Analyse trends in the UK branded coffee bar industry.

Authors Avatar
Contents

Overview page 2

Definition of Industry page 3

Intensity of rivalry amongst industry competitors page 4

Threat of Substitutes page 9

Threat of New Entrants page 11

Bargaining Power of Suppliers page 12

Bargaining Power of Consumers page 13

What does the future hold? page 15

Bibliography page 16

Overview

This report will be seeking to analyse trends in the UK branded coffee bar industry. It was estimated that the total coffee shop market numbered 7,603 outlets as at May 2003 and this growth is expected to continue at a compound rate of 5.1% between 2003 and December 2005. Much of this growth has been as a result of the development of the branded coffee bar which has seen phenomenal growth since the early 1990s and this seems to have continued unabated into 2003, despite accusations that the market is already saturated and in contrast to the views of many including Bobby Hashemi, of Coffee Republic, who is known to have said that 'the UK coffee market was sustainable to only 1500 outlets'.

Nonetheless the UK branded coffee bar market is still expanding after 7 consecutive years of growth. The market is forecast to grow by 9.5% per annum to reach 2,690 units by December 2005. Market turnover is forecast to exceed £1 billion in 2005 as the reach of 'coffee culture' grows. This growth is driven by consumer demand and lifestyle factors as leading branded operators such as Starbucks, Costa Coffee and Caffé Nero continue to expand across the UK with an increasing focus outside London.

This review of the industry will analyse trends in the branded coffee bar industry and look at the changes undergoing the sector. This should serve to illustrate whether growth of the industry is sustainable or whether there is overcapacity in the market with the consequent need for consolidation and restructuring of the coffee market.

Definition of Industry

Before we can proceed further it is essential that we define the exact nature of the industry we are looking at. It is very easy to get confused given the diverse range of facilities offering coffee for sale. It has been decided to utilise the economist's notion of an industry as the group of firms producing the same or similar products (i.e. products that are close substitutes for each other). (Johnson and Scholes, 1999).

Thus this report will be restricted to those establishments where coffee is the primary sales item and for the most part these are based on the European and US coffee shop models (Mintel, 2003) typified by the market leaders such as Costa Coffee which has been recently criticised as "too much of the Starbucks 'me-too' concept' (Starbucks being a leading US brand) whereas Café Nero has sought to transplant 'more of the Italian experience'. These establishments specialise in selling gourmet or espresso-based coffee, offering a diverse range and variety of coffee such as cappuccino, latte, mocha and so forth alongside other items such as pastries, tea and coffee beans which are usually on sale as add-ons to the main product line. It must however be noted that the food offer is generally very limited. The branded coffee shop includes venues such as individual stores, kiosks and concessions offered in a variety of locations including motorway service areas, bookshops and train stations. However an essential requirement to fall into our definition is that they be independent of the facility they are located in.

The report will disregard the multitude of other establishments that sell coffee, such as restaurants, in-store cafes, teashops or traditional cafes as well as sandwich shops such as Pret A Manger and Subway.

Framework for report

Now that a definition of the industry has been provided it is possible to proceed and carry out an in-depth examination into the branded coffee shop industry. Michael Porter's five forces framework will be adopted in order to help identify the sources of competition within the industry. The five forces framework seeks to explain the competitive forces by looking at five separate though not wholly independent facets of competition. These may be defined as threat of new entrants, intensity of rivalry among competitors, threat of substitutes, bargaining power of suppliers and bargaining power of customers.

Intensity of Rivalry among the Industry Competitors

The coffee shop market is characterised by a great deal of fragmentation, with the largest percentage of outlets being owned by individuals or small companies. This has the resulting effect that the total market value is difficult to calculate, although it was estimated to be in the region of £1.5 billion during 2002 (Mintel, 2003).

Figure 1: Segmentation of coffee shop market, January 20031

Number of outlets

% of total

Top five branded chains

940

6

Other branded coffee chains

250

4

Single-site/ independent coffee shops

4,810

80

Total

6,000

00

The phenomenal growth of the branded coffee shop has been driven by expansion with the present market leader, Starbucks, yet to show a profit (due to this expansion policy) despite its operation of 375 outlets throughout the UK.

The market in 2002 had seen a two and half times increase in size on the 1997 levels, and turnover will have more than doubled at 1997 prices. The branded coffee shop market has seen average growth of around 20% a year over this period. Despite the difficult trading conditions faced in 2001, due to a fall in tourism caused by both the foot and mouth outbreak and the aftermath of 11 September, the market saw a rise of 16%, to almost £300 million.

Although the nation's economic future is difficult to predict, conditions are likely to be at least marginally better than those faced over the last two years especially given the conclusion of the Iraq conflict.

It is estimated that an increase of around 20% should be seen this year, largely as a result of continued outlet expansion. Many of the brands are also seeking to strengthen and consolidate their market position by such measures as improving their food offering, which will help to increase the spend per customer (a crucial indicator of success in the industry). In addition, there have been moves towards rationalisation and disposal of underperforming stores as the chains come under increasing pressure from competitors and the markets to demonstrate profitability. These measures should ultimately drive increases in turnover and improved profits.

As shown in figure 1 above, the market is dominated by single-site and owner-managed stores as well as 15 branded chains. Recent trends in the market, have seen brands such as Aroma disappear and the branded chains acquiring more of the independents.
Join now!


Five branded chains currently account for 16% of the market, while the remaining other smaller branded chains have a 4% share. Nearly all of these companies are seeking to expand their estates over the coming years and it is likely that the number of single site and independent stores will fall as the branded stores increase in number. Allegra Strategies has forecasted the branded coffee bar market to number 2,690 units by December 2005 which would mean the branded chains would represent 36.56% of the overall coffee shop market.

The London market will serve as an early ...

This is a preview of the whole essay