Coffee shop market still wide awake and hyper-active

A few years back there were many detractors of the rapidly expanding coffee shop market who were continually forcasting the "froth to be blown off the coffee market".

Coffee shop market: comfortable with its level of froth.

But it never really happened and such is the acceptance of the ongoing high growth rates of this category that today nobody seems willing to risk calling the top anymore - maybe for fear of getting froth all over their faces.

The big chains Costa, Caffe Nero and Starbucks continue to grow at frenzied rates and are increasingly joined by non-specialists wanting to get in on this high-margin part of the leisure and hospitality market. Among the biggest to have joined them in recent times are McDonald's and JD Wetherspoon.

If you are among the rare few, who are still unconvinced of the ongoing growth in the coffee market, then just take a look at the Whitbread-owned Costa chain. It is now the biggest UK coffee shop operator with 1,175 branches and has enjoyed an incredible 35 consecutive quarters of like-for-like growth.

Costa served everywhere.

There can't be many other retail categories that could sustain such growth from the largest player in the market. It certainly validates the strategy of Whitbread's management to largely jettison its long-standing pubs and brewing businesses some years back.

And the forecasts over the next few years look equally buoyant, according to the key research house in this part of the market Allegra Strategies, whose 'Project Cafe 10' report calculates the sector will go from a current 14,000 outlets to 16,700 by August 2013. This follows on from the 800 units that were added in 2010.


Growth rates the rest of the retail industry would probably kill for. [Source: Caterer & Hotelkeeper]


This rapid growth is set against a back drop on the high street of increasing under-performance by many retailers. Just compare the 2.5% growth seen in the broad UK retail market during 2010 with the enormous 12% enjoyed by the coffee shop market.

And the way things are going so far in 2011 it could be that the growth disparity between general retailers on the high street and their coffee shop counterparts becomes even wider. Coffee shops really are one of the very few bright spots on the increasingly troubled British high street.

Retail property market further polarises

Now we all know that Rotherham is no London. But the difference in the vacancy rates of shops at these two locations could not be more stark.

Rotherham: UK towns become ghost towns.

The recent National Retail Barometer from Colliers International shows vacancy rates in the centre of Rotherham are running at almost 30% whereas on London's prime shopping thoroughfare, Oxford Street, the rate is a little over 1%.

The news from O2 that it is closing 40 of its 493 stores (reported on Retail Week) did not come with any specifics about which stores will get the chop but it's more than likely they will be in Rotherham rather than London - even though the company probably has a dozen shops on Oxford Street alone.

Heading for the chop?

This highlights the growing polarisation around the UK between the haves and have-nots (in Rotherham you can have loads of shops, Mr Retailer, but you haven't a hope of finding anything in the capital).

Large units in prime locations are still very much in demand and it is the appetite for this specification that has been the main driver behind the first UK-wide fall in vacancy rates for four years. The proportion of vacant retail floorspace fell in October to 10% from 11.4% in April.

Although this is a major improvement, just compare it with the paltry 6.4% of voids around in October 2006, which shows just how far things have deteriorated in the UK's city and town centres.

And there's plenty more where this came from.

But while this represents good news, the reality is that we are in a new polarised shopping world. Whereas the proportion of vacant space along primary shopping frontages is now only 5.2% (below the long-term high street void rate) the void shop units in secondary locations now account for three-quarters of all empty units.This is up from 69% only 12 months ago.

The primary shopping space undoubtedly benefits from having more larger shops that are now the unit of choice for expanding retailers - notably the multiples. In contrast, trying to fill a small unit in the middle of nowheres-ville is becoming a real tough one for landlords.

A quiet day on London's Oxford Street.

Just consider that the UK void rate continues to run at more than three times the rate for central London. And the gap between these two has grown by 500% over the past four years.

So polarised has it become that while property in prime shopping locations is snapped up relatively quickly - when it becomes available - the Colliers research shows the average length of vacancy continues to rise. The percentage of vacant units unoccupied for 12 months or more has increased from 55.7% in April to 59.3% in October. It was a mere 37.8% in October 2008.

What has not helped secondary shopping locations is the recognition by the big multiple retailers that they can operate from fewer, higher quality locations. Research from CB Richard Ellis in 2009 found retailers are able to access 50% of the population of the UK with only 90 shops, compared with 200 in the 1970s. (I wonder if this means they can access 100% of shoppers with 180 stores!)

Is it any wonder therefore that pop-up (or more apppropriately named - very short-term lease) shops are becoming a feature of the British high street as landlords outside the prime areas are keen to avoid operating in ghost-towns.

Customer loyalty finally arrives at restaurants

Customer loyalty solutions have been used to great effect within the retail sector for many years and even its most vocal opponents have ultimately succumbed to recognising that points and prizes means regular shoppers.

Brucie would have recognised what points mean.

Asda in particular has long rubbished loyalty programmes, instead preferring to focus on its Every Day Low Prices strategy. But it has started to change its thinking, having recognised this as being a deeply flawed strategy.

