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Coffee Industry Heats Up as Giants Target Expansion

Published on: 12/09/2018

With Coca-Cola’s £3.9bn takeover of Costa Coffee and Starbucks opening in Italy, what is in store for the coffee industry in the UK and internationally?

According to the British Coffee Association, coffee is not only the world’s most popular drink, but consumption of it is on the rise both at home and in coffee shops. Costa is the biggest coffee chain in the UK by some margin, with over 2000 outlets; its acquisition by Coca-Cola has been hailed as a strong move by industry experts. As consumers increasingly replace unhealthy soft drinks with coffee and beverage producers are hit with a new sugar tax in the UK, it is logical for Coca-Cola to add a hot beverage brand to its catalogue for the first time.

But one of the biggest benefits cited for the Costa deal has been the potential for global expansion. Costa is already present in 31countries, including China, Russia and India. They are reportedly keen to explore territories which do not currently have a developed coffee culture, focusing on “coffee strategy, not retail strategy” in the long term.

Rival Starbucks, on the other hand, is taking on a more challenging market: Italy. Friday saw the opening of the American chain’s first ever branch in the country, in an impressively converted former post office building in central Milan. Coca-Cola will no doubt be watching with interest.

Italy has a famously well-established coffee tradition, one which will no doubt be a challenge for large, American-owned retailers to break into. As Domenico Panetta, Italy analyst at business intelligence firm Plimsoll Publishing, comments: “There are a number of cultural differences when it comes to coffee in Italy which could prove challenging for international chains. Most people drink espresso and do not order take out drinks or spend a long time in cafes. The sweet, milk-based coffees - which have the highest profit margins for brands like Starbucks - are not only perceived as unhealthy, but also overpriced; Italians do not expect to pay more than around €1 for an espresso and up to €2 for a larger coffee such as cappuccino.”

Starbucks are arguably sensitive to these issues, and plan to attract customers with an extravagant coffee “roastery” in their new Milan branch, which will offer food, cocktails and over 100 coffee-based beverages. But both analysts and competitors remain sceptical. Mr Panetta continues, “Consumers, especially younger people, will no doubt be curious about the new Starbucks location and it could do well in the first few months. But whether the company can gain a long term foothold in other Italian cities remains to be seen.”

Despite this, it is worth noting that the two biggest coffee brands in Italy, Lavazza and Illycaffè, have also upped their game in recent months. Both have invested in coffee shops in Milan, and Lavazza has announced plans to increase store numbers worldwide.

Back in the UK, there is a rapidly increasing number of independent coffee shops which are proving popular with a young, millennial audience. But research by Plimsoll Publishing has found that around 1/3 of UK cafés and coffee shops are running at a loss.

If the number of coffee shops continue to rise, there could be a period of consolidation as smaller businesses fail to compete with industry giants. But their future will probably come down to consumer preferences, and whether a more artisan-style product can continue to appeal to British customers over the convenience and familiarity of brands like Costa. And, with recent negative press surrounding Starbucks due to recent tax controversies, it will be interesting to see what, if any, impact the Coca-Cola brand has on the perception of Costa Coffee among its regulars.

In the UK the success of coffee shops is also heavily influenced by the high street; recent problems there could start to affect outlets in months to come. What’s more, the availability of good-quality coffee which can be brewed at home, including increasingly popular capsule machines, could also have longer-term implications.

In the case of Costa Coffee, this could be another smart move on the part of Coca-Cola. Taking the lead from Nestlé’s recent £5bn deal with Starbucks to exclusively sell their branded products in supermarkets and other retail outlets worldwide, this could be another area for growth going forward. Selling branded products through retailers helps to circumvent competition from independent coffee shops as well as increasing the reach of big brands. In order to reinforce their position in locations like China as well as breaking in to new territories, this kind of strategy could be just what Costa needs.

The extent of the benefits to both sides of the Costa Coffee acquisition will no doubt take years to be   fully appreciated. But in a rapidly evolving market, the actions of the big players make one thing clear: in order to win over both unchartered territory and long-established markets it seems that bolder is definitely better.

 

 

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