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Coffee Shops - UK - February 2009

After a prolonged period of consistent year-on-year growth, much of the coffee shops market is now entering a phase of consolidation, as consumers and operators alike hunker down in reaction to the current economic recession. Although the market proved particularly resilient during the last economic downturn in the early 1990s, the current trading climate is very different. For example, there is now increased competition from generalists such as pubs and fast food outlets, which, at lower price positions, offer consumers more opportunities to down trade their out-of-home coffee consumption.

More significantly, however, the strategy of rapid expansion in order to increase accessibility has, in reality, eroded the original USP of certain brands in terms of being exclusive and fashionable. As a result, it could be argued that economic factors have had less impact on the market than this fundamental concept of market positioning. Indeed, what better proof is there of this then the evident success of non-specialists entering or encroaching on the coffee shop market? In which case, earlier market predictions that consumers will still purchase coffee out-of-home as an affordable luxury continues to hold true as operators themselves adopt strategies to accommodate consumers’ changing circumstances.

That said, in the long term, operators are generally optimistic for future growth within the UK market, buoyed, for example, by growth in non-high street channels. However, past strategies such as the incredibly rapid outlet expansion and tactics of clustering stores close together to gain brand share despite cannibalisation of trade are unlikely to re-emerge, with forward strategies more likely to focus on image concerns within a consolidated outlet base.

This report looks at the factors that have been driving market growth during the past five years and those which will influence it in the future, and examines the current status of the industry. It also provides forecasts for the development of sales during the next five years and considers whether the coffee shop market is thriving or just surviving.

Main report themes

  • Changing consumer behaviour as a result of the impact of the economic recession.

  • Operators’ response to changing trading conditions.

  • The role of branding and the issue of coffee shops becoming less aspirational and more commoditised.

  • The impact of a growing cost base on the bottom line of operators.

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Table of contents

  1. Issues in the Market

      • Main issues
        • Definition
          • Abbreviations
          • Future Opportunities

            • Australian influences
              • Specialists losing USP of customisation
              • Market in Brief

                • Period of consolidation in prospect as boom times fade
                  • A £1 billion-plus market
                    • Costa seemingly outperforming Starbucks
                      • Still plenty of opportunities for market growth longer-term… but it will take work
                        • Independents and in-store restaurants challenge specialists
                        • Internal Market Environment

                          • Key points
                            • Stagnation in visitor numbers
                              • Figure 1: Trends in visiting coffee shops, 2007-08
                            • Opportunities to increase frequency?
                              • Figure 2: Frequency of visiting coffee shops, 2007-08
                            • Instant coffee predominates
                              • Figure 3: Trends in in-home instant coffee consumption, 2006-08
                            • Ground coffee usage on the up
                              • Figure 4: Trends in in-home fresh ground coffee consumption, 2006-08
                            • Tea: An opportunity for coffee shop operators?
                              • Figure 5: Trends in in-home tea consumption, 2004-08
                            • Coffee price trends: A major factor affecting retail prices
                              • Figure 6: Trends in the price of coffee, 2003-07
                              • Figure 7: Trends in the price of coffee, 2008
                            • Per capita consumption: Room for growth
                              • Figure 8: Per capita consumption of coffee in selected countries, 2003 and 2007
                            • Ethical issues
                              • Figure 9: Sales of Fairtrade hot beverages in the UK, 2003-07
                            • The National Minimum Wage
                              • Rising utility costs
                              • Broader Market Environment

                                • Key points
                                  • The reality of recession
                                    • Figure 10: Trends in personal disposable income and consumer expenditure, 2003-13
                                  • How will the economic slowdown impact on consumer expenditure habits?
                                    • Figure 11: Areas where consumers would cut back spending, July 2008
                                  • Continued growth for pre-/no family target market
                                    • Figure 12: Forecast adult population trends, by lifestage, 2003-13
                                • Competitive Context

                                  • Key points
                                    • JD Wetherspoon
                                      • Eat
                                        • Pret A Manger
                                          • McDonald’s
                                            • Burger King
                                              • Wild Bean Café
                                              • Strengths and Weaknesses in the Market

                                                  • Strengths
                                                    • Growth potential for UK market
                                                      • Brand equity
                                                        • Product quality and consistency
                                                          • Product range
                                                            • Economy of scale
                                                              • Weaknesses
                                                                • Vulnerable to economic downturn?
                                                                  • Lack of differentiation
                                                                    • Becoming ubiquitous?
                                                                      • Increased competition from non-specialists
                                                                      • Who’s Innovating?

