sandwich chain that dominates lunch trade. The core offering has been lattes that are less milky and sharper than, say, the US The fast-emerging growth area is the “flat white,” espresso-based, with a micro-foam of steamed milk forming a thin topping of small bubbles with a velvety finish. It has a higher proportion of coffee to milk than a latte. It’s served in smaller cups. One of the most distinctive features of the drink is that designs can be drawn on the foam that retains their clarity and shape.

Both Australian and New Zealand coffee shops claim to have originated the flat white in the mid-1980s. Starbucks was the first to offer it, but only in its London stores. Costa followed nationally, just a week later. It’s a complex drink to make well. Many commentators see flat white, which is now about 10% of the sales of the leading chains, as “the poster child for the growth of specialty coffee…” “People now understand the difference between a really great coffee and a substandard one…”

Just as coffee in the US has been driven by Starbucks, in the UK Costa is the emblematic leader. Both built critical mass by offering not just an attractive and differentiated product but a distinctly enticing experience. Howard Schulz, the retired executive chairman at Starbucks, has often stated that its success came from revivifying the “romance” of coffee in the US at a time when it was mediocre, to put things nicely. The brothers who founded Costa in the 1970s were consciously motivated by the poor quality of coffee in London and brought their family’s long experience in Italy in coffee roasting. Both companies shared a specialty approach to coffee and were able to add scale without losing quality.

The UK coffee market is highly segmented by age and the behaviors of each generation differ from patterns in other growth markets, especially in Asia. Generally, millennials globally dominate the major market shifts and older segments are less likely to change. For coffee, however, the oldest are the pace-setters and the youngest the naysayers:

  • Under 20s ....................   0.5 cups/day
  • Millennials, 20-37 ........... 1.3 cups/day
  • Generation X, 38-52 ....... 2.1 cups/day
  • Baby Boomers, 53-72..... 2.2 cups/day
  • Elderly, older than 72 ..... 2.2 cups/day

The younger age groups are far more responsive to the new tea market trends: green teas, “wellness” herbals, matcha, and botanicals. Much of the older segment demand underlies the decline of traditional teas and the erosion of the British pub as a social and community nexus. (75,000 in the 1970s, 47,000 today.) Coffee shops have filled an experience gap. Tea has always been very much an at-home drink in the UK. One commentary observes that in a medium-size town there will be multiple branches of Starbucks, Costa, and Caffèe Nero plus successful local independents and a growing number of regional chains. By contrast, there is not even one national tea chain.

The growth in coffee demand has been very much driven by the new supply of outlets on the High Street, where shopper traffic is high and stopping off to enjoy a good coffee is part of routine. (Railway and football stadium kiosks are mobile responses to the imperative of putting the coffee where the people go.)

If expansion is driven by shopping, so too may its erosion. In late 2017, just about all the press converge on Costa and the market, in general, was happy news about Growth! Growth! Growth!

By mid-2018 coverage was full of questions: “Has growth peaked?” “Is this a plateau or a decline?” One characteristic of the new UK coffee shops is that they are relatively expensive – Britain’s import costs of coffee are among the world’s highest. Specialty coffee is a “treat” for most consumers and one they enjoy but don’t have to buy.

They may stop buying. Brexit is hurting consumer confidence and incomes. Starbucks explicitly blamed Brexit for its 60% drop in profits in 2016. The British are moving back home for their beverages and for alcohol. More and more shopping is online: 17% of total retail sales, the highest in Europe. (The US figure is 10%.)

Costa: today, the UK, tomorrow China?

Costa is now the world’s second-largest chain. That needs to be put in context. Its sales are $1.7 billion. Starbucks’ is $22.4 billion from 28,218 locations. Costa operates 2,422 UK stores and 7,000 “express” kiosks, at railway stations, stadiums, etc. Its plans center on international expansion, building on its presence in 31 countries, with 1,450 stores, this includes 459 in China.

Costa stands out as well-positioned to continue its growth surge by targeting international expansion and offset domestic slowdown. It was built up from a small family firm to national chain as part of Whitbread, the large UK brewer. Several dissident shareholders forced a demerger, on the grounds that Costa could grow faster and bigger as an independent firm. It certainly has access now to investment capital.

China is both a major growth opportunity and challenge. Costa has not yet established a profitable position. Starbucks has 3,200 locations in China and opens ten stores weekly.

Though Costa is under a tenth the size of Starbucks, which operates 13,930 US stores, it is significantly larger than many US players. Privately held JAB Holding, which owns majority shares of Peet’s Coffee and Tea ($800 million), Caribou Coffee ($600 million), Intelligentsia Coffee & Tea and Stumptown Coffee, together generate approximately $2 billion in sales. Dunkin’ Donuts operates 7,677 US locations with annual revenue of $900 million. Coffee Bean & Tea Leaf ($500 million) operates 1,200 stores (with plans to open 1,000 new US locations).

The secular – long-term economic – trend for coffee in the UK seems very positive. The situational trend – who knows? Brexit is not good news.