The UK branded coffee bar industry

This report will be seeking to analyse trends in the UK branded coffee bar industry. It was estimated that the total coffee shop market numbered 7,603 outlets as at May 2003 and this growth is expected to continue at a compound rate of 5. 1% between 2003 and December 2005.

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Much of this growth has been as a result of the development of the branded coffee bar which has seen phenomenal growth since the early 1990s and this seems to have continued unabated into 2003, despite accusations that the market is already saturated and in contrast to the views of many including Bobby Hashemi, of Coffee Republic, who is known to have said that ‘the UK coffee market was sustainable to only 1500 outlets’. Nonetheless the UK branded coffee bar market is still expanding after 7 consecutive years of growth.

The market is forecast to grow by 9. 5% per annum to reach 2,690 units by December 2005. Market turnover is forecast to exceed i?? 1 billion in 2005 as the reach of ‘coffee culture’ grows. This growth is driven by consumer demand and lifestyle factors as leading branded operators such as Starbucks, Costa Coffee and Caffi?? Nero continue to expand across the UK with an increasing focus outside London. This review of the industry will analyse trends in the branded coffee bar industry and look at the changes undergoing the sector.

This should serve to illustrate whether growth of the industry is sustainable or whether there is overcapacity in the market with the consequent need for consolidation and restructuring of the coffee market. Definition of Industry Before we can proceed further it is essential that we define the exact nature of the industry we are looking at. It is very easy to get confused given the diverse range of facilities offering coffee for sale. It has been decided to utilise the economist’s notion of an industry as the group of firms producing the same or similar products (i.

e. products that are close substitutes for each other). (Johnson and Scholes, 1999). Thus this report will be restricted to those establishments where coffee is the primary sales item and for the most part these are based on the European and US coffee shop models (Mintel, 2003) typified by the market leaders such as Costa Coffee which has been recently criticised as “too much of the Starbucks ‘me-too’ concept’ (Starbucks being a leading US brand) whereas Cafi??

Nero has sought to transplant ‘more of the Italian experience’. These establishments specialise in selling gourmet or espresso-based coffee, offering a diverse range and variety of coffee such as cappuccino, latte, mocha and so forth alongside other items such as pastries, tea and coffee beans which are usually on sale as add-ons to the main product line. It must however be noted that the food offer is generally very limited.

The branded coffee shop includes venues such as individual stores, kiosks and concessions offered in a variety of locations including motorway service areas, bookshops and train stations. However an essential requirement to fall into our definition is that they be independent of the facility they are located in. The report will disregard the multitude of other establishments that sell coffee, such as restaurants, in-store cafes, teashops or traditional cafes as well as sandwich shops such as Pret A Manger and Subway.

Framework for report Now that a definition of the industry has been provided it is possible to proceed and carry out an in-depth examination into the branded coffee shop industry. Michael Porter’s five forces framework will be adopted in order to help identify the sources of competition within the industry. The five forces framework seeks to explain the competitive forces by looking at five separate though not wholly independent facets of competition.

These may be defined as threat of new entrants, intensity of rivalry among competitors, threat of substitutes, bargaining power of suppliers and bargaining power of customers. Intensity of Rivalry among the Industry Competitors The coffee shop market is characterised by a great deal of fragmentation, with the largest percentage of outlets being owned by individuals or small companies. This has the resulting effect that the total market value is difficult to calculate, although it was estimated to be in the region of i?? 1. 5 billion during 2002 (Mintel, 2003).