Coffee bars feel the crunch
Carina Bloom, the former managing director of the Good Bean coffee chain, is one coffee-shop specialist who has been at the sharp end of the takeover business. Coffee Republic bought the loss-making Good Bean's 19 sites in December 2000 for £1.2m.
"There has been consolidation, and there will be more," she said last week.
More small operators are now likely be eaten up as consolidation intensifies over the next year.
The growth in the number of coffee-shop chains is slowing, and the major operators are under increasing pressure to show profitability. Good Bean was meant to expand to 50 branches, but although individual shops made a profit, it was never enough to cover the central overheads, and nearly 20 head office staff were made redundant. Bloom said it was "very unlikely" she would be re-entering the coffee-bar business.
Jacqmotte, a coffee-bar branch of the Dutch Sara Lee group, pulled out of the UK earlier this year. "I wouldn't like to be starting a coffee-bar chain now. It's far too late to try to create the necessary critical mass in the marketplace," said Paul Ettinger, commercial director of Caffè Nero. He has told the City that Caffè Nero will show a pre-tax profit for the first time next year and - given the drive to achieve "critical mass" - he would not rule out the possibility of buying BB's Coffee & Muffins, which has 66 outlets, mostly at railway stations.
The coffee-shop market has reached a crucial point in its evolution. Jon Lake, a manager in financial services company Deloitte & Touche's leisure team, commented: "There are too many players. This has led to a clamouring for key sites because they know that consumers are driven by convenience of location. You start to wonder about the rents they are paying." Tony Barcroft, group general manager of Bakers Oven, said: "People aren't making as much money as they'd like to."
The raw materials for a frothy cuppa cost about 20p, and the average price of a cappuccino from a major chain is £1.70. Despite this impressive 850% mark-up, the drawback is that people don't spend as much as they do in a pub or somewhere that sells more food.
Lake added: "There's a reliance on a small trading window of a couple of hours in the morning and afternoon. It is still early days to see people meeting after work in a coffee bar rather than a pub." Another insider commented: "If coffee made you drunk, I think they'd be more successful."
Such pressures on profit margins may push operators to increase the variety of food they sell. Surprisingly, food accounts for 35% of Caffè Nero's sales. Ettinger describes Nero's hot pasta dishes as its "well-kept secret".
But too much diversification could prove unwise, according to Barcroft. "All the chains are saying, ‘We've got to get food on the menu.' If they add food, it ends up as a more complex business. Before you know it, you've lost the focus on coffee and you've lost the plot. It's a paradox, but less is more, and more can mean less."
The message seems to be that if the coffee-focused chains are tempted to provide more food, they may regret it five years down the line. In the USA, 90% of coffee sales are take-away, compared with just 10% in the UK.
As expansion continues, albeit more slowly, cultural change has not kept pace. It remains to be seen whether consumer habits here will follow the US example, and how long such changes will take. In the meantime, investors are unwilling to wait much longer to see returns.
| Brand | Outlets | Market share |
| Market share | 300 | 23.4% |
| Starbucks | 294 | 23.0% |
| Coffee Republic | 107 | 8.3% |
| Caffè Nero | 106 | 8.3% |
