Rise of the roasters: Coffee consumption

Claire Dodd

Claire Dodd

05 September 2016

While pubs close and beer consumption falls, the UK’s coffee consumption just keeps on rising. Claire Dodd meets the bars and pubs that are cashing in on the cappuccino craze to serve lattes alongside their lagers

If you're an on-trade outlet looking to compete with the continued rise of the coffee shops, the only way to beat them may be to join them. Seemingly recession-proof, coffee shops are the big success story of the high street in recent years, with major names such as Starbucks and Costa Coffee now dominating most UK town centres. And with a number beginning to trial alcohol sales, could it be time for the on-trade to play them at their own game?

Although pubs and bars have been upping their coffee offer for a while now – some becoming major players in the coffee market – just serving good brews may no longer be enough.

the coffee shop boom has been remarkably recession-resistant

Jonny Forsyth

With beer sales in decline, it's perhaps unsurprising that pubs and bars are looking for another revenue stream to bolster sales. Annual sales of beer in Britain declined by 1.5% in 2015, according to figures from the British Beer and Pub Association.

In comparison, the growth of coffee seems relentless. Data from research company M&C Allegra shows that as recently as 2005 there were just 1,600 coffee shops belonging to branded coffee chains in the UK. However, by 2015 the total number of coffee shops had shot up to 20,728, with 30,000 coffee outlets predicted by 2025. Mintel believes that coffee shop sales are set to reach a record high of £3bn in 2016.

Jonny Forsyth, global drinks analyst at Mintel, says, 'The nation's appetite for coffee shops shows no signs of abating. The coffee shop boom has been remarkably recession-resistant in the past decade, which illustrates just how important a part of UK culture the fresh, speciality coffee habit has become.'

Banking on caffeine
Which all looks in stark contrast to how pubs have fared. Estimates from CAMRA in February 2016 place the total number of pubs closing each week at 27. And there's a good chance a fair few of them have been converted into coffee shops. It’s no surprise then that the number of pub chains investing in stand-alone coffee concepts is on the up.

'I guess like many licensed hospitality businesses, we have observed the more moderate attitude to alcohol consumption in the UK,' says Bruce Newman, head of marketing for Welsh brewer and pub operator SA Brain.

In 2011, it acquired existing 15-strong coffee shop chain Coffee#1, but has considerably ramped up expansion in recent years, opening 12 stores last year. In November, it announced it had secured £85m funding to help accelerate the roll-out, alongside further investment in its pubs. With 66 stores today, it plans to open 15 more this financial year.

'Coffee was a market that we were already building expertise in through our pubs,' adds Newman. 'The next logical step to round out our business was to acquire a standalone business. We have a very different profile of guests using our coffee shops during the day, and using our pubs in the evening.'

Yet interestingly, while each Coffee#1 store usually takes between £8,000 and £10,000 a week, Newman says that its managed pubs actually remain a more profitable business for them.

But what about existing pubs? Is there a profit to be made from coffee? Where – depending on your landlord – beer typically offers a profit margin of 65-70% for tied tenants, coffee margins can be higher at around 80-85%. Brewer and pub owner Charles Wells has also just opened its first stand-alone coffee concept, The Pantry, housed in an outbuilding of its Cox’s Yard pub in Stratford-upon-Avon.

Craig Mayes, director of Apostrophe Pubs at Charles Wells, says, 'Our pubs open at 9am. And coffee is part of that 9am-12pm trading offer, as well as the 2.30pm-5pm slot for us. We put high-end coffee in to make sure we could fill those sessions, be it mums after the school run, or business meetings. They’ll only choose you if your coffee is consistently good. Ten years ago our coffee machine probably costs us £500. It now costs us anywhere between £6,000 and £10,000.

Punch intends to add a range of three or four different coffee machines and offers

'That’s basically led to what we’re doing at the site in Stratford. If it works, then yes, we’d like to have a few more.'

Getting the consumer’s attention
According to Mintel, 74% of Brits buy hot drinks out of home. That breaks down to 27% who use independent coffee shops or cafes, 27% who use fast-food chains, and finally, just 14% of consumers who choose to buy hot drinks from restaurants, pubs and hotels. The latter could be lagging behind because, quite simply, not enough outlets have taken coffee seriously. Filter coffee and mismatched mugs are not going to cut it.

But the opportunity is such that it prompted Punch Taverns to hold an internal coffee strategy day, inviting suppliers to advise where the market is heading. The result? Instead of offering 'coffee solutions' from just one supplier, Punch now intends to add a range of three or four different machines and offers, and work with licensees on selecting the right offer, backed up with thorough staff training.

Senior retail development manager Andrew Jobes says, 'The market is sophisticated, and with where it’s moving, we don’t currently have a solution available for all of our sites.

How do you make a success out of coffee?

Be unique
Jonny Forsyth, global drinks analyst at Mintel, says: 'Representing considerable competition to specialist coffee shop brands, independent stores are likely to grow significantly as coffee drinkers seek a more unique, artisanal, high-quality 'third wave' coffee experience.' Data published by the Caffè Culture Show, held in London in May, showed that out of the 1,600 consumers it surveyed, 63% prefer to buy their coffee from an independent operator.

