CASE STUDIES

Costa Coffee case study

Retaining brand leadership in coffee shops
Reference Code: CSCM0192 Publication Date: August 2008

DATAMONITOR VIEW CATALYST

Costa Coffee has surpassed Starbucks as the leading coffee chain in the UK. This case study looks at how the company plans to grow further in both the UK and abroad, despite the threat of economic slowdown, by focusing on creating an authentic coffee experience and an ethical business structure.

SUMMARY
Costa Coffee is the UK's largest coffee chain and has an aggressive expansion strategy. The company plans to double its UK outlets by 2013, focusing on growth in non-conventional locations such as airports. It also aims to enhance its global business by focusing on under-represented markets with growing economies, such as China, India and Russia. Costa Coffee markets its authenticity as being a key differentiator between itself and its rivals. The company has used the same slow roasting technique and coffee blend since its establishment in the 1970s, and instills its staff with its in-house style of brewing by training them at a special academy. As authenticity is a strong consumer trend, the company has focused on an area that consumers are increasingly demanding. Costa Coffee also focuses on marketing its ethical credentials, an area increasingly important to consumers. The company is to become to first major UK coffee chain to source all of its coffee through Rainforest Alliancecertified farms, and also operates a coffee foundation to help under-privileged coffee communities. These could aid customer loyalty to the brand. Costa Coffee is confident that it can survive the credit crunch by focusing on its core attributes, particularly, retaining an enjoyable coffee experience at its outlets. This could help to ensure that consumers remain willing to pay for their daily coffee fix at its outlets in the future.

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ANALYSIS Costa Coffee has overtaken Starbucks as the leading coffee chain in the UK
The company has reported strong sales due to aggressive expansion
Costa Coffee was founded in the UK by Italian brothers Sergio and Bruno Costa in 1971. Now owned by Whitbread, which bought the company in 1995, the chain currently encompasses 750 stores in the UK and over 300 internationally, in 22 countries. The company reported strong sales for the last fiscal year, with turnover up 23.5% to reach 216.3 million ($431.8 million) for the 12 months ending February 2008, aided by its new store openings during the period, which included over 140 in the UK alone. Even when these new stores are not considered, company growth was significant, with like-for-like sales up 6.5% during the period. Nonetheless, aggressive expansion has no doubt aided growth, helping Costa to achieve healthy results for the year.

Costa now has more UK stores than Starbucks

Aggressive expansion has allowed Costa to surpass its long-term rival Starbucks in terms of store numbers. Costa Coffee has overtaken Starbucks as the leading coffee retailer in the UK, with around 100 extra stores in the country than Starbucks. The latter had been the UK market leader for a number of years previously, supplanting Costa in around 2003 in the leadership position.

Costa aims to double store numbers by 2013

Whitbread plans to expand the Costa chain to 2,000 stores worldwide over the next five years, doubling its current size. The expansion plans are a result of Whitbread's strong performance over the past year. Alan Parker, chief executive of Whitbread, commented: "We have researched the opportunities for disciplined growth across the group and have established two longer-term ambitions - in the next five years to increase the size of Premier Inn by 50% to 55,000 rooms and to double Costa to 2,000 stores. Whitbread is well placed for the future" (Whitbread press release, 2008). This will enable Costa to compete strongly against its main UK rival Starbucks, helping it to retain its leadership position in the UK and strengthening its global position.

Costa is to boost its UK growth through tie-ins with retailers and grocery stores
UK high streets are awash with coffee shops, consisting mainly of the big three: Costa Coffee, along with its main rivals Starbucks and Caf Nero. Therefore, in order to help it continue to generate growth in the UK, Costa Coffee is looking to

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expand out of the conventional high street coffee chain format, and develop more store concessions that are attached to bookshops, newsagents and grocery stores, and which are located in train stations and airports. The latter two especially could enhance growth, as they are located in areas of high consumer traffic where there is less competition than in city centers.

