The British have always loved shopping; Napoleon cited us as a
"nation of shopkeepers" and at the heart of every town and city
across the country there is a high street, indicating our love affair with
retail. However, Next posted their second consecutive fall in annual profits in
2017, with the CEO of the mainstream fashion and home brand describing last
year as the toughest ‘in the past 25 years’. This is only one of the many
retail casualties we have seen in 2018. In February, Toys R Us and Maplin announced
they had gone into administration and fashion retailer New Look announced plans
in March to close 60 of its stores, affecting approximately 1000 jobs. Most recently
RBS have announced the closure of 162 branches in England and Wales;
reinforcing a 2017 study of the top 500 British town centres – only 4,083 shops
had started up compared to 5,855 closures, a net deficit of 1,772 shops¹.
Today, retailers face an assault on multiple fronts such as national living wages and spiralling property prices, with Brexit helping push up the cost of many items. According to Morar HPI's latest Consumer Compass, the British public remain cautious thanks to the uncertain political climate and in spite of a slight recovery in confidence surrounding the economy. They are concerned with personal finances, disposable income and job security, thus limiting their spending appetite. 31% of consumers interviewed are feeling squeezed, up 4% on February 2017, and are now taking action by buying ‘cheaper brands and trading down’. This trend is exemplified by the rapid rise of e-commerce giants like Amazon – more consumers see online shopping as a cheaper and easier option than going to the high street. Furthermore, the British Retail Consortium have warned that sales are likely to remain sluggish throughout the rest of 2018; especially for those selling non-essentials such as clothes, furniture and electronics, as well as brands with a large bricks-and-mortar presence.
Beyond retail, other high street stalwarts are facing a testing time, in particular the UK’s £9.6bn restaurant industry. There are mixed reports as to how well operators are doing, but the pattern suggests an increasingly challenging market. Some communicate good results whilst others are entering CVAs. Jamie’s Italian and burger chain Byron are struggling, and Prezzo are shutting 94 of their 300 outlets, putting 500 jobs on the line in the process. This is reinforced by the +20% growth (YoY) of UK restaurants entering administration and, according to London accounting firm UHY Hacker Young, it’s estimated that more than a third of the top 100 groups in the category are losing money due to weak consumer spending and a saturated market. It’s not just retailers who are trying to cope with amount of choice at consumers' fingertips; restaurant operators have been partnering with brands such as Deliveroo, Just Eat, Hungry House and UberEATS, which resulted in the demand for home deliveries growing 10 times faster than dining-out last year.
Is this the end of the traditional UK high street as we know it? Increasingly, consumers are refining what they think is a good retail experience, sometimes preferring online and other times preferring to be physically in-situ. High streets will need to think more creatively to win back a share of wallet: what’s key is providing a different ’experience’ to the online alternative. Despite the lowest rate of high street store openings in seven years¹, it appears that experience-based propositions are bucking the trend - namely beauty salons, bookshops, ice-cream parlours and coffee shops. This is further reinforced by the fact that 3.3 coffee shops are opening daily across the nation and are expected to overtake pubs by 2030²; resulting in the coffee shop industry pouring £9.6bn into the UK economy in 2017; an increase of 7.3% .
There are now around 24,000 coffee shops across the UK; a combination of non-specialists, independents, and major chains such as Starbucks, Costa and Caffe Nero. All of the major brands are continuing to expand their portfolios – either via acquisition, different store formats and NPD – and are proving that the market has not yet reached saturation. Small and medium sized boutique chains such as Joe & the Juice and Taylor St. Baristas are also gaining momentum and driving comparable sales growth across the sector.
Such is the interest in coffee that, according to our BrandVue Eating Out brand tracker, awareness is almost total across the UK: Costa at 99%, Starbucks and Caffe Nero at 98% and 94% respectively. Moreover, Morar HPI estimate that today the Big Three make up approx. 19% of the total coffee shop sales with sales per store ranging from approx. £450k to £750k, and estimated store-level EBITDA margins at 41% to 43%, depending on unit size.
So, what’s currently driving consumers to these coffee shops? Firstly convenience – 33% choose to go as they are ‘near to an outlet at the time’, indicating that food and beverage plays a central role in an impulse-led high street experience. Consumers now implicitly expect them as part of a trip to the shops, and catering for this has been a huge springboard for coffee shops. Capitalising on such demand and using available floor-space wisely has been central to attracting trade through the door.
With consumers tightening their belts, value-seeking behaviour is becoming more common. According to BrandVue, price perception (affordability and good value) is the main differentiating aspect for repeat visits. Average spend for the top 3 coffee brands sits at £5.23 and has remained flat over the last 2 quarters, ensuring that the price entry point is still achievable for many despite the recent tightening of their belts, especially when compared with an average spend of +£13.00 per head for branded casual chains. 50% of customers see Costa, Starbucks and Nero as value for money and this means more visits – annual frequency sits at an average of 5.4 times a year vs. 2.6 for branded casual dining. The big coffee operators have a business model which targets a modern set of consumers (mostly Gen Z with a female skew), who want a quick eat and drink and have a good idea of what they will order before they enter.
