Coffee break?
Once again there's speculation that the coffee-shop boom has run its course, although anyone who's stood in a queue at the Starbucks in London's Oxford Street would question that. Most of us use coffee shops, whether it's to grab a skinny latte to take back to work or to lounge around on a home-from-home sofa reading the Sunday papers and nursing a tiny espresso. Yet, despite demand, we hear that Coffee Republic - one of the big four - is having to turn itself into a New York-style deli-caf‚ chain to survive.
"In our case, the coffee-shop concept hasn't worked," admits executive chairman Bobby Hashemi. "We have decided to make a very committed break from coffee bars rather than tinker with Coffee Republic."
The company's Broadgate outlet in London is the only one to be converted into a Republic Deli so far, selling freshly made sandwiches and focusing on brisk customer turnover - there isn't a sofa in sight. Hashemi is in the process of selling off all underperforming Coffee Republics, which will take the estate from 103 to 50-60, mostly in the Midlands and South. Those sites will then gradually be rebranded (see below).
The perennial problem with coffee shops, of course, is that low average spend (starting at, say, £1.79 for a small cappuccino) doesn't tally with hefty high-street rents. At Coffee Republic there were a few other difficulties, too. Hashemi says the company grew too quickly, took expensive sites in areas of high competition and didn't differentiate itself in the market. It's certainly been a tough year, with reported losses of £7.7m in 2002, a drop in the share price to 2p, a takeover bid by CaffŠ Nero, and the competition - in Hashemi's words - "cannibalising sales".
"Unlike the coffee-bar craze, we will be prudent, very measured, and do a slow roll-out. We hope to be wiser this time around," says Hashemi.
Rumours that coffee shops are on the way out have been further fanned by news that Italian coffee dynasty Zanetti is to scatter deli-bars throughout the UK. It's just opened the first Segafredo Zanetti Espresso on London's Baker Street and plans to open 100 over the next five years through a franchise agreement with coffee-bar company Puccino's. The aim is to get an average spend of £3.50-£3.75 through offering waitress-served Italian fare such as antipasti, Continental sandwiches, paninis, cakes - and alcohol.
According to Puccino's managing director Gerry Donald, the company wouldn't have touched Segafredo if it had been a pure high-street coffee shop. Puccino's burnt its fingers eight years ago when it opened one in Brighton. Business couldn't keep pace with the rents, so they rescued it by serving tapas and pizzas. No surprise, then, that out of the 96 Puccino's in the UK, some 55 are kiosks in railway stations, with the balance being caf‚s serving steaks, tapas and all-day breakfasts.
Not everyone agrees that the coffee-shop scene is on the way out, however. Jeffrey Young, managing director at retail analyst Allegra Strategies, argues that in the right location they can make money. He cites one in Edinburgh (which he won't name) that makes £150,000 profit a year. "You've got to have the right balance between a not-too-high rent, good volume of passing trade and good management, which can add 20% to sales by keeping customers happy and loyal," he explains.
In fact, Young is surprised that Coffee Republic is turning all its coffee shops into delis. "I think it's a bit radical. Some are good stores. I thought they'd keep a portfolio still trading coffee," he says.
Overcrowded market
Jon Lake, assistant director, corporate finance, at Deloitte & Touche, says the market is overcrowded, however. "When coffee shops started five years ago it seemed there was room on every high-street corner for one, but that's not the case," he says.
So what of the three remaining big players: Starbucks, Costa and Caffè Nero? Lake reckons, with Coffee Republic gone, they could flourish, particularly as they serve three slightly different markets. He describes Starbucks as "American and fast", with lighter decor and "milkier" coffee, while CaffŠ Nero is more Continental, with darker interiors and stronger coffee. Costa sits in the middle, concentrating on concessions in pubs, offices and gyms, rather than taking the high-street route.
"They are performing OK," he says. "The model is unclear because their growth is so rapid. When they get to 150 outlets and the capital expenditure slows down, the question will be: can they make a profit?"
Starbucks and Costa wouldn't comment, but Paul Ettinger, commercial director at Caffè Nero, isn't afraid to say he's pleased Coffee Republic has moved into delis. "It takes them out of our market. The experts always said there was only room for three players, and so we are very happy."
