Business | Features
UK-oriented coffee houses taking the froth off Starbucks
'Too commercial' image prompts cash-strapped customers to patronise more homey rivals
- By Esther Bintliff, Financial Times
- Published: 00:00 October 29, 2009
- Image Credit: Supplied
In 2003, the café latte entered the UK's retail price index for the first time.
Made with a strong espresso shot and a generous slosh of steamed milk the latte had become such a staple that the Office of National Statistics decided it should be included in the "basket of goods" used to measure average household spending.
Today, the UK still boasts more branded coffee bars than anywhere else in Europe, but the company that brought lattes to the masses is grappling with a market that looks very different from those early days of frothy expansion.
Starbucks entered the UK in 1998, acquiring 65 Seattle Coffee Company stores and installing its bright, sofa-filled cafés on high streets across the country. By 2005 there were about 200 Starbucks coffee shops in London (more than Manhattan) and about 450 in the UK.
However, having introduced speciality coffee to the mainstream, Starbucks also paved the way for some strong competition.
Costa Coffee, founded by two Italian brothers in Lambeth in 1971 and bought by Whitbread in 1995, has expanded so fast in the past 18 months that its UK outlets now exceed those of Starbucks by more than 200.
While Costa opened its 1,000th store this month and celebrated a 21 per cent rise in sales in the first half of this year, Starbucks is due to shut down 100 "underperforming" international stores, with analysts expecting at least 30 closures in the UK, leading to questions being asked over its recent business model.
Jeffrey Young, analyst at Allegra Strategies, says: "Starbucks were applying a global model to the UK. At the height of the recession, Starbucks' message was ‘summer's back' and they were focusing on their frappuccino range.
"In contrast, Costa was saying: ‘Try our great value lunch, £4.95 (Dh29.75) for a sandwich and any drink'. The UK is Costa's heartland and they're really in tune with the market. It's about being nimble."
The UK's recession proved to be something of a crucible for the big coffee retailers, with one, Coffee Republic, going into administration.
According to Allegra research, 47 per cent of European coffee house operators experienced a like-for-like decline in sales in the six months to October, while just 34 per cent achieved positive growth. Starbucks, which reports its full-year results in November, may have seen like-for-like sales fall up to seven per cent in the year to September, says Young.
In contrast, Costa's tailored marketing to the cash-strapped UK consumer helped push like-for-like sales up 2.5 per cent in the first half of this year, and the chain is now targeting growth in China, Russia and central Europe.
John Derkach, Costa's managing director, says: "Things are going spectacularly well. Although the sector is flat, we're still growing, which means that our competitors are suffering."
Not strong enough
Just before midday at a Costa outlet on Borough High Street in London, Caglar Colak, a 25-year-old student, has popped in for his daily latte.
Asked why he chose Costa, he smiles and says: "I don't like Starbucks. The coffee isn't strong enough."
Pete, an investment banker, says: "Starbucks is too commercial. Obviously Costa's a chain as well, but the coffee is a bit different, more interesting."
But Starbucks is now raising its game to counter this image problem, renovating existing coffee houses, introducing a healthier food range and committing to Fairtrade espressos in all its UK and Ireland stores.
It says: "We are committed to the UK market and will emerge from the review that we have undertaken with a stronger store portfolio focused on providing the best possible service and value to our customers."
In September it launched a multi-million pound advertising campaign, its biggest in the UK since 1998, and promised a new UK store design "shortly".
The new store decor is expected to be less standardised, more local.
But Young says that approach will be increasingly necessary if big brand coffee retailers — not just Starbucks, but Costa and Caffe Nero too — are to retain market share against a new threat: a surge of "edgier" independents in the UK market.
He says: "The edgier consumers are tiring of chains, so chains will need to work very hard to get that level of authenticity into their offer."
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