Demonstrate profitability

The phenomenal growth of the branded coffee shop has been driven by expansion with the present market leader, Starbucks, yet to show a profit (due to this expansion policy) despite its operation of 375 outlets throughout the UK. The market in 2002 had seen a two and half times increase in size on the 1997 levels, and turnover will have more than doubled at 1997 prices. The branded coffee shop market has seen average growth of around 20% a year over this period.

Despite the difficult trading conditions faced in 2001, due to a fall in tourism caused by both the foot and mouth outbreak and the aftermath of 11 September, the market saw a rise of 16%, to almost i?? 300 million. Although the nation’s economic future is difficult to predict, conditions are likely to be at least marginally better than those faced over the last two years especially given the conclusion of the Iraq conflict. It is estimated that an increase of around 20% should be seen this year, largely as a result of continued outlet expansion.

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Many of the brands are also seeking to strengthen and consolidate their market position by such measures as improving their food offering, which will help to increase the spend per customer (a crucial indicator of success in the industry). In addition, there have been moves towards rationalisation and disposal of underperforming stores as the chains come under increasing pressure from competitors and the markets to demonstrate profitability.

These measures should ultimately drive increases in turnover and improved profits. As shown in figure 1 above, the market is dominated by single-site and owner-managed stores as well as 15 branded chains. Recent trends in the market, have seen brands such as Aroma disappear and the branded chains acquiring more of the independents. Five branded chains currently account for 16% of the market, while the remaining other smaller branded chains have a 4% share.

Nearly all of these companies are seeking to expand their estates over the coming years and it is likely that the number of single site and independent stores will fall as the branded stores increase in number. Allegra Strategies has forecasted the branded coffee bar market to number 2,690 units by December 2005 which would mean the branded chains would represent 36. 56% of the overall coffee shop market. The London market will serve as an early signaller of national trends given that it has been the hub of activity for the branded chains.

Competition has been intense in London with some of the smaller chains, such as Madisons, which do not have the backing of a large parent, being forced to pull out. Branded sites will often take-over existing sites and this may explain why although the number of branded coffee shops are expected to grow at a tremendous rate, the overall coffee shop numbers will increase much more slowly. This enthusiasm for acquiring sites which have previously operated as coffee shops arises from the fact that these sites already have the necessary planning licences and, often, a proven clientele.

The practice of clustering where several branded stores open in one area, can also force local independents to close as they will not have the funds to sustain their activities during periods of underperformance. It will be useful at this point to look at the top five brands in the UK in order to understand the competitive position a little better. The table below illustrates the growth in the number of outlets of the top five branded chains, between January 2001 and 2003.

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