Trouble could be brewing for branded coffee chains

Research warns that the branded coffee chain market could be reaching the limits of its expansion. But analysts are divided on the issue. Kerstin Kühn and Ros Mullen report.

The collapse of Coffee Republic, which was forced to call in administrators earlier this month, has highlighted the challenges being faced by the branded coffee chain market, a report warned last week, but industry experts are split on the sector's future.

The study, by market analyst Key Note, found that the branded coffee chain sector has come under intense competition as consumers spend less and make fewer visits.

INDEPENDENT CHOICE

A survey of 1,000 consumers combined with analysis of the UK and Ireland's major branded coffee and sandwich shops found that 42% of respondents would be less likely to visit a branded store in the future as a direct result of the recession. Only one in five said they would choose a branded store rather than an independent.

Key Note predicted that the effect of the recession, at least initially, would be to slow down the number of new openings by the larger chain operators.

"The recent strong growth in outlet numbers is forecast to fall significantly over the next five years, during a recession that could affect the market until 2012," the survey warned.

Stephen Broome, director of hospitality and leisure at PricewaterhouseCoopers, said he broadly agreed with Key Note's findings. "Coffee shop spend is highly discretionary and the market place is very competitive in most high-street locations," he said.

"There are a number of negative issues facing the sector currently but some growth is also forecast, so it's not all gloom. Although growth will stall this year, it should increase marginally until 2012."

However, Jeffrey Young, managing director of Allegra Strategies, which publishes its own annual branded coffee chain market report, told Caterer the Key Note survey flew in the face of his findings.

"To say that only a fifth of consumers would choose a branded coffee store over an independent conflicts with our research and with what the market is telling us," he said. "While there are some fantastic independents out there, there just isn't a good enough offer overall to really rival the big players."

Young added that while there had been a slow down on expansion plans among the big groups, opportunities in the current property market would see a rise in new openings.

PROPERTY MARKET

"The property market is extremely favourable at the moment, there are a lot more sites available and landlords are offering good deals and incentives," he said. "The major operators are still growing."

Costa Coffee, which has 870 stores in the UK, confirmed that it would be opening about 100 outlets in 2009/10. But while John Derkach, managing director of the Whitbread-owned group, played down Key Note's predictions, he conceded Costa would be reducing the pace of its organic expansion in the short term.

"We will capitalise on our brand by focusing on new locations, as well as areas where we can replace existing operators, such as in supermarkets, hospitals and leisure facilities," he said.

Starbucks was equally circumspect despite having experienced a dramatic 97% tumble in worldwide profits last year, which it blamed partly on a decline in UK traffic.

A spokeswoman admitted: "We are seeing some softness in UK business during the economic downturn," but added that Starbucks, which has 700 stores in the UK, would continue to look for new types of locations and formats for expansion, with a particular focus on its Drive To and Drive Thru concepts.

VALUE FOR MONEY

There was consensus, however, that consumer demand for value for money would continue to increase. In response, Costa Coffee is launching a hot drink and sandwich offer for £4.95 in August, while Starbucks has launched a Starbucks Card rewards incentive scheme following its success in the USA.

And as Caterer went to press, Middle Eastern property company Arab Investments was emerging as a potential buyer of at least 80 Coffee Republic outlets. If successful, it is believed the company would expand the chain.

So despite the market continuing to face increasingly competitive trading conditions and a downturn in consumer spend, the big players remain positive about the future of the market. In future, it's clear that value for money will be key.

Starbucks is still planning to expand, despite its profits fall, but customers may be voting with their feet if they don't feel they are getting value for money.

Challenging times ahead for branded coffee chains, says report >>

Middle Eastern property developer tables bid for Coffee Republic >>

Starbucks blames UK for flat international sales >>

Costa Coffee links up with Hilton in the UK >>

By Kerstin Kühn and Rosalind Mullen

E-mail your comments to Kerstin Kühn here.

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