Grinding out a profit
There's a profitable new sound in Fleet Street, London's former newspaper centre. The roar of the presses has been replaced by the hissing of espresso machines, with virtually all the UK's speciality coffee operators now active in the area, including Seattle Coffee Co, Madison's, Costa Coffee, Coffee Republic, Aroma, Au Bon Pain and Seattle's Best.
These "gourmet coffee" outlets, many of them within fast-growing chains which barely existed two or three years ago, now trade cheek-by-jowl with a host of sandwich bar businesses that also feature espresso and cappuccino strongly, including Pràt à Manger (with no fewer than four branches in the area), Benjy's (selling, at 45p, one of London's most competitively priced cappuccinos), Café Sofra, Eat, Treats, Chubbie's, and several independently owned Italian cafés.
The area's rise as a coffee mecca reflects the inflow of well-paid financial services workers after the barren period which followed the press exodus. Rents and premiums have been getting overheated recently, with one agent citing a rise from £75-£80 per sq ft to £130 in the past three years. But the rapid build-up of coffee bars in Fleet Street does not appear to have diluted available business.
"Every coffee operator in the market has come here since we set up," comments Gareth Lloyd-Jones, managing director of City Gourmet, which owns the seven-branch Madison's chain. Its Fleet Street unit, established in 1995 and expanded to 80 seats in 1996, is probably Fleet Street's largest espresso café. "All this growth has actually added to the overall market," says Lloyd-Jones, "and we have not witnessed any erosion of sales. But there could be if we enter a recession in two or three years' time."
"We have not noticed any drop-off in sales," comments Sean Pound, marketing manager of the 16-outlet Aroma Café chain, which has traded in Fleet Street since 1996. "People are becoming much more educated about coffee."
Fleet Street, along with a growing number of other "mid-town" areas around London, demonstrates a major shift in popular catering which, projected nationally, could offer major opportunities for both chain operators and independents.
Premium-price coffee bodes well for the caterer, with more substantial mark-ups against ingredient cost than those experienced elsewhere in catering. But just as significant is the ability of the new-style coffee bars to trade, as demonstrated on Fleet Street, in small (less than 1,000sq ft) premises carrying A1 planning use rather than the more onerous A3 consent applied to catering businesses with cooking on the premises. This greatly widens the range of siting options compared with pubs or fast-food outlets. And thanks to the cost-profit structure of the coffee focus, units appear more able to survive on relatively limited trading hours - Fleet Street is quiet in the evenings and at weekends. Setting-up costs are also relatively low (around £80,000-£90,000) although specialist design to achieve a distinctive image can push the price up.
Is the 1990s-style coffee bar really so different? After all, Continental-style cafés, sandwich bars and patisseries in town centres throughout the UK have been successfully serving espresso and cappuccino since the 1950s.
The new opportunities lie to some extent in the way expansion-minded groups, in some cases with sizeable financial backing or with stock market flotation in prospect, have been redefining the market and creating viable new trading identities.
Some chains continue to draw heavily on espresso's Italian heritage, as with the "L'Amore Per Il Caffe" imagery now strongly featured by the 73-outlet Costa Coffee chain, which since 1995 has been part of Whitbread. Others, such as Seattle Coffee Co and Coffee Republic, follow the trail blazed by US chain Starbucks, allying quality coffee with a laid-back image and the facility for speedy service of a huge choice of customisable drinks. A hybrid style is also in evidence at chains such as Aroma, combining both European and American features.
In all cases, the new operators are paying a lot of attention to the branding imperatives of consistent merchandising, strong own-label identification, structured staff training, clear menu presentation and repeat business promotion via such ploys as loyalty cards and fax ordering. Most outlets also retail beans and sell paraphernalia such as domestic coffee-makers, but one operator admitted that "we are all failing to make much of this opportunity".
Food menus
At most of the speciality coffee outlets, food has to date played second string to the coffee. Some offer Continental-style speciality sandwiches and bagels, but in other cases the offer goes no further than muffins, cakes and confectionery items, accounting for perhaps 30% of total sales.
However, there are signs that competitive pressures will make this side of the business increasingly sophisticated. Whether products are made up on site or delivered from a central commissary, menu expansion increases the complexity of the business and brings down overall margins, since, to be competitive, food items will typically entail a margin of 35-40% against the 15-20% on coffee.