The main rationale for 43% of consumers who visit the top 3 coffee shop brands is the perception that they ‘provide great coffee and hot drinks’. Costa leads in terms of affinity (consumer opinion of a brand), 19% in front of Caffe Nero and 10% ahead of Starbucks, but it’s Caffe Nero that leads the charge as the best brand for coffee quality and choice. Within the capital, Starbucks is the favourite big coffee shop brand. Consumers see it as modern and a place with great coffee, but not somewhere to bring someone you want to impress.
With a coffee shop or two on every street corner, coffee has become the ultimate drinking commodity. Satisfaction levels amongst customers have remained stable over time and, unlike other F&D outlets who have used the persuasive power of discounting promotions, the Big Three tend to focus on loyalty programmes rather than a 2 for 1 offer. Generally, the greater the store share, the greater the number of respondents who say they have a loyalty card with Costa at 43%, Nero 40% and Starbucks at 37%.
So, how long will satisfaction levels remain as they are and what happens next?
Coffee has the power to generate footfall into the high street and significant sales, but according to Morar HPI's specialised drinks team, Cardinal:
“if coffee shops are to further thrive, consideration must be given to providing an exceptional and stand-out offer in a competitive market. They must have the benefit of a focussed offer supported by well-trained baristas, a range of coffee beans and seasonal coffee-based recommendations as well as impressive equipment; these all signal expertise”.
Findings also highlighted that while
filter coffee is popular, cappuccino sits highest on the list of preferred
coffee drinks at 27%, alongside the Americano. Furthermore, while lattes are
another popular choice, around 25% of respondents were also looking for other
options, showcasing the demand for variety in the sector. Different styles
should be considered, but alongside different preparation methods to showcase
expertise; this all adds to the overall coffee experience.
It is clear that the environment for drinking coffee is important for customer experience. Operators must create a space that is coffee friendly as well as using their venue’s unique point of difference to stand out and make a statement.
Increasing dwell time is one way to drive spending: coffee operators with a dwell time of around 30 minutes convince consumers to spend an average of £5.23 but a Branded Casual Dining operator (e.g. Frankie & Benny’s, Café Rouge and TGI Fridays) where customers sit for 45 mins receives £13.00 per visit. For each minute of dwell time gained, £0.12 is added to every customer bill. So, while this isn’t good news for coffee brands, there is opportunity to differentiate themselves either through upselling (only 27% of respondents order a second drink) or by competing head-on in food ‘flavour and freshness’.
Look at the likes of Pret and Leon: they are almost defined by their healthy range of food, and this has established a higher price point, aimed at more affluent consumers. Add to that the increase of artisan shops jostling alongside the more established high street players. According to BrandVue, Pret leads, with customers highly satisfied with ‘flavours and freshness’ as well as their ability to cater for ‘different dietary requirements’. All coffee chain brands are working to improve their food: in 2015 Costa created their Fresco concept trial in London, focussing on fresh and healthy food to broaden their food range and quality credentials - but it is yet to be rolled out across the UK. It’s also worth noting that a few years back vegan, gluten-free, vegetarian etc were niche concerns barely considered when concocting a menu. Now it is critical to success: today nearly 1 in 4 of 18-30 year olds claim to have an allergy or food intolerance - 50% higher than other groups.
The Big Three coffee brands fulfil a range of occasions; the most popular being while a customer is ‘out shopping’ (20.4%), ‘to take a break’ (10.7%), or a ‘quick refuel’ (10.3%). With consumers feeling the pinch, there may be an opportunity to appeal to consumers when ‘having a treat’ with the focus on higher price point, artisanal, indulgent treats. However, this is likely not to be the right move for all coffee brands.
Whatever the next step for the Big Three, they need to be clear on their point of differentiation. Consumers have a huge array of food and drink brands to choose from, so it is critical to a brand’s success that their offer is razor-sharp. Think Wagamama and McDonald’s, whether it’s their specific cuisine or service style, both have a clear focus and place in people’s minds. This is reinforced by BrandVue tracking data – both brands achieve the highest spontaneous awareness scores across the +140 UK brands monitored. If you try and stand for too much, to too many people, it will be a challenge to fix your brand at the front of a consumer’s mind.
The future of the High Street will lie in playing a special supporting role rather than being the main attraction in shoppers' lives, and coffee shops are integral to that success. Perhaps we are still a nation of shoppers, just with less shopkeepers and a lot more baristas.
¹ Local Data Company 2017
² UK Coffee Report (for the London Coffee Festival) 2018