Figure 1:

Whitbread is to double Costa store numbers over the next five years

Source: Datamonitor

DATAMONITOR

The company is planning an aggressive global expansion strategy, focused on underrepresented countries
Although Costa has more UK stores than Starbucks, it is a lot smaller than its rival on a global scale (Costa has 1,000 outlets in total, while Starbucks has over 15,000). Costa is aiming to enhance its global numbers over the coming years by focusing on underrepresented coffee shop markets that have growing economies, such as China and India, as well as Russia. This will help to lift its global store number closer to that of Starbucks.

Costa plans to open hundreds of stores in China's main cities over the next five years, to capitalize on its growing economy
Costa entered the Chinese market in 2006 in a joint venture with Yuenda and, in a short space of time, China has become its second largest market. The company plans to open 300 outlets in Shanghai over the next five years, and 300 in Beijing, capitalizing on the country's growing economy, large population and relatively small number of existing Western style coffee shops. The Olympics in summer 2008 should also help to boost the brand's performance in China, as Westerners seek a familiar coffee shop to go to in the country. At the time of Costa's entry into the Chinese market, Alan Parker said: "China is a very attractive market, making this a major deal for Costa. There is an established coffee culture and increasing interest in drinking coffee out of the home so there is consumer demand for the product" (Whitbread press release, 2006).

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The company is expanding its India-located stores, aiming to make the country its third largest in terms of store numbers
Shortly before entering China, Costa entered the Indian market, which is on track to becoming its third biggest market. The company formed a joint venture with master franchisee Devyani International in September 2005 and had opened 36 outlets in India by the end of 2007. Costa aims to double that number by December 2008, focusing on high street locations, IT parks and malls, as well as metro and railway stations and airports which have high footfalls. While store numbers in India are currently at modest levels, the company said that rapid expansion over the next five years will facilitate India becoming its third largest market. What has hindered growth in the past is what Costa Coffee's managing director, John Derkach, calls the nation's "aggressive pricing environment". In an interview recorded in the India Times, Mr Derkach noted the pressures of this market: "To give you an idea how aggressive the pricing in Indian market is, sample this: in the UK, we sell a cup of coffee for 2, whereas in India market we sell that for just half a pound (INR49). In the Middle East, we sell it for around INR145, in China for INR150 and even in Pakistan for INR100. So a cup of Costas coffee is cheapest in India. We have realized that even such low prices are economically sustainable, provided we get the volumes" (India Times, 2008). Costa is, therefore, banking on high footfall to make its India business profitable.

The company has also targeted Russia for growth, aiming to benefit from its rising middle income groups
Another country in which Costa is keen to expand is Russia, due to the growing economy in the country. In 2007, the company signed a partnership deal with OJSC Rosinter Restaurants, reportedly Russia's leading casual dining operator, to build the coffee business in this country, focusing at first on Moscow and St Petersburg. Costa plans to open 200 outlets in Russia over the next five years, spanning out from the main economic centers to Ukraine and Belarus at future dates. John Derkach, managing director of Costa, noted: "Costas arrival in Russia is another milestone on our journey to become a global coffee brand" (Whitbread press release, 2008). Costa believes that Russia is an attractive market for the company, noting in a press release that over 50% of the 11 million people in Moscow visit coffee shops regularly and that there is currently only one other international coffee brand established in Russia (Starbucks also opened in Russia in 2007). In addition, Costa notes that there is a wealthy demographic of young Russians whose average income is growing by 16% per annum, and that increasingly, they are spending a higher proportion of their disposable income in coffee shops. Costa says that it plans to introduce a range of cakes in its Russian stores that are designed to appeal to Russian tastes. In addition, it is reportedly working towards introducing a selection of coffee with alcohol to the market. These additions could help to entice Russian customers to its outlets.

