Wake up and smell the profit

Costa Coffee has blitzed its home market in the UK and is now ramping up expansion in emerging markets, says COO Andy Marshall
Wake up and smell the profit
Costa Coffee COO Andy Marshall says that the firm is ramping up expansion in the BRIC economies
By Claire Ferris-Lay
Tue 08 Nov 2011 02:33 PM

The days of tea drinking have gone. The UK is now a coffee drinking nation. You don’t see many branded chains of tea shops anymore so the days of Lyon’s tea houses have long gone,” says Andy Marshall.

Marshall would say that. As the chief operating officer of Costa Coffee’s international arm, he’s hoping that every Brit ditches their cup of tea in favour of a £1.92 ($3) latte or mocha. He’s not wrong though, the once-tea-loving nation is now firmly a country of coffee drinkers.

Four in ten of the 511 million cups of coffee consumed every week are served in coffee shops such as Costa with Britons forking out as much as £2,000 a year on cappuccinos, lattes and espressos, according to research by espresso makers VillaWare.

The UK’s growing passion for coffee saw like-for-like sales at Costa increase by 9.7 percent in the second quarter, boosting parent company Whitbread’s overall sales by 12.9 percent. The financial results were the 38th consecutive quarter of growth for the coffee chain which, despite the economic slump, has continued to tempt consumers seeking a little affordable luxury.

“Costa has been a very resilient brand over this recent uncertainty in the world, particularly in places like the UK, where our like-for-like sales remain very strong - we see no change to that in current trading,” says Marshall.

“Despite the fact that people have reconsidered how they spend their money on key, luxury large items - they may have foregone buying that television for another year or two holidays is now only one holiday - when it comes to that bit of instant gratification and luxury, they don’t seem to want to give up on that, they still want to give themselves a treat,” he adds.

Coffee lovers in the UK would be hard pressed not to find a Costa Coffee to quench their thirst. In the sixteen years since Whitbread acquired the chain from the Italian brothers, Sergio and Bruno Costa, for £12.3m, it has grown the brand into an internationally recognised chain, rivalling the likes of Starbucks and Café Nero.

The Costa brothers established their coffee roastery in Lambeth, London in 1971, supplying local caterers and coffee shops with blended mocha Italia, before branching out into the retail business in 1978. By the time Whitbread purchased the chain the Costas had grown their business to include 41 owned and franchised coffee shops.

Today, it is virtually unrecognisable with some 1,700 outlets across the UK and abroad, making it Britain’s largest coffee shop chain in terms of stores. It has also gained significant prominence in Whitbread’s portfolio with Costa and the budget hotel chain Premier Inn accounting for a combined 85 percent of its overall business.

Whitbread doesn’t plan to stop its expansion drive any time soon. In its home market, Costa is looking to grow its 1,270-plus stores to 2,000 as well as expand its new concept, Costa Express, to 3,000 points of sale.

“I hesitate to give a figure [for our UK shops] because we are opening so many every week that figure is growing and we don’t see yet that we’ve reached any sense of slowing down. That’s really because there are still large towns in the UK that don’t have a Costa or people are still having to travel a fair distance to be able to get great coffee,” says Marshall.

“Every time we set a number, the one thing I can be sure about is we surprise ourselves and it keeps moving forward so I think realistically that could be 2,000-plus over the next three to four years,” he adds.

Whitbread acquired Coffee Nation, owner of 900 self-service machines in service stations and supermarket chain Tesco, for £59.5m in March. Costa, which has since rebranded the business Costa Express, hopes to tap into a relatively new market by placing the coffee machines in hospitals, universities and offices as well as travel hubs such as train stations and airports.

“Coffee is not just about coffee shops anymore. We have clearly become a coffee company rather than just a coffee shop company and our recent acquisition of Coffee Nation provides us premium vendor opportunities [and] has opened up a whole new channel,” explains Marshall.

“We think probably in that space there are 11,000 additional points of distribution for coffee in premium vending. We don’t want to own all of those - we’re looking for 3,000 - so there is space for others as well. But there’s definitely space for 3,000 Costa Expresses over the next five years,” he adds.

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Costa’s expansion plans outside of its home market sound just as ambitious. Plans to open 100 stores in the UAE, where it operates a franchise agreement with Emirates Airline’s subsidiary Emirates Leisure Retail, are already two years ahead of schedule following a fifteen percent increase in like-for-like sales, boosted by a rise in the Arab clientele.

“[In January 2010] we suggested 100 coffee shops by 2014 but I think we’ll get to that number by 2012. We have pushed the pedal down and are now moving much faster. I’d like to think that we can get towards 125 and then up to the maximum 150,” says Marshall.

Costa has seen like-for-like sales in Saudi Arabia, the Gulf’s wealthiest economy, increase 30 percent and also plans to roll out ten more stores in Abu Dhabi. “Abu Dhabi is a place where we see strong growth and I know that we’ve got a good pipeline of new openings there and it’s an important emirate.

“I think we’ve about ten more openings, which will come from Abu Dhabi. I think we’ll start looking at some of the other emirates as well because I think they do provide opportunity in selected premium malls and retail parks,” he says.

A recent study commissioned by Costa revealed the brand’s growing popularity amongst Arabs with around 25 percent of customers in the UAE either nationals or expatriate Arabs. Costa is now looking to capitalise its growing trend with a range of localised food items and drinks such as date coolers and date cakes.

“Anyone who thought we were British and only selling to British expats is far from the truth. The largest sector of our consumers is local Arabs, Arab expats and Asian expats so 25 percent of what we do is from the Arab community.

“It’s a strong base and it’s a market we have to get right. We have to meet and appeal to their flavours in our food products and our taste profiles - we are a brand that is up for localising that need,” he says.

Costa will also look to grow its concession business in the UAE, which has already proved popular with motorists in Dubai petrol stations. “There are clearly places where people would like to have a premium coffee experience and I think our current experience in petrol forecourts in Dubai has been really successful. I think there are more opportunities to do that and I think we’ll do more in the right places to do that.”

Elsewhere, the firm is also ramping up its expansion in the BRIC economies as well as Eastern Europe. In December 2009, Whitbread purchased Poland-based Coffeeheaven for £36m, adding a further 90 stores to its growing empire. Marshall doesn’t rule out future acquisitions as Costa grows its presence abroad, “When there are chains available I think we might want to look at other potential acquisitions in core markets that we identify,” he says.

“[Overseas stores] are becoming increasingly important and over time will become even more so,” he adds.

“Costa has set a target of 3,500 coffee shops over the next five years and we see that actually we’ll have at least 1,500 coffee shops internationally during that period of time… I think India remains important for us, Russia we’re in and we will be looking to Brazil and Latin America at some point in the future. There are no specific plans but I have been there and I will be there again so we are serious about filling in on the BRIC.”

China, where Costa recently celebrated the launch of its 100th store, is also becoming an increasingly important market for growth on the back of a growing demand for Western brands. “We’re moving rapidly to create a new experience for the Chinese customers who are tea drinkers.

“It’s completely new for them but their thirst for Western brands and their understanding and acquiring that knowledge of what makes great coffee means we’re carving an opportunity among an urban population that can afford coffee,” says Marshall.

Given Costa’s popularity in home markets of traditional tea lovers, its looks like it won’t be long before China heads down the same route.

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