However, an attractive food offer can push up spend per head from £1.20-£1.50 into the £2.50-£3 realm, and therefore double overall revenue without increasing overall transaction time, which is largely influenced by beverage dispense time.
For independent operators, speciality coffee offers scope to build a business from scratch, and in some cases expand into a fuller catering operation. Boston Tea Party opened in Bristol in December 1995 with a California-style range of customised coffees (plus teas), but food, including full plated meals, has grown to account for 50% of sales, with trade from 7am to 10pm. According to co-founder Ben Mangan, annual turnover at the original unit and two subsequent units in Bristol and Exeter now exceeds £1m.
Regional growth
Some still tend to dismiss the coffee bar boom as a "flavour of the month" fad with a southern bias. About 70% of chain development to date has been in London, but the growth of key brands suggests that provincial expansion is now well under way.
For example, Costa, once limited to rail station and airport locations, reports a significant shift to high street sites in Scotland and in the north and west of England following the establishment of a nationwide area manager structure. It has also just launched a franchise scheme, the first of its kind in speciality coffee, to both groups and individuals.
Seattle Coffee Co, while most visible in London, now has branches as far afield as Bolton, Taunton, Bradford and Leamington Spa. "We have yet to find a market where our concept does not work," comments Ally Svenson, co-founder and managing director. "It can take time to get started but we employ a lot of sampling, and that seems to work."
She attributes a lot of her company's rapid expansion, from nowhere to 52 outlets in less than three years, to the flexibility of the speciality coffee format, fitting into large and small spaces not only on the high street but also in-store concession areas in retail stores and at places such as airports.
Bookstores, where Seattle and other chains now operate branches, have been a notable instance of the natural fit between coffee and shopping, matching both the browsing aspects of the purchase as well as the social and aspirational characteristics of the shopper.
Seattle Coffee Co recently expanded this approach with a branch in Jerry's Homestores, a stylish household goods store in London modelled on the USA's Crate & Barrel, while Costa has just opened a branch in a health and fitness retailer. It is now poised to seek a stock market flotation, and could be valued at £75m.
State Coffee Co, a six-unit chain formed last year, has so far located all its branches in out-of-town retail sheds operated by Craft World, which sells a selection of arts-and-crafts products. All branches are on the outskirts of provincial towns. "Our aim was to take something which was happening in London and get into the provinces before everyone else," says managing director Mark Ellis.
Hybrid pub outlets
Potentially even more revolutionary is the establishment of coffee bars within pubs. Two large Hogshead pubs in the City of London and in Glasgow respectively have just installed franchised Costa branches, with their own countering, signage, staff and full drink and food menus.
According to Costa business development and franchise manager Nick Williams, a key benefit is that pubs in central locations can start generating business from 7am. The coffee unit also creates a more female-friendly environment and boosts afternoon occupancy.
All this activity is not lost on established high street fast-food operators. McDonald's has since December 1996 been trialling store-within-store units called McCafé at three of its larger central London branches. These otherwise standard hamburger restaurants have a separate service counter with bean-to-cup espresso machine, tea-brewing facilities and a patisserie case stocked with half-a-dozen different types of pastry and cake. They also have their own separate Parisian-style tables and chairs and, even more surprisingly, serve all the drinks in china cups and saucers.
Clearly, speciality coffee is becoming a high-stakes game. In fact, the biggest prize for companies able to establish national brands goes a long way beyond the high street. Retailing and leisure aside, concession opportunities are numerous in cost sector catering, a point underlined by the attention being given by Compass Group to building its Café Select and more recently Café Ritazza brands.
An even bigger prize may lie in product marketing. Building on its wholesale supply to over 3,000 accounts, Costa's Espresso Blend went on sale at selected Sainsbury's last November. Seattle Coffee Co supplies upmarket restaurants such as Conran's Bluebird and Le Manoir aux Quat'Saisons.
The player that started the coffee mania, Starbucks, has had success in its 1,600 stores and in its ability to get its products on to supermarket shelves and even airlines. The US giant has targeted the Far East already, and most industry pundits believe that entry into Europe would be on a joint-venture basis.