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Costa Coffee aims to create an atmospheric coffee experience using knowledgeable staff and quality coffee
Costa trains its coffee roasters at a special academy, highlighting its aims to create a premium coffee drinking experience
Costa Coffee highlights staff training as a key point of difference from its competitors, with every in-store barista spending time at the Costa Coffee Academy in Lambeth. Here, baristas learn what Costa terms the four 'M's: Miscela (blend, referring to Costa's coffee blend, Mocha Italia); Macinatura (grind, showing how to get the right consistency to ensure the best aroma and flavors); Macchina (machine, using Costa's Italian designed espresso machines), and Mano (hand, the skill of the barista). By concentrating on training staff to its in-house standards, the company emphasizes its aim of creating a premium coffee drinking experience.

The company markets its traditional roasting methods as a key point of difference
Costa believes that its adherence to traditional roasting methods allows it to stand out from its competitors and is a key reason for its success. The company's special coffee blend and slow-roasting methods date back to its founding in London in 1971 by two Italian brothers, Sergio and Bruno Costa. Originally, the company was a coffee wholesaler, but it branched out into coffee shops in 1978. Since Costa's founding, its coffee has been roasted in small batches, using a traditional Italian drum roaster and a special coffee blend that combines seven different beans. The slow roasting method roasts the beans slowly at reduced temperatures, which is designed to give a fuller, less bitter flavor. This provides the company with the ability to market its products' authenticity, a topic which is on-trend with consumer preferences.

Authenticity is a key consumer trend

Being able to perceive products as 'the real thing' or 'genuine' is increasingly important to consumers, who more often than not view mass-market food, drinks and personal care products, typically purchased in chain retailers, as bland and lacking hedonistic benefits. Costa therefore capitalizes on these perceptions by marketing the traditional aspects of its coffee stores. Figure 2 summarizes the social and consumer dynamics driving the authenticity trend.

By sponsoring a book award, the brand links up with a cultural pursuit that could enhance its premium image
In 2006, Costa Coffee took over the Whitbread Book Awards after Whitbread ended its 34-year association with the annual literary prize. Whitbread, which is Costa's owner, said that it was ending its direct sponsorship of the award because its brand is no longer sold directly to customers. Instead, Costa Coffee agreed to take on the sponsorship to strengthen its tieup with Ottaker's and Waterstone's (now the same company), which had seen the brand opening coffee shops within these book store chains.

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John Derkach, Costa's managing director, commented that the sponsorship would strengthen its link with the book world: "This is the perfect match for the Costa brand as there is a very natural association between books and reading and the UK's growing coffee culture. We have always offered readers the chance to take time out to enjoy both these pleasures in our stores, many of which are located in bookshops" (Costa press release, 2006). The sponsorship could enhance the company's premium image by tying it to a cultural pursuit which is held in high regard by many. It could also encourage more people to visit Costa outlets on their own, highlighting that it is a natural fit to read books in a coffee shop environment.

Figure 2:

The authenticity trend is built on various concepts that reflect consumers active pursuit of

higher quality experiences

Source: Datamonitor's New Developments in Global Consumer Trends report (DMCM2468)

DATAMONITOR

The company has addressed ethical consumer concerns through new coffee sources and a coffee foundation
Costa is set to become the first major coffee chain to source its coffee through the Rainforest Alliance
Costa Coffee announced a major shake-up of its coffee sourcing in April 2008, stating that it plans to source its entire coffee from Rainforest Alliance-certified farms by 2010. To start with, Costa plans to have 30% of its coffee certified by the Rainforest Alliance by September 2008. By doing so, the company will be the first major UK coffee retailer to switch to the Rainforest Alliance for its entire coffee supply. This could enhance Costa's image and appeal to the increasing number of consumers who are attempting to purchase more ethical goods. In order to comply with Rainforest Alliance standards, farms must: reduce pesticide use; improve worker safety;

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ensure workers have decent housing and access to clean water; access to education and medical care for workers and their families; wildlife, water, forests and soils must also be protected.