                                                                        • Key points
                                                                          • Ethical offers gathers momentum
                                                                            • Starbucks launches instant coffee
                                                                              • Flavour of the month…
                                                                                • … as seasonal variations keep the offer fresh
                                                                                  • Healthy options becoming more prevalent
                                                                                    • Getting creative in the kitchen
                                                                                      • BB’s opts for digital in-store promotion
                                                                                        • Coffee Republic trials contactless payment
                                                                                        • Market Size and Forecast

                                                                                          • Key points
                                                                                            • Figure 13: Market size and forecast of coffee shops, at current and 2008 prices*, 2003-13
                                                                                          • Sales growth and new store openings drive market
                                                                                            • Slowdown in past 12 months…
                                                                                              • …worse to come but long-term growth still expected
                                                                                              • Market Share

                                                                                                • Key points
                                                                                                  • Figure 14: Leading operators in the UK coffee shop market, 2008
                                                                                              • Companies and Products

                                                                                                • Key points
                                                                                                  • Major players
                                                                                                    • Costa Ltd
                                                                                                        • Figure 15: Costa UK outlets by type, 2007-08
                                                                                                        • Figure 16: Key financial indicators for Costa Ltd, 2007-08
                                                                                                      • Starbucks Coffee Company (UK) Ltd
                                                                                                          • Figure 17: Starbucks outlets in the UK by type, 2007-08
                                                                                                          • Figure 18: Key financial indicators for Starbucks Coffee Company (UK) Ltd, 2007-08
                                                                                                        • Caffè Nero Group Ltd
                                                                                                            • Figure 19: Key financial indicators for Caffè Nero Group Ltd, 2007-08
                                                                                                          • BB’s Coffee & Muffins Ltd
                                                                                                            • Puccino’s Ltd
                                                                                                              • Coffee Republic plc
                                                                                                                  • Figure 20: Key financial indicators for Coffee Republic plc, 2007-08
                                                                                                                  • Figure 21: Breakdown of total network sales of Coffee Republic by type of outlet, 2007-08
                                                                                                                  • Figure 22: Coffee Republic outlet profile, 2007-08
                                                                                                                • AMT Coffee Ltd
                                                                                                                    • Figure 23: Key financial indicators for AMT Coffee Ltd, 2007-08
                                                                                                                  • Other players
                                                                                                                    • Caffé Ritazza
                                                                                                                      • Coffee Primo
                                                                                                                        • Coffee Nation
                                                                                                                        • Brand Communication and Promotion

                                                                                                                          • Key points
                                                                                                                            • Figure 24: Advertising expenditure on selected coffee shop brands, 2004-07
                                                                                                                          • Starbucks and Costa main advertisers
                                                                                                                            • Figure 25: Advertising expenditure on selected coffee shop brands, by media type, 2007
                                                                                                                          • Mainstream media traditionally avoided
                                                                                                                            • Subtle promotions and sponsorship preferred
                                                                                                                              • Not all publicity is good publicity
                                                                                                                                • Stores provide good promotional platform
                                                                                                                                  • Added-value promotions popular
                                                                                                                                    • Technology matters…
                                                                                                                                      • … while net gains are evident
                                                                                                                                        • Students targeted
                                                                                                                                        • Brand Elements

