Pension V Espresso

With wallets tightening, will people kick the habit?

Are we better off forgoing our daily coffee to put towards our retirement? Or is the regular espresso fix a way of life? One finance company suggested that the average 30-something could add £3,843 per year to their retirement pot by saving this expense. The past decade has seen the rapid growth of coffee companies in high-streets and retail services throughout the UK. Media reported a ‘love affair’ with the cappuccino, and the market became extremely competitive. This led to suggestions that coffee had become a non-negotiable part of the consumer spending habit, no matter the financial climate. Yet, with Starbucks closing 600 stores in the US alone and Chairman Howard Schultz singling out the UK economy for its poor consumer confidence and ensuing slowdown in sales, is the love affair turning sour?
In this special feature EP spoke with industry leaders to get their thoughts on the debate.

John Derkach, Managing Director, Costa
“Clearly coffee shops are well established in the lifestyles of many people. About half of the adult population visit coffee shops with varying degrees of frequency – roughly one-third reasonably regularly and some very often indeed. Prior to the recession, purchasing a cup of coffee was an ingrained feature of the daily routine of many people. At the moment our customers seem to be sticking to this routine and are still allowing themselves an everyday affordable treat. We are well aware that the economic environment is changing on a daily basis, and in order to keep our customers loyal we need to offer more than just an excellent cup of coffee, we need to offer them an enjoyable experience.
The secret of the coffee shop is to ensure customers have a comfortable environment when they visit and to deliver an everyday experience that offers great value. The idea that you can spend about two pounds and get 30-45 minutes of peace and quiet away from problems is perhaps even more important to people in this climate. We want to create great customer experiences that offer amazing value. The difficult times we face are not over yet, and our business is focused on delivering our core values of unbeatable coffee and great service in a luxury environment.”

Peter Breach, Chief Executive, Coffee Republic
“Our experience falls into two camps; franchisee experience and our company stores. Our franchisees are holding their own. They have not grown sales on a year on year basis but neither have they lost ground. I think had it not been for the Crunch they would have grown, maybe 6%. We are negotiating some costs down so their margins should not be losing out. Company stores have always been the Cinderella of Coffee Republic activity (I know, we only had company stores until two and a half years ago). We have had a major initiative in our own stores, particularly since June 08 and these sales are up over 10% over that period. So I think these are a special case. In summary, I think sales must weaken a bit, say 3% to 5% because of the crunch, depending on location but I think coffee houses are fairly recession-proof. We certainly have seen no sign of ‘falling off a cliff’ as the new year comes in. It has been a tough two years of turnaround and we are a lot smarter now!”

Tony Keating, Chief Executive, SSP UK
“The climate may be difficult, but we are still seeing coffee sales growing year on year across our range of outlets. But as we know that our customers are looking for sharper value for money offers than ever before, creativity in the way we are offering good value is definitely playing a role in that growth. Ultimately a cup of coffee pre and post commute is an important part of our customers’ daily lives, and we have to think carefully and cleverly about how to meet their needs in a way that keeps them satisfied and loyal to us. One size does not fit all though in the way we are keeping promotions appealing.
At Upper Crust, our customers can buy a coffee for £1 with any baguette and a similar deal applies for 99p with a pasty from Pasty Shop. Whilst at Caffé Ritazza seated rail and airport locations we are offering coffee refills for £1 to keep customers refreshed if they have a wait. With two new openings of SSP operated Soho Coffee Co.’s at Manchester Airport this month, it is testament to the fact that there is still a consistent-to-increasing demand for coffee on the move.

Dr. Gerry Ford, Chairman and CEO, Caffé Nero
“Relative to most items, people are continuing to buy their coffee. It is part of their daily ritual. We are at a relatively low price point and I believe that people have looked at their expenditure and decided that they will still buy a cup of coffee, just like buying a newspaper.
In addition, a coffee house can become something like an oasis for people, a place to go to outside of the home or office during difficult times. For two to three pounds outlay, you can sit down somewhere nice, read a free paper or just relax. I think this is quite a nice value proposition. It’s true that in the food industry people are trading down, and that sectors such as fast-food are benefiting. We are also seeing some evidence of people trading down benefiting our business. I am not suggesting that we have not seen some impact from the downturn, but we are seeing people continue to buy coffee, and it has remained part of their natural routine.”

Gary McGann, Sales & Marketing Director, Beyond the Bean
“Industry operators in the main are saying that business is up, including operators in London and East London with a discerning client base. Sites are still opening and, in the main, they are trading well. Outside London is performing better – the UK capital has seen a footfall reduction. However, tourist areas are holding up better and the impact of the weak pound is having an effect, whilst Canary Wharf is suffering. The holy grail used to be about the price per cup. Now, operators are looking at ways to add value and increase their perception of value to customers. Cup sizes are coming down as people are trading down. If anything good comes out of this recession, it will be a return to smaller sized cups which offer better quality coffee because there is more coffee and less milk.
Pret a Manger is trialling a 99p coffee in some stores, mainly to target buyers who would not normally come into shop, and this is having an uplift. It’s acting as a carrot – people might not necessarily buy the coffee, but will try something else. Marks and Spencer is trialling a £1 takeaway coffee which was on trial for January, but has been extended.
In general a ‘coffee habit’ is seen as a way to escape the pressures of everyday life. However, there is a lot of fear amongst consumers, even though they may still be better off than they were a year ago if they have a job and a mortgage.”

Alistair McCallum-Toppin, Managing Director, AMT Coffee
“AMT Coffee launched the gourmet take away coffee concept during the last recession. We succeeded because we focused solely on our customers, after finding any way we could to get them to try our fantastic new concept. Believe it or not only a decade ago, this was not a nation of coffee drinkers walking around with lattes. Naturally price was a big part of our success, this is why for the past 16 years we have focused and improved our original formula of quality products at reasonable prices while maintaining excellent service. This includes becoming the first national coffee company to go 100% fair-trade.
I don’t think this time around is going to be much different, I think people will not sacrifice their beloved coffee. However, as some of the coffee giants have realised, unlike America or the Middle East, people in this country won’t just buy things because they are more expensive, in fact quite the contrary. As long as prices don’t keep rising, people won’t give up their daily fix. However, if prices keep rising there is no doubt custom will be lost. We set up our business model to make a reasonable amount of profit from each of our customers, not an absurd one. I think the UK high streets will return to what they were before the coffee phenomenon i.e. we will start seeing ‘to let’ signs across the country here and there and although hard to believe, the landlords will start seeking reasonable rents. This may not be a bad thing really, it may be just what we all need to return to a proud and prudent nation of craftsmen and independent shopkeepers!”

It is perhaps not surprising that operators are ultimately positive in their outlook. However, with the recession deepening and no one really sure where the bottom might be, it is possibly too early to make the call on whether coffee is a boom time staple or, in fact, has become part of people’s daily lives. In addition, recent reports suggest that landlords, despite a reduction in occupancy rates, are still seeking an increase in rent. When one considers not only the pressure on revenue, but the simultaneous pressure on the cost base this might result in a very different picture for coffee houses as we emerge from the downturn.