It had effectively excluded itself from collecting knowledge and insights into its customers' shopping habits (the key reason retailers should have loyalty programmes). But it has seen the light over the past year and has started to use vouchers.

What has been surprising is that the restaurant sector remains in the darkness. It has almost universally ignored any form of loyalty programme (beyond coffee shops having cards that are stamped when customers buy a drink).

It's not exactly the most advanced loyalty programme.

What has made this scenario even more difficult to understand is that restaurants have failed to implement such solutions at a time when they have been dishing out millions of pointless money-off vouchers. Restaurants haven't had a clue who has been using these vouchers and what their purchasing preferences have been.

This is a shocking state of affairs and it beggars belief that it has gone on for so long. At least the likes of Pizza Express has been investigating loyalty programmes and the capture of customer data.

Pizza Express: better than most, but not that good.

But when Retailinsider.com spoke to the company's management last year, this reasonably savvy company seemed almost embarassed by the lack of sophistication in the way it collects customer data. Don't ask me how useless the worst offenders are at giving vouchers out to all and sundry and not closing the redemption loop.

However, things may be starting to change if news from the US is anything to go by as the pioneer in loyalty programmes UK-based Dunnhumby (that handles the successful Tesco Clubcard scheme) has just signed a three-year deal to supply insight and customer behaviour information to leading casual dining restaurant group Ruby Tuesday, which operates almost 700 outlets.

Hello Ruby Tuesday - to loyalty programmes.

If this means the restaurant industry is now going to take loyalty solutions much more seriously then it can only be good news for both the sector and the dining public. Consumers will be rewarded for their loyalty to specific restaurants and will no longer be indiscriminately targeted with irrelevant, money-off vouchers. And restaurants will stop giving away margin to promiscuous deal-chasing consumers.

Latest retail fashion accessory - the international CEO

With the world's developed markets universally on the skids there has been much talk among retailers of expanding into new growth markets.

Retail growth in the developed world.

Some have done so while others have been all mouth and little action. But what is interesting is just how many large retailers now have internationally experienced executives in the driving seat.

In the US, Wal-Mart has Mike Duke who was previously the head of its international business and is intent on boosting the retailer's exposure to overseas markets.

At home in the UK it is the same story at Tesco where in-coming CEO Philip Clarke has been running the group's overseas business for some years.

Philip Clarke: expansion overseas, just like that.

Among the other large retailers Morrisons has Dalton Philips as its new-ish CEO who cut his teeth in Canada working for Loblaw. And at Marks & Spencer we have Marc Bolland who before his stint at Morrisons gained great international experience at Heineken where he worked in various countries.

He has also recently stated his intention to take M&S back overseas with India and China under serious consideration. But even if retailers have no intention (at the moment) of venturing overseas it looks to be the height of fashion for a merchant of substance to have a globe-trotting CEO at the helm.

Next big food frontier - garden centres

Ever since Tesco surprisingly bought garden centre chain Dobbies way back in 2007 for £155.6 million it has kept rather quiet about the activities at its unlikely off-shoot.

Tesco: keeps quiet about this one.

One thing Retailinsider.com did predict (rather predictably) before the deal was completed was that an increase would be seen in the level of food sales at the centres as Tesco would undoubtedly ship in rows of jams, chutneys and other long shelf-life foodstuffs.

What has been surprising is that it is the cafe/restaurants in these outlets that have really been on fire since its acquisition. Retailinsider.com has been informed that although the cafe areas account for only around 10% of the trading space, and that they only cater for lunches and afternoon snacks, they are delivering circa 25% of sales at the centres.

This is illuminating as it shows the power of garden centres to attract grey haired and green fingered leisure consumers who wander around, looks at a few plants, and then retire to the cafe to splash out on cakes and pots of tea.

Forget the plants, where's the tea and cakes.

Dealing with such shoppers in what is effectively a leisure environment must be pretty alien to Tesco. It's over-riding objective at its supermarkets is to process people as quickly as possible and get them out of the door without any fuss and with a lot less in their wallets. No doubt, in its mind, browsing is for the wimps of the retail sector such as the specialists.

Although many of its stores have cafes I'm not sure Tesco (along with the other major supermarket operators) have ever really gotten their heads around this part of their businesses.

I've always felt they could utilise the space much better - to maybe highlight their food propositions and use the area to host promotions and free tastings. Their efforts at cafes have frequently felt rather half-hearted.

That's more like it, here's the food.

But with trading space at such a premium the major grocers should finally bite the bullet and either sweat their cafe space more aggressively or use it for something more productive - like non-food.

Maybe when Tesco gets some experts in from the hospitality industry to advise it on how to better handle and develop the cafes at its Dobbies stores it will then apply this knowledge to the in-store cafes at its supermarkets.

Feeding people out-of-the-home in cafes can be a rather profitable business, even if they have garden centres and supermarkets attached.