Branded coffee shops prove resilient to the UK recession

A very useful article in the Feb 2010 edition of Cafe Culture (the trade magazine for the cafe industry) has explained what a winning strategy has been in the UK coffee shop market during the recession.

The overall conclusion from market researchers Allegra Strategies is that the UK branded coffee shop market has proved pretty resilient to the economic downturn. Although the rapid growth of the market in recent years has now slowed, 2009 still provided successful operators with some growth opportunities to exploit.

According to Allegra, there are around 11,000 coffee outlets in the UK, of which 4,158 (at the end of 2009) are branded (e.g. Starbucks, Costa, Caffe Nero). The branded coffee shops have a turnover of £1.63 billion. Revenues in the segment rose by 6.2% in 2009, compared with 12.6% growth in 2008. The net number of new outlets rose by 258 in 2009, a 6.6% increase. So you can see that volume growth (as measured by new outlets) was a key driver in the small rise in market sales.

Like-for-like sales (a comparable way of measuring sales for outlets that were open in both 2008 and 2009) were broadly static. But that statistic hides a disparity between the best-performing chains (where LFL revenues grow by between 1-2%) and the rest, where LFL sales declined.

Might we have expected coffee market revenues to have declined during 2009? After all, GDP fell by almost 5% in 2009, partly due to much weaker consumer (and retail) spending? The answer is that UK consumers did not abandon their coffee treats in 2009. They continued to visit almost as frequently as in 2008, but preferred to “trade down” to lower-price items or take advantage of greater price promotions.

Some commentators in the media have found the resilience of the coffee shop market to be a surprise during the recession. Surely, they argue, a trip to Starbucks or Costa Coffee is a discretionary spend (perhaps even a luxury) that cash-strapped consumers can do without?

However, Allegra’s detailed research into customer attitudes reveals a significant change in customer behaviour in recent years. Cafe or coffee shop culture is now so entrenched in the UK that consumers are reluctant to cut back on what many now consider to be a necessity, or day-to-day staple. The daily coffee fix is something that customers are unlikely to give up, even if some of them have become more price-conscious.

Allegra found that the average spend by a visitor to a branded coffee shop fell slightly in 2009, from £3.59 in 2008 to £3.50. Partly this was due to a reduction in the proportion of customers who bought food with their coffee. It also reflected greater price competition in the market. For example, Starbucks lowered its UK prices below the £2 level for the first time in its history in 2009.