RECESSION? What recession? As John Derkach, the boss of Costa, Britain’s
biggest coffee-bar chain, gets up to greet his guests at one of the
business’s newest outlets in London’s Holborn, he surveys the room.
It might be three o’clock in the afternoon, long after the morning peak has
subsided, but the place is packed with a mixture of students, business
people and tourists. No wonder Derkach looks relaxed as he sips a large
cappuccino topped with chocolate sprinkles.
Costa, part of the Whitbread leisure empire that includes Premier Inn budget
hotels, has been growing at an unnerving rate. The hotels arm may have been
considering eye-catching acquisitions such as Travelodge, but the coffee
bars’ growth has been exclusively organic.
It added 142 new outlets last year, a feat Derkach believes is unprecedented
in the British leisure industry. According to Costa’s parent company’s most
recent trading update, sales were ahead 6.3% for the 50 weeks to February 14.
The management expects to achieve similar growth in the coming 12 months, with
overseas outlets also becoming an increasingly important part of the
business. The chain will make its Russian debut this week when Costa opens a
branch in Moscow. The idea that an economic slowdown in Britain might put a
brake on this progress seems of little concern.
The coffee-bar market has grown up since the last recession in Britain in 1992
so nobody quite knows how it will perform in straitened times. Some analysts
believe it could fare badly because a “latte to go” is something easily
sacrificed by consumers looking to save money.
Matthew Gerard of Investec Securities said: “Costa is one of those businesses
that would feel the strain in a widespread consumer downturn.”
This is not a view shared by Derkach, a Whitbread veteran who previously ran
its Pizza Hut division. “We are very aware of the economic situation. I
would say that what we are talking about, though, is £2.25 for a cappuccino
and for an espresso, less than £2. It’s important to register that. I’m not
saying that’s an insignificant amount of money, by any means, but to a lot
of customers it’s incidental. A nice cup of coffee is a treat, but it’s a
treat that costs £2.
“On average, people spend about 25 minutes in one of our stores. I think we
deliver astounding value for £2.25. I can’t control the economy, but I can
control what we do. We have to make the experience as good as we can and we
will take our chances along with everybody else.”
The coffee-bar industry has not been without its problems. Starbucks, the
American world market leader, has undergone a back-to-basics approach with
Howard Schultz, its founder, assuming day-to-day control once more to give
the company the sort of boost its customers usually get from a double
espresso.
In a high-profile initiative, Costa added 142 outlets to its chain last year
and will make its Russian debut this week with a Moscow branch Schultz
recently closed all the group’s American outlets for three hours so staff
could be retrained. Derkach cannot resist a little dig at his rival,
pointing out that Costa “typically trains its staff before they start work”.
And despite the perception that the mark-up on coffee leaves plenty of
headroom, Derkach insists the industry is “not an easy way to make money”,
pointing out that with sky-high rents, particularly in central London, each
site has to sell a huge number of cups of coffee to make the economics stack
up.
Part of Derkach’s strategy to keep customers is to ensure the coffee shops
offer a smart and inviting experience.
Critics argue that one of the chain’s problems is the inconsistency of its
product. The smart, new Holborn store is an infinitely different experience
from the more tired-looking Costa outlets at motorway service stations.
Upgrading stores is “a never-ending cycle” said Derkach. While there are about
100 outlets with the latest design, about 95% of the rest have a look dating
back to the last revamp in 2004.
Although it seems as if every high street in Britain sports at least half a
dozen coffee shops, Derkach believes there is still scope for Costa to
expand.
“You can’t walk down many high streets without seeing several coffee shops,
but you can walk down many high streets and not see a Costa coffee shop,” he
said. “Inside the M25 we have 135 shops and our competitors have twice that
number. Costa is significantly underrepresented in London.”
Derkach takes heart from the fact that there is little sign of sales
cannibalisation even though the company opened so many new stores last year,
while there is also strong potential from tie-ups with retailers, including
Waterstone’s, the bookseller, and Tesco, where Costa has concessions.
Jeffrey Young, managing director of Allegra Strategies, a management
consultancy that has studied the coffee market, agrees there is plenty of
room for growth by the incumbent operators. “There are thousands of places
that still don’t have a branded coffee-shop chain on their high street,” he
said.
All this growth has prompted talk among City analysts that Whitbread would be
better off demerging Costa, an idea that would have gathered extra momentum
had a proposed deal to acquire the rival Travelodge hotel chain gone ahead.
Those talks, revealed in The Sunday Times, foundered last week, while
Derkach said there were no current plans by Whitbread to spin off the coffee
business it has owned since 1995. “Costa has been a tremendous success story
under Whitbread’s ownership; I can’t see any reason to change that at all,”
he said.
Derkach also argues that there are greater synergies between Costa and Premier
Inn than people might initially suppose. There are a number of Costa outlets
in Whitbread’s budget hotels and, perhaps more importantly, as Premier Inn
begins to expand internationally, it can tap the expertise built up at
Costa, which has a presence in 21 overseas markets.
Its foreign business is big, with a lot of untapped potential, but Derkach
knows that Britain remains all-important. He just wants to make sure that
the British consumer – if not the economy – remains perked up.
POTTED HISTORY
-COFFEE was discovered in Ethiopia in the 9th century. According to legend,
shepherds saw the effects of caffeine when their goats appeared to dance
after eating wild coffee berries
-It was first roasted and brewed as a drink in Arabia Around the end of the
16th century coffee reached Italy, but it is claimed that it took an
official declaration by Pope Clement VIII - deeming it a Christian drink –
before it was widely accepted Coffee was brought to Britain by the British
East India Company.
-The first coffee house opened in Oxford in 1651 Edward Lloyd’s coffee
house, founded in 1688, attracted seafarers and merchants and eventually
became Lloyd’s of London
-The UK now has more than 3,000 branded coffee shops
-After oil, coffee is one of the world’s largest traded commodities More
than 100m people in developing countries depend on coffee as a primary
source of income
-The UK has more than 3,000 branded coffee shops Brazil is the world’s
biggest coffee exporter
