Grounds for growth

It takes barely 10 minutes to walk from West Hampstead Tube station to the top of West End Lane, the main drag through this London neighbourhood, but a real coffee-lover could drop in for a shot of caffeine in at least half-a-dozen cafés, bars or coffee shops during the half-mile journey.

The stretch offers a mix of chains, such as Starbucks and Café Rouge, and independents such as Dominique's, La Brioche, Art of Food and Moment Espresso Bar. But, even with that many places to go to, getting a table on a sunny weekend can be tricky.

And what's happening on West End Lane is not unusual. Many other high streets throughout the capital boast a similar density of outlets to satisfy a public with a seemingly unquenchable thirst for espresso, cappuccino and latte. According to market research organisation Foodservice Intelligence, there are just under 2,000 coffee shops (defined as places that sell hot and cold drinks but not alcohol, and which do not have meals as the main business) in the UK, and most of them are in London. By 2003, it will be nearer 4,000.

Warning shots

But Foodservice Intelligence is sounding a warning note. The London coffee shop market is already reaching saturation point and, although there is still scope for growth elsewhere, it says that the rest of the country will be in a similar situation by 2003. The chains, relative latecomers on the scene, will treble their business to account for 30% of outlets by 2003, leaving the independents battling against powerful marketing machines.

Some chains are looking to develop business outside London while the going is still good. "It makes sense to look at the regions," says Carina Bloom, business development director at GoodBean, a two-year-old family-run company based in Brighton.

"Brighton is very cosmopolitan and is the right place for coffee shops," she adds. "Two years ago, there was nobody else here, but Starbucks, Costa and Caffé Nero have all arrived in the past nine months." GoodBean has shops in Brighton, Reading, Oxford and Bristol and is considering towns such as Worcester and Eastbourne. It plans to have 50 shops by 2002.

Starbucks, which hit the UK in May 1998 when it bought the Seattle Coffee Company, has about half its shops in London but, with plans to double the number to 300 by 2003, is looking further afield too - its first Welsh outlet is about to open in Cardiff.

Aroma, bought by the McDonald's group in March 1999, is expanding from its London and South-east base. "Next year's strategy will concentrate more on outside London," says Aroma's marketing manager, Richard Scott-Clark. "We aim to double the amount of cafés by expanding as far as Manchester." He wants to see another 10 Aromas open before the end of the year, bringing the total to 50.

Whitbread-owned Costa, which claims to be the UK's largest coffee retailer and, like Starbucks, has half its shops in the capital, recently opened its 200th store and says it is embarking on an acquisition strategy in major towns nationwide, although prime sites in London - Shaftesbury Avenue, Oxford Street and the Strand are all new Costa sites - will always be of interest.

Costa is also trying to increase its customer base through partnerships with retailers such as Waterstone's, Homebase and Abbey National, in each instance opening a coffee shop on their premises. The plan is to have 50 Abbey National link-ups by 2002, and the Homebase coffee shops are opening at the rate of one a month, says Costa.

Nescafé has also gone down the partnership route with its Café Nescafé sites in easyEverything Internet cafés, Granada service stations and in the Regent Palace hotel in London. Its aim is to "make the coffee shop experience accessible to the mass market".

The impact of marketing is a lesson that the whole sector has learnt from Starbucks, which has created a strong brand awareness since arriving in the UK just two-and-a-half years ago. Jackie Bosci, marketing manager at Douwe Egberts, speaks for many when she says: "We're seeing a proliferation in the variety of coffee drinks available and great innovations in the way they are sold. Starbucks started that trend."

It is tough for independents to follow, though, as Selina Morris at Lavazza admits. "The message we're driving home is the importance of innovation and consistent quality," she says. The company's Club Lavazza is a scheme aimed at encouraging independents to adopt some of the marketing techniques used by the chains.

Importance of food

But some fundamentals are the same. Getting the food right is crucial, says Bloom - GoodBean offers chef-made sandwiches and pastries. "It makes us a cross between Coffee Republic and Prêt à Manger in that people will come to us for lunch," she says. She adds that many operators have not realised the importance of food.

Louie Salvoni, managing director of Brasilia, agrees. "The real reason people are moving out of London is a financial one," he says. "You can't make money selling coffee alone. Successful coffee acts will have to be more food-led, more like Prêt. The average transaction there is probably £3.50-£3.70, so they're OK."

Then, of course, there's the coffee itself. Menu boards are getting longer - another Starbucks-induced phenomenon - and more complex. Coffee supplier Matthew Algie is capitalising on this with its single-origin filter and cafetière coffee range, which includes Guatemala HueHuetenango, Java Banda Blue and Sumatra Mandheling Decaffeinated. The coffees are made from one bean type from a single season and grown on one estate, just as a fine wine would be.

It's a trend that Soner Yilmaz, managing director of speciality coffee expert Coffeehouse, welcomes. Australia may not spring to mind as a coffee-producing country, but the Skybury coffee is wonderful, he says, though not cheap at £18 per kilogram, compared with a Colombian, which would cost £7.40/kg. "Kona Hawaii is generally thought to be finer than Jamaican Blue Mountain but, again, it's not cheap at up to £25 per kilo," he says. "Given the choice, I'd go for an Ethiopian Yergercheffe, which I think is the finest coffee you can buy. We are getting more sophisticated, and top restaurants or specialist delicatessens will buy these coffees."

There's still a long way to go, however, says Andrew Paxton McMillan at Matthew Algie. Extending the comparison with wine, he says: "We're just about leaving the Blue Nun stage and approaching Piat d'Or."

Talk of saturation seems bizarre, though, when the coffee consumption figures for the country as a whole are considered. We still drink a fraction of the amount of roast and ground coffee consumed in other European countries. Market research organisation Mintel puts it at about 0.5kg each per year, compared with 3.7kg in Italy and 4.3kg in France.

For Salvoni, it means that there's still plenty of room for growth for the good operator. "Everyone is offering cappuccino," he says, "but people aren't accepting just froth on top of a coffee any more."