                                                                                                                                            • Brand Map
                                                                                                                                              • Figure 26: Attitudes and usage of coffee shop brands, January 2009
                                                                                                                                            • Costa Coffee
                                                                                                                                              • What the consumer thinks
                                                                                                                                                • Figure 27: Attitudes towards the Costa Coffee brand, January 2009
                                                                                                                                              • Starbucks
                                                                                                                                                • What the consumer thinks
                                                                                                                                                  • Figure 28: Attitudes towards the Starbucks brand, January 2009
                                                                                                                                                • Caffè Nero
                                                                                                                                                  • What the consumer thinks
                                                                                                                                                    • Figure 29: Attitudes towards the Caffè Nero brand, January 2009
                                                                                                                                                  • BB’s Coffee & Muffins
                                                                                                                                                    • What the consumer thinks
                                                                                                                                                      • Figure 30: Attitudes towards the BB’s Coffee & Muffins brand, January 2009
                                                                                                                                                    • Tchibo
                                                                                                                                                      • What the consumer thinks
                                                                                                                                                        • Figure 31: Attitudes towards the Tchibo brand, January 2009
                                                                                                                                                      • Coffee Republic
                                                                                                                                                        • What the consumer thinks
                                                                                                                                                          • Figure 32: Attitudes towards the Coffee Republic brand, January 2009
                                                                                                                                                        • Brand qualities of coffee shop brands
                                                                                                                                                          • Starbucks seen as overrated
                                                                                                                                                            • Figure 33: Personalities of various coffee shop brands, January 2009
                                                                                                                                                          • Experience of coffee shop brands
                                                                                                                                                            • Little familiarity with brands outside of the ‘big three’
                                                                                                                                                              • Figure 34: Consumer usage of various coffee shop brands, January 2009
                                                                                                                                                            • Brand intentions for coffee shop brands
                                                                                                                                                              • Costa and Starbucks have best customer retention
                                                                                                                                                                • Figure 35: Consideration of various coffee shop brands, January 2009
                                                                                                                                                              • Brand momentum for coffee shop brands
                                                                                                                                                                • Lack of direction holding the market back
                                                                                                                                                                  • Figure 36: Momentum of various coffee shop brands, January 2009
                                                                                                                                                                • Brand satisfaction for coffee shop brands
                                                                                                                                                                  • Good but not great
                                                                                                                                                                    • Figure 37: Satisfaction with various coffee shop brands, January 2009
                                                                                                                                                                  • Brand commitment to coffee shop brands
                                                                                                                                                                    • Brand equity for Starbucks, but Costa consumers show more loyalty
                                                                                                                                                                      • Figure 38: Commitment to various coffee shop brands, January 2009
                                                                                                                                                                    • Round up
                                                                                                                                                                    • Case Study – Starbucks

                                                                                                                                                                      • Key points
                                                                                                                                                                        • Loss of direction
                                                                                                                                                                          • The Burberry experience
                                                                                                                                                                            • The McDonald’s experience
                                                                                                                                                                              • Downsizing down under
                                                                                                                                                                              • Coffee Shop Usage

                                                                                                                                                                                • Key points
                                                                                                                                                                                    • Figure 39: Coffee shops visited, October 2008
                                                                                                                                                                                  • ‘Big two’ are neck-and-neck in the popularity stakes
                                                                                                                                                                                    • Major chains appeal equally to men and women and to most ages
                                                                                                                                                                                      • An affluent customer base
                                                                                                                                                                                        • A different breed of consumer…
                                                                                                                                                                                          • What’s Costa’s is Starbucks’ and vice versa
                                                                                                                                                                                            • Figure 40: Most popular coffee shops visited, by coffee shops visited, October 2008
                                                                                                                                                                                          • Customers go where convenience takes them
                                                                                                                                                                                            • Figure 41: Next most popular coffee shops visited, by coffee shops visited, October 2008
                                                                                                                                                                                        • Attitudes Towards Drinking Tea/Coffee Out-of-Home

                                                                                                                                                                                          • Key points
                                                                                                                                                                                              • Figure 42: Attitudes towards drinking tea/coffee out of home, October 2008
                                                                                                                                                                                            • Location bigger than brand
                                                                                                                                                                                              • USP?
                                                                                                                                                                                                • Creatures of habit
                                                                                                                                                                                                  • Only one in 20 have cut back so far
                                                                                                                                                                                                    • Men opt for ‘hit and run’
                                                                                                                                                                                                      • Non-specialists encroaching on the traditional coffee shop market
                                                                                                                                                                                                        • Figure 43: Most popular attitudes towards drinking tea/coffee out of home, by coffee shops visited, October 2008
                                                                                                                                                                                                      • Starbucks – down but by no means out
                                                                                                                                                                                                        • Figure 44: Next most popular attitudes towards drinking tea/coffee out of home, by coffee shops visited, October 2008
                                                                                                                                                                                                      • Loners tend to order the same thing
                                                                                                                                                                                                        • Figure 45: Most popular attitudes towards drinking tea/coffee out of home, by attitudes towards drinking tea/coffee out of home, October 2008
                                                                                                                                                                                                      • Regular routine bolsters catering sales
                                                                                                                                                                                                        • Figure 46: Next most popular attitudes towards drinking tea/coffee out of home, by attitudes towards drinking tea/coffee out of home, October 2008
                                                                                                                                                                                                    • Attitudes towards Branded/Specialist Coffee Shops