Don't skimp on quality
The quality of coffee served is the biggest motivating factor in choosing which coffee shop to visit, according to 81% of consumers surveyed by the Caffè Culture Show. While 82.5% refuse to return if the quality is poor.

Be convenient
In a city-centre location? Close to the school run? Office workers nearby? Get the A-board out, and order the paper cups. When it comes to how consumers choose where to buy coffee, 44% said location was an important factor, while 37.6% said long waiting times would put them off returning.

Fit consumer lifestyles
Nearly a fifth of consumers use coffee shops to work from on laptops and other devices. One in seven hold work meetings there. As a result, 17.6% said Wi-Fi access is the most important factor when choosing a coffee shop, while 11.3% think coffee shops should provide more power sockets.

'Coffee operators have shown that people are out and about in the daytime. But we really need to start pushing forwards and giving pubs the ability to add to a good daytime business, rather than waiting to see where the market goes.

'Pubs need to convey that they’re doing [coffee] seriously to reach consumer groups that don’t traditionally use pubs.'

Where next?
Even drinks brands seem to want in on the action. Diageo is clearly taking note. Bulleit Bourbon partnered with coffee shop The Gentleman Baristas in April to produce barrel-aged coffee and whiskey cocktails for London Coffee Festival. While liqueur brand Baileys was at the show, too, to push a new seven-figure marketing campaign to drive 'mass' consumer- and outlet-awareness of coffee and Baileys pairings.

Following research which it says shows consumer demand for coffee with provenance is rising, Mitchells & Butlers has also begun trailing its own unique blend of coffee. Named 'Brood', it has been developed with coffee roaster Bewley's. The growing trend for roasteries could also see them become the new brew pubs as consumers continue to seek out unique experiences.

The Society of Independent Brewers (SIBA) has also spotted an affinity between coffee and craft beer. It's recently extended its Beerflex service, which supplies the UK’s biggest pub companies with 'independent' beer from SIBA breweries, to serve coffee shops too. The move follows research showing that consumers want coffee shops to sell craft beer alongside speciality brews.

But while rumours abound that the likes of Starbucks and Pret are gearing up to add alcohol to their sites, the truth is that such initiatives have so far only been rolled out to a very limited number of stores.

Coffee#1 has also trialled alcohol, but with 'modest' success. It says it will keep a close eye on how consumers choose to use coffee shops. Mintel says interest in craft beer at coffee shops stands at 12% on average and rises to 19% among men, while 10% of consumers are interested in seeing cocktails and 13% are interested in wine on coffee shop menus.

But with coffee shops and pub operators alike searching for the holy grail of all-day, all-night business, the number of chameleon businesses only looks set to rise.

Case studies: David v Goliath

The David: Grind & Co
Founded five years ago by David Abrahamovitch and business partner Kaz James, the Grind brand focuses on coffee, cocktails and good music. It raised £1.3m last year on Crowdcube, launched its own app, and opened its seventh site at London's Royal Exchange. It’s now set to open its own roastery.

Our bread and butter is coffee and Espresso Martinis

'We try to keep the brand interesting,' says Abrahamovitch. 'Every one of our sites is different. One has a recording studio, one has a wonderful restaurant, and one of them has a hidden cocktail bar. Hopefully we keep surprising people.

'We do look at coffee trends around the world, such as nitro and cold brew. But the bread and butter of what we do is sell tons of coffee and tons of Espresso Martinis. We sell
roughly the same amount of cocktails as coffee now. It's an equally important part of our business. I think that's because we found out everything there was to know about [cocktails], and went for the ultimate execution.

'I think people who are trying to rapidly add coffee to multiple venues in the on-trade will find that there's quite a lot more to it than they imagined. We're now doing 25,000 coffees a week across our sites, and each one has to be consistently good. That takes good staff, good equipment and a good product.'

The Goliath: JD Wetherspoon
When JD Wetherspoon added a breakfast offer in 2010, it significantly beefed up its coffee offer. Today it sells more than 50 million cups a year, and has just launched a take-out offer.

'Coffee is an absolute bonus for a pub company,' says Wetherspoon spokesman Eddie Gershon. 'Looking back to when we first started serving coffee in pubs, if someone had said a pub chain would sell nearly a million cups a week, people would have laughed at you. That’s around 2% of our business.

'Roughly 99% of our pubs are in town or city centres. So, if you can go and get a decent cup of take-out coffee at speed for 99p, that seems to make sense for both us and customers. People walking down the street with a branded cup doesn’t do any harm. We think we'll be competing with the major coffee players.

Wetherspoon has always been a pub company. But pubs change

'Setting it up has taken thought. That's why we are only offering filter coffee to take out. You don't want someone queuing for coffee and not serving someone who is ordering a meal or a beer. Wetherspoon has always, always been a pub company, and beer and the like will always be at the forefront. But pubs change.'


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