Ettinger appreciates why Hashemi is moving into food. Caffè Nero, arguably, strays into deli territory by providing soup, pasta and Italian sandwiches, which has pushed average spend up to £3. Ettinger says that about 35% of sales are from food, compared with 15% at its competitors, but adds there are no plans to follow Coffee Republic. "We are a coffee bar that's doing food, and it has given us an advantage, especially out of London," he says.
So it's not the end of coffee shops, then? Hashemi won't speculate. "I have no predictions. Let the big boys fight it out," he says.
Who's still brewing?
Starbucks Tel: 020 7878 4822
Web: www.starbucks.com
Style: grab-and-go, US-style - the "milky one"
Outlets in the UK: 350
Planned outlets: not disclosed
Turnover: about £450,000 per store (Source: Allegra Strategies)
Costa
Web: www.whitbread.co.uk
Style: sits in the middle of the other two - not just in the high street, often in offices, airports and pubs
Outlets in the UK: 300
Planned outlets: 500 by 2006
Projected operating profit for 2004-05: £10m
Caffe Nero
Tel: 020 7520 5150
Web: www.caffenero.com
Style: more Continental - it's darker and serves stronger, richer coffee
Started: 1997
Floated on Stock Exchange: March 2001 (raised £9m and was valued at £33.7m)
Outlets in the UK: 125
Planned outlets: 150 by December
Cost of opening an outlet: £180,000
Turnover for six months to 30 November 2002: £19.2m (£11.3m for the same period in 2001)
Pre-tax profit for six months to 30 November 2002: £450,000 (there was a loss of £578,000 for the same period in 2001)
Analysts' corner
Speculation that the coffee-shop boom will turn to bust has dogged headlines ever since Starbucks bought Seattle Coffee Company in the mid-1990s.
However, Jeffrey Young, managing director at retail analyst Allegra Strategies, says the market is still growing. His research shows that the coffee-bar market (which includes food-focused operations such as Pret A Manger) will turn over £904m this year and will bust £1b by the end of 2004.
So what does the future hold? Young reckons the remaining coffee-bar chains will take advantage of softening rents to open more outlets and predicts more partnerships, allowing expansion into different locations - airports, shops and so on - in a variety of formats. He says the chains are becoming more confident as they discover what works and what doesn't, while continued expansion will give them better economies of scale.
Jon Lake, assistant director, corporate finance, at Deloitte & Touche, says that with Coffee Republic's departure the market has entered a new era. "It's time for them to take stock, to slow down, clean up their estates and look to the next phase of their growth - perhaps Europe," he says.
There may also be acquisitions. Lake says the consolidation that was predicted six months ago, when CaffŠ Nero mounted a takeover bid against Coffee Republic, might still happen. "Coffee Republic is diversifying, and if they do make it work, they could come back and buy another coffee chain - or else they will be an attractive buy for a chain looking to diversify."
Contacts
Allegra Strategies
020 7691 8800
www.allegra.co.uk
Republic Deli
020 7033 0600
Segafredo Zanetti Espresso
www.segafredo.it
Bobby Hashemi on Republic Deli
OK, you had to do something, but why delis? We think we have found a gap in the market for premium, freshly made sandwiches. The sandwich market in the UK is 60% "wedge" (pre-prepped) but only 40% fresh, and with no major brands. We went to New York, where fast-casual dining has been growing for about four years. It's all about fresh sandwiches, quality coffee - and not lingering.
What will you invest? The infrastructure is there, so the costs of making the change will be a fraction of a typical bar. Any extra staff costs will be well covered by the increase in sales and gross profit.
Why get rid of the Coffee Republic name? We actually want people to think we are just a small entrepreneur opening a local deli on a Coffee Republic site. We want to make a break with the coffee-bar culture - there's no point if customers think we are the same as before.
How's your first deli at Broadgate doing?
As a Coffee Republic, this was empty at lunchtime, but now it's buzzing. It's our closed period, so I can't talk about average spend, but food as a percentage of turnover has doubled at this site.
