STiR coffee and tea magazine

STiR coffee and tea 35 the "romance" of coffee in the US at a time when it was mediocre, to put things nicely. The brothers who founded Costa in the 1970s were consciously motivated by the poor quality of coffee in Lon- don and brought their family's long experience in Italy in coffee roasting. Both companies shared a specialty approach to coffee and were able to add scale without losing quality. The UK coffee market is highly segmented by age and the behaviors of each generation differ from patterns in other growth markets, especially in Asia. Generally, millennials globally dominate the major market shifts and older segments are less likely to change. For coffee, however, the oldest are the pace-setters and the youngest the naysayers: • Under 20s 0.5 cups/day • Millennials, 20-37 1.3 • Generation X, 38-52 2.1 • Baby Boomers, 53-72 2.2 • Elderly, older than 72 2.2 The younger age groups are far more respon- sive to the new tea market trends: green teas, "wellness" herbals, matcha, and botanicals. Much of the older segment demand underlies the decline of traditional teas and the erosion of the British pub as a social and community nexus. (75,000 in the 1970s, 47,000 today.) Coffee shops have filled an experience gap. Tea has always been very much an at-home drink in the UK. One commentary observes that in a medium-size town there will be multiple branches of Starbucks, Costa, and Caffèe Nero plus successful local independents and a growing number of regional chains. By contrast, there is not even one national tea chain. The growth in coffee demand has been very much driven by the new supply of outlets on the High Street, where shopper traffic is high and stopping off to enjoy a good coffee is part of rou- tine. (Railway and football stadium kiosks are mo- bile responses to the imperative of put the coffee where the people go.) If expansion is driven by shopping, so too may its erosion. In late 2017, just about all the press converge on Costa and the market in general was happy news about Growth! Growth! Growth! By mid-2018 coverage was full of questions: "Has growth peaked?" "Is this a plateau or a de- cline?" One characteristic of the new UK coffee shops is that they are relatively expensive – Brit- ain's import costs of coffee are among the world's highest. Specialty coffee is a "treat" for most con- sumers and one they enjoy but don't have to buy. They may stop buying. Brexit is hurting con- sumer confidence and incomes. Starbucks explic- itly blamed Brexit for its 60% drop in profits in 2016. The British are moving back home for their beverages and for alcohol. More and more shop- ping is online: 17% of total retail sales, the highest in Europe. (The US figure is 10%.) Costa: today, the UK, tomorrow China? Costa is now the world's second largest chain. That needs to be put in con- text. Its sales are $1.7 billion. Starbucks' are $22.4 billion from 28,218 loca- tions. Costa operates 2,422 UK stores and 7,000 "express" kiosks, at railway stations, stadiums, etc. Its plans center on international expansion, building on its presence in 31 countries, with 1,450 stores, this includes 459 in China. Costa stands out as well-positioned to continue its growth surge by target- ing international expansion and offset domestic slowdown. It was built up from a small family firm to national chain as part of Whitbread, the large UK brewer. Several dissident shareholders forced a demerger, on the grounds that Costa could grow faster and bigger as an independent firm. It certainly has access now to investment capital. China is both a major growth opportunity and challenge. Costa has not yet established a profitable position. Starbucks has 3,200 locations in China and opens ten stores weekly. Though Costa is under a tenth the size of Starbucks, which operates 13,930 US stores, it is significantly larger than many US players. Privately held JAB Holding, which owns majority shares of Peet's Coffee and Tea ($800 million), Caribou Coffee ($600 million), Intelligentsia Coffee & Tea and Stumptown Coffee, together generate approximately $2 billion in sales. Dunkin' Donuts operates 7,677 US locations with annual revenue of $900 million. Coffee Bean & Tea Leaf ($500 million) operates 1,200 stores (with plans to open 1,000 new US locations). The secular – long-term economic – trend for coffee in the UK seems very positive. The situational trend – who knows? Brexit is not good news. Brexit has driven import prices higher and created undertainty in the market Older drinkers consume two times more coffee than the young

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