                                                                                                                                                                                                      • Key points
                                                                                                                                                                                                        • Figure 47: Most popular attitudes towards branded/specialist coffee shops, October 2008
                                                                                                                                                                                                      • Demographic traits
                                                                                                                                                                                                        • Costa leading the way as a treat
                                                                                                                                                                                                          • Figure 48: Most popular attitudes towards branded/specialist coffee shops, by coffee shops visited, October 2008
                                                                                                                                                                                                        • Starbucks continues to draw on breadth of choice
                                                                                                                                                                                                          • Figure 49: Next most popular attitudes towards branded/specialist coffee shops, by coffee shops visited, October 2008
                                                                                                                                                                                                        • Brand sceptics happy to sit on their own
                                                                                                                                                                                                          • Figure 50: Most popular attitudes branded/specialist coffee shops, by attitudes towards drinking tea/coffee out of home, October 2008
                                                                                                                                                                                                        • Weekend usage of branded specialists
                                                                                                                                                                                                          • Figure 51: Next most popular attitudes branded/specialist coffee shops, by attitudes towards drinking tea/coffee out of home, October 2008
                                                                                                                                                                                                        • Consumers who want an ordinary cuppa most likely to be put off by prices
                                                                                                                                                                                                          • Figure 52: Most popular attitudes towards branded/specialist coffee shops, by attitudes towards branded/specialist coffee shops, October 2008
                                                                                                                                                                                                        • Customers who want choice choose branded outlets
                                                                                                                                                                                                          • Figure 53: Most popular attitudes towards branded/specialist coffee shops, by attitudes towards branded/specialist coffee shops, October 2008
                                                                                                                                                                                                      • Coffee Shops Targeting Opportunities

                                                                                                                                                                                                        • Key points
                                                                                                                                                                                                          • Branded/specialist coffee shop target groups
                                                                                                                                                                                                            • Loyal
                                                                                                                                                                                                              • Switchers
                                                                                                                                                                                                                • Promiscuous
                                                                                                                                                                                                                  • Non-specialist/branded outlets target groups
                                                                                                                                                                                                                    • Majority stick to one or two outlets
                                                                                                                                                                                                                      • Older consumers more habitual
                                                                                                                                                                                                                        • More affluent consumers tend to be more adventurous
                                                                                                                                                                                                                          • Figure 54: Repertoire of non-specialist/branded outlets, by types of non-specialist/branded coffee shops visited in the last three months, October 2008
                                                                                                                                                                                                                      • Appendix – Coffee Shop Usage

                                                                                                                                                                                                                        • Most popular coffee shops visited, by detailed demographics
                                                                                                                                                                                                                          • Figure 55: Most popular coffee shops visited, by detailed demographics, October 2008
                                                                                                                                                                                                                        • Next most popular coffee shops visited, by detailed demographics
                                                                                                                                                                                                                          • Figure 56: Next most popular coffee shops visited, by detailed demographics, October 2008
                                                                                                                                                                                                                      • Appendix – Attitudes towards Drinking Tea/Coffee Out-of-home

                                                                                                                                                                                                                        • Most popular attitudes towards drinking tea/coffee out-of-home, by detailed demographics
                                                                                                                                                                                                                          • Figure 57: Most popular attitudes towards drinking tea/coffee out-of-home, by detailed demographics, October 2008
                                                                                                                                                                                                                        • Next most popular attitudes towards drinking tea/coffee out-of-home, by detailed demographics
                                                                                                                                                                                                                          • Figure 58: Next most popular attitudes towards drinking tea/coffee out-of-home, by detailed demographics, October 2008
                                                                                                                                                                                                                      • Appendix – Attitudes towards Branded/Specialist Coffee Shops

