Have we finally hit peak coffee? After years of gravity-defying growth, sales at Britain's biggest coffee shop chain, Costa Coffee, have ground to a virtual halt in recent months.
Having once enjoyed double-digit growth on the back of the booming coffee market, sales at Costa have slowed in recent years amid fierce competition from large rivals as well as the growing number of independent, artisan shops.
Owner Whitbread, which bought Costa just over 20 years ago, has pursued an aggressive expansion policy, opening hundreds of new outlets every year. Despite the sales slowdown, it is still adding new shops in the UK, opening more than 100 over the past year, and taking its chain to more than 2,300.
But how many coffee shops can the market sustain – particularly when household incomes in the UK are falling in real terms and consumer confidence post-Brexit has taken a dive?
The new stores helped boost Costa’s overall revenues in the UK by just over 8 per cent, to £542 million (€605 million), in the six months to the end of August. But, stripping out the new space, sales grew at a glacial 0.1 per cent in the second quarter.
This was far slower than analysts had expected and is a marked decline on the 1.1 per cent like-for-like growth recorded in the first quarter – and the 2.3 per cent seen in the previous first half.
Margins were also under pressure. Profits in the UK fell by 5 per cent to £61 million as staff costs increased and the bill for imported coffee beans rose in line with the weaker pound.
So have we finally become fed up with handing over our hard-earned cash for skinny lattes, flat whites, cortados and cappuccinos?
Not a bit of it, says Whitbread chief executive Alison Brittain. In fact, she's betting that we'll be willing to fork out even more in the future as we outgrow basic lattes and Americanos and graduate to more innovative – and expensive – ways of achieving our caffeine hits.
Third wave of coffee
As she describes it, the UK is entering the “third wave” of coffee – a period in which consumers’ preferences for coffee becomes more sophisticated and they are willing to spend more per cup for higher quality and innovative drinks.
As market leader, Costa has “a prime opportunity to capitalise on these attractive trends”, Brittain says, likening it to the way British wine drinkers have developed more sophisticated palates over the years. And she quotes the coffee market consultancy Allegra, which is forecasting coffee shop numbers will increase by 5-6 per cent a year over the next few years.
Analysts were not convinced. Although Whitbread’s Premier Inn division – which has also expanded rapidly – enjoyed good growth over the first half, it also showed signs of a slowdown and Whitbread shares tumbled by 5 per cent as the market took fright.
Costa Coffee has come a long way since Italian immigrant brothers Sergio and Bruno Costa founded it in London in 1971. They set up a coffee roastery in Lambeth, supplying local caterers, and branched out into the retail trade in 1978 when they opened their first London shop. By the time Whitbread bought the business in 1995, they had 41 outlets.
According to Allegra, the leading three specialist chains – Costa, Starbucks and Caffe Nero – continue to dominate, with a 53 per cent share of the branded coffee market. But medium-sized chains have been gaining momentum and are now outstripping their larger rivals in sales growth.
The consultancy believes that high-quality boutique chains will be a major feature of the market in the future, “delivering authentic artisan concepts at scale”.
By the end of last year, the number of coffee shops in the UK had reached almost 23,000, turning over sales of £8.9 billion. Allegra forecasts coffee shop numbers will rise to 32,000 by 2025, with combined sales reaching £16 billion. By 2030, it predicts the UK will have more coffee shops than pubs.
The coffee culture that has developed in the UK over the past two decades is clearly there to stay. But there is a limit to how many mass-market chains can be sustained.
Tastes probably will become more sophisticated, as Brittain says, but will a consumer willing to pay top dollar for the latest coffee tasting menu or rare bean roast really opt to go to Costa rather than an artisan rival?
And if they do choose Costa, will they be able to cope with the queue while the baristas conjure up their latest, pricey, concoctions?
Fiona Walsh is business editor of theguardian.com
