INDUSTRY REPORT: Coffee shop chains carve up 53% of the market

Costa

The outlook for coffee machine suppliers looks bright after it was revealed that there are now nearly 21,000 coffee shops in the UK. Branded chains are leading the way as they continue to add more stores to their burgeoning estates, but can they stave off the threat of independent rivals staking a claim for market growth?

The coffee shop sector is a consistent performer. So much so that after 17 years of considerable growth, it continues to be one of the most successful in the UK economy. The most well-known and high profile brands have certainly exploited the opportunities presented to them, opening up in some of the unlikeliest of locations and evolving their offer in the face of stiff competition.

Costa Coffee (1,992 outlets), Starbucks Coffee Company (849) and Caffè Nero (620) remain the UK’s leading brands with a collective 53% share of the branded chain market. Physical expansion by leading chains is a compelling driver of industry growth, particularly if you take market leader Costa, which added no fewer than 171 UK outlets and posted sales growth of 14% in calendar year 2015.

According to the latest ‘Allegra World Coffee Portal: Project Café 2016 UK’ report, the branded coffee chain segment recorded £3.3 billion worth of business across 6,495 outlets last year, following impressive outlet growth of 12%. 714 stores were added during 2015, delivering sales growth of 15%. Overall, meanwhile, the UK coffee shop market is estimated at 20,728 outlets and has grown 10% year-on-year to £7.9 billion.

With a market now valued at £7.9 billion, no-one can ignore the fact that coffee is big business”

Coffee quality is now expected and is being constantly improved across the sector due to the influence from both artisan chains and independents. In Allegra’s survey of more than 16,000 consumers, artisan chain Harris + Hoole was ranked number one for coffee quality. Increasing competition provides consumers with better choice of quality coffee at home, at work and from non-specialists, with consumer choice now based on far more criteria than ever before.

A greater commitment to coffee credentials by the non-specialist sector, such as pubs, fast food outlets, supermarkets and retail stores, has also generated wider consumer interest while adding to competitive pressures. This sector has experienced outlet growth of 10.5%, reaching 7,976 establishments with a strong coffee offering (excluding branded chain partnerships).

Supermarkets also fuelled growth, adding a further 322 outlets, driven mainly by Morrison’s commitment to a competitive coffee experience. It added a further 270 cafés to reach 398 stores, second only to market giant Tesco with 481 coffee shops and cafés. The non-specialist sector took a further 2% share of the market and now represents 39% of the total coffee shop market, compared to the branded chains with 31% share and the independents with 30% share.

Market trends

The coffee shop market is dynamic and rapidly growing and the report shows that the UK is rapidly becoming a nation of coffee connoisseurs. Compared with last year, daily visits to coffee shops have increased, while 16% of coffee shop visitors frequented a coffee shop at least once a day in 2015 compared with 14% in 2014.

With coffee widely available out of home, coffee shop visitors drink an estimated 2.2 billion cups of coffee per year in coffee shops. Costa is the number one seller of speciality coffee with an estimated 169 million cups sold annually. Coffee shops are playing an increasingly important role in the UK, enhancing the social vibrancy of a community as well as being a large contributor to employment and the economy.

The significant growth of medium-sized artisan chains, such as Coffee#1, signals a new era of competition for the branded chains. The third wave/artisan coffee has profoundly helped to raise consumer expectations about coffee quality and store design, and the most successful brands are responding to this trend.

The artisan independent segment is becoming far more regionalised than ever before, with cities such as Bath, Edinburgh, Manchester and York boasting strong artisan independents.

Furthermore, these strong artisan independents are expanding into small chains with the support of consumer funding and traditional investment, following the success of leading small chains that are blazing a trail, such as Taylor St. Baristas, Department of Coffee & Social Affairs and Grind & Co.Coffee shop chains

The gradual decline of instant coffee consumption at home and the subsequent premiumisation of the at-home segment further increase the availability of speciality coffee and intensify the competition. Consumers are becoming increasingly knowledgeable about coffee and brewing at home is on the rise, with 7% of consumers now having a range of third wave equipment, such as V60, aeropress or chemex , compared with 2% in 2014.

While outside of the report scope, Allegra notes that gourmet vending units are now outnumbering branded chains, with 6,838 machines in operation. This represents growth of 29% in 2015 and an estimated £280 million turnover.

Market growth

Allegra predicts the total UK coffee shop market will comfortably exceed 30,000 outlets and £15 billion turnover by 2025, driven by branded coffee chain expansion and non-specialist operator growth. The branded coffee shop segment is forecast to exceed £5.7 billion with more than 8,500 outlets by 2020, with outlets predicted to grow at 6% compound and revenue at 12% compound over the next five years.

The future market place

The future coffee shop market place will be shaped by further increasing consumer participation and the desire for premium quality coffee anywhere at any time. This will drive improved coffee offers across a broader set of channels. UK consumers will become even more informed about the subtleties of coffee preparation and delivery from bean to cup, in particular origin and roast, as well as the importance of milk foaming and water quality. Allegra expects to see a significant increase of multi-brand strategies by leading operators and increased investment in artisan brand concepts.

Jeffrey Young, managing director of the Allegra Group, said the strong market growth of the past 12 months has exceeded its own estimates.

He commented: “This provides further evidence of the growing importance of coffee shops to the British economy and, more importantly, their impact on the daily lives of everyday consumers. With a market now valued at £7.9 billion, no-one can ignore the fact that coffee is big business.”

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