Costa follows other major UK companies in sourcing from Rainforest Alliance-certified farms, including PG Tips tea, Good Natured fruit juice and Lavazza's Tierra coffee. Costa's marketing director, David Hutchinson, said: "Costa is at the beginning of a journey towards greater sustainability in its business. We know it will take time to convert our supply base to certified sustainable sources but we believe it's an investment that is right for our business, right for the coffee industry as a whole and we believe it's a journey our customers will want to be part of" (Rainforest Alliance website, 2008). In the first year of this initiative, the company will source around 1,000 tons of green beans from Rainforest Alliancecertified farms in Colombia, Costa Rica, Brazil and Guatemala. Over a longer timeframe, it will also bring farms in Ethiopia, Kenya, Uganda and Vietnam into the certification program.

The Rainforest Alliance has been criticized for being an easier marker to achieve than Fairtrade
While consumers are encouraged to applaud the decision by Costa to source its coffee via Rainforest Alliance-certified farms, there have been criticisms that the alliance is a less stringent version of the Fairtrade foundation, and a certification that is easier to achieve. Unlike Fairtrade farmers, the Rainforest Alliance offers no minimum or guaranteed price for coffee. The scheme instead enables compliant farms to negotiate better prices in the marketplace. Also, while Fairtrade certification guarantees that 100% of the product's ingredients comply with Fairtrade regulations, the Rainforest Alliance allows products to bear the seal if a minimum of 30% of the contents have been certified. This, along with the fact that there is no license fee for using the Rainforest Alliance logo (unlike the Fairtrade logo), makes it potentially easier, and cheaper, for companies to get Rainforest Alliance certification. Nonetheless, Rainforest Alliance has the support of consumer groups such as Consumer Reports' GreenerChoices.org, which commented that Rainforest Alliance labeling is "clear and meaningful in support of sustainable agriculture, social responsibility and integrated pest management". In addition, Ethical Corporation calls Rainforest Alliance certification "rigorous". Costa says that it will continue to offer Fairtrade coffee alongside its Rainforest Alliance coffee when the switchover is made, so that consumers can make up their own mind as to which Costa coffee they prefer.

The company has set up a foundation to help coffee communities

As well as Rainforest Alliance-certified coffee, Costa has shown its strong ethical credentials through its Costa Foundation. Established in 2006, Costa said that the foundation allows it to: "give something back to the communities within the countries from which we source our coffee beans". The foundation primarily aims to improve the social and economic

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welfare within these communities and, in 200708, included building, improving and maintaining schools within four coffeegrowing communities in Colombia, Ethiopia and Uganda. The foundation allows Costa to highlight its ethical awareness to its customers, who could be persuaded to become loyal purchasers based on the company's ethical credentials.

Costa's ethical work is to be highlighted in a new marketing campaign created by Grayling

In 2008, Costa recruited marketers Grayling to promote its brand, with a particular focus on highlighting its ethical work; an area that Costa's marketing had not previously focused on. By highlighting its foundation work as well as its Rainforest Alliance allegiances, the company can promote its stronger ethical focus than rival Starbucks, which does not source its coffee from the Rainforest Alliance, and has only a select range of Fairtrade coffees. It also shows the greater priority that Costa now places on its ethical work as a means of attracting more loyal consumers to the chain.

The company is confident that the global economic slowdown will not hinder its growth
Coffee shop coffee could be a luxury easily given up at a time of consumer downturn
Despite Costa's current strong business, there remains a dark shadow on the horizon. The global credit crunch that has been emerging over the last year could hinder coffee shop businesses across the world, as consumers give up their daily coffee fixes to save money for more essential food and drink purchases. The financial website moneysupermarket.com, for example, advises people to cut back on coffee shop coffee to save money: "The chances are, you could make significant savings just by changing your spending habits slightly - foregoing the morning coffee on the way to work, and taking a packed lunch rather than buying a sandwich could save around 100 a month, for example" (moneysupermarket.com, April 2008). This could impact coffee sales at coffee shops such as Costa in the future, as consumers become stricter about their outgoings.