                                                                                                                                                                                                                        • Most popular attitudes towards branded/specialist coffee shops, by detailed demographics
                                                                                                                                                                                                                          • Figure 59: Most popular attitudes towards branded/specialist coffee shops, by detailed demographics, October 2008
                                                                                                                                                                                                                        • Next most popular attitudes towards branded/specialist coffee shops, by detailed demographics
                                                                                                                                                                                                                          • Figure 60: Next most popular attitudes towards branded/specialist coffee shops, by detailed demographics, October 2008
                                                                                                                                                                                                                      • Appendix – Coffee Shops – Targeting Opportunities

                                                                                                                                                                                                                        • Specialist coffee shop repertoire groups, by detailed demographics
                                                                                                                                                                                                                          • Figure 61: Specialist coffee shop repertoire groups, by detailed demographics, October 2008
                                                                                                                                                                                                                        • Specialist coffee shop repertoire groups, by coffee shops visited
                                                                                                                                                                                                                          • Figure 62: Specialist coffee shop repertoire groups, by coffee shops visited, October 2008
                                                                                                                                                                                                                        • Specialist coffee shop repertoire groups, by brand loyalty
                                                                                                                                                                                                                          • Figure 63: Specialist coffee shop repertoire groups, by brand loyalty, October 2008
                                                                                                                                                                                                                        • Repertoire of non-specialist/branded outlets, by detailed demographics
                                                                                                                                                                                                                          • Figure 64: Repertoire of non-specialist/branded outlets, by detailed demographics, October 2008

                                                                                                                                                                                                                      Companies Covered

                                                                                                                                                                                                                      • AMT Coffee
                                                                                                                                                                                                                      • Asda Group Ltd
                                                                                                                                                                                                                      • British Market Research Bureau (BMRB)
                                                                                                                                                                                                                      • Burberry Group Plc
                                                                                                                                                                                                                      • Burger King UK Ltd
                                                                                                                                                                                                                      • Café Ritazza
                                                                                                                                                                                                                      • Caffé Nero Group Plc
                                                                                                                                                                                                                      • Cineworld
                                                                                                                                                                                                                      • Co-operative Group
                                                                                                                                                                                                                      • Coffee Nation
                                                                                                                                                                                                                      • Coffee Primo
                                                                                                                                                                                                                      • Coffee Republic Plc
                                                                                                                                                                                                                      • Compass Group Plc
                                                                                                                                                                                                                      • Costa
                                                                                                                                                                                                                      • Debenhams Total (GTV)
                                                                                                                                                                                                                      • Douwe Egberts UK
                                                                                                                                                                                                                      • Fairtrade Foundation (The)
                                                                                                                                                                                                                      • Government Actuary's Department (GAD)
                                                                                                                                                                                                                      • Greene King Brewing and Retailing Ltd
                                                                                                                                                                                                                      • Guinness
                                                                                                                                                                                                                      • International Coffee Organization (ICO)
                                                                                                                                                                                                                      • J. Sainsbury
                                                                                                                                                                                                                      • JD Wetherspoon
                                                                                                                                                                                                                      • KFC Ltd (UK)
                                                                                                                                                                                                                      • Marks & Spencer
                                                                                                                                                                                                                      • McDonald's Restaurants Limited (UK)
                                                                                                                                                                                                                      • Office for National Statistics
                                                                                                                                                                                                                      • Pret A Manger
                                                                                                                                                                                                                      • Puccino's Ltd.
                                                                                                                                                                                                                      • R Twining and Company Limited
                                                                                                                                                                                                                      • Rainforest Alliance
                                                                                                                                                                                                                      • Seattle Coffee Company
                                                                                                                                                                                                                      • Somerfield
                                                                                                                                                                                                                      • Starbucks Coffee Company UK Ltd
                                                                                                                                                                                                                      • Tchibo coffee
                                                                                                                                                                                                                      • Tesco Plc
                                                                                                                                                                                                                      • Tetley Group
                                                                                                                                                                                                                      • The Kenco Coffee Company
                                                                                                                                                                                                                      • The Sun
                                                                                                                                                                                                                      • Waitrose
                                                                                                                                                                                                                      • Waterstones Booksellers
                                                                                                                                                                                                                      • Wm Morrison Supermarkets

                                                                                                                                                                                                                      Coffee Shops - UK - February 2009

                                                                                                                                                                                                                      £1,995.00 (Excl.Tax)