Shortly after Starbucks entered the UK market through the acquisition of Seattle Coffee Company back in 1998 it rapidly opened a raft of stores in London before it realised it might have been rather gung-ho with its property selection criteria and it retreated from some of those initial unsuitable and probably over-priced units.
From that point on the coffee chain market in the UK has pretty much been on fire and Starbucks has gone on to open around 1,000 further units alongside myriad other players in the market – from the big branded chains right down to the single-store independent operators.
During this rampant growth period many stories have been written about the froth finally blowing off the buoyant coffee shop market but they have all been absolutely wrong. However, things might now be changing. It’s not that the category is going to hit a brick wall. Far from it. Consider that the UK consumed a modest 3.3kg of coffee per capita in 2015 versus 12.2kg in Finland and 6.5kg in Germany, which I did not even recognise as a particularly big coffee drinking nation. This suggests more growth potential.
The change I believe is afoot is more about an industry that is growing up and where widespread consolidation will take place. This was set off by the Coca Cola acquisition of Costa earlier in the year and a new retreat by Starbucks from some of its sites in London. It has been reported that it has closed up to 35 units across the capital over the past 18 months. This led to the company putting aside £20 million for lease provisions in the UK.
Below these massive chains there is plenty of other activity taking place and arguably the most informative was the sale of a 70% stake in the 90-plus strong Coffee#1 chain by SA Brain brewery to Caffè Nero. The company had built up the business to be a pretty powerful operator but to move it onto the next stage of its development Brain’s management felt it could be done most effectively by specialist Caffè Nero.
A similar scenario is being played out across the UK for many sub-scale chains (below 20-25 sites) that are finding it tough in a very competitive market to reach a size whereby the economies of scale from centralised sourcing, processes and functions really kick-in. It has been hard for those operators looking to grow and to raise the necessary funding to take them onto the next level.
It is interesting to note that only £11 million has been raised via crowdfunding for 28 different coffee chain campaigns (half of which went to Grind) compared with £72 million across 61 campaigns for breweries (half going to Brewdog), according to Sapient Corporate Finance.
Against this backdrop there is undoubted strain in the market for those businesses that cannot raise the necessary money and build-out their growth strategies. This has led to an increased amount of corporate activity in the sector. This has included Taylor Street Baristas appointing administrators to support its restructure – which might involve the sale of its coffee wholesale business – after it sold eight cafes to Black Sheep Coffee, which has plans to hit 70 units by the end of the year.
The most active player in the market is the well-funded Coffeesmiths Collective that has built up a powerful team of executives with the objective of acquiring stressed, branded coffee chains. It is certainly finding fertile ground in the UK as it adds to its earlier Baker & Spice and Nordic Bakery acquisitions that complement its flagship brand Department of Coffee and Social Affairs. Over recent weeks it has bought two Spring Espresso sites in Yorkshire, 10 Filmore & Union outlets in a pre-pack administration, and four CoffeeWorks Project cafes out of administration.
With over 7,000 independent coffee shops in the UK, according to Allegra, and most of them sub-scale it is fair to say that Coffeesmiths Collective, and other opportunistic players like it, will find many more rich pickings in the marketplace as it benefits from a coffee shop sector that is suffering from some of the inevitable pains of growing up and maturing.
Glynn Davis, editor of Retail Insider
This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.