Costa rival Starbucks has announced store cuts and slower growth to deal with the recession
One of Costa's main rivals has already been impacted by the credit crunch. Starbucks announced the closure of 600 US stores in July 2008, which it planned to close over the following 12 months, causing the loss of 12,000 jobs. It also intends to open 200 US outlets in 2009, which is fewer than it originally anticipated and 50 less than the initial target set for 2008. Starbucks has been blamed in part for causing its own fall by expanding too quickly and placing many stores too close to each other, which could mean that other coffee chains are better equipped to deal with a slowdown. Furthermore, while this slowdown is currently affecting Starbucks' US business, UK coffee chains may not be immune from closures in future if the credit crunch worsens.

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Costa says that it plans to avoid slower growth by ensuring its coffee shops continue to offer an inviting experience
Costa Coffee's managing director, John Derkach, believes that the company can overcome the economic crisis and will not have to resort to store closures like Starbucks. The Sunday Times reported Mr Derkach as stating his belief that the under2 price tag for coffee is an everyday luxury that consumers can afford to keep: "We are very aware of the economic situation. I would say that what we are talking about, though, is 2.25 for a cappuccino and for an espresso, less than 2. It's important to register that. I'm not saying that's an insignificant amount of money, by any means, but to a lot of customers it's incidental. A nice cup of coffee is a treat, but it's a treat that costs 2. On average, people spend about 25 minutes in one of our stores. I think we deliver astounding value for 2.25." He also noted how important it is for the company to create an enjoyable environment for consumers in order to encourage loyalty. "I can't control the economy, but I can control what we do. We have to make the experience as good as we can and we will take our chances along with everybody else" (The Sunday Times, 2008). This is an important factor, as not only do coffee shops attract consumers with premium coffee, they also offer the "third place" between work and home. The coffee shops that emerge unscathed from the credit crunch could therefore be the ones than offer the most inviting experience for consumers, as people look to retain more affordable and pleasurable everyday luxuries in their lives.

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APPENDIX Case study series

This report forms part of Datamonitor's case studies series, which explores business practices across a variety of disciplines and business sectors. The series covers a range of markets including food and drink, retail, banking and insurance, pharmaceuticals and software. Each case study provides a concise evaluation of a company that stands out in some area of its strategic operations, highlighting the ways in which the company has become one of the best in its field or how it deals with different problems encountered within that sector.

Methodology
A variety of secondary research was carried out for this case study. This included researching the coffee market on Datamonitor's Interactive Consumer Database and the Productscan Online Database of new products, alongside an extensive review of secondary literature and other in-house sources of information.

Secondary sources
Our cup runneth over, says Costa; The Sunday Times (March 2008) Costa Coffee brews expansion plan in India; India Times (February 2008) Costa goes to Moscow in Whitbread venture; The Times (December 2007)

Further reading
Recessionary Consumers & Product Choice: Responding proactively to changing attitudes and behaviors in the current economic downturn (DMCM4622, June 2008) Consumer Hot And Soft Drink Preferences: New Trends & Future Perspectives (Datamonitor, DMCM4594, January 2008) New Developments in Global Consumer Trends (Datamonitor, DMCM2468, April 2007)

Ask the analyst

The Consumer Knowledge Center Writing team askcm@datamonitor.com

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Datamonitor consulting
We hope that the data and analysis in this brief will help you make informed and imaginative business decisions. If you have further requirements, Datamonitors consulting team may be able to help you. For more information about Datamonitors consulting capabilities, please contact us directly at consulting@datamonitor.com.

Disclaimer
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Datamonitor plc. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that Datamonitor delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such Datamonitor can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect.

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