Bean Counting: How to Operate in the Out-Of-Home Coffee Market

Thursday, December 1, 2016

Take a walk down any high street in the UK and you’ll see the same thing: coffee shops and cafés buzzing with customers, morning, noon and night. But look a little closer and you’ll see big changes are also happening beneath the surface of the out-of-home coffee market.

Man and woman drinking coffee

Café culture is changing

The UK’s coffee shops generated £7.9bn turnover in 2015*. If customer spend continues to grow at current rates of 10.7% year-on-year, by 2019 the market will be worth £17bn.

*World Coffee Portal, Allegra Strategies Project Café 2016 UK Report

But as the market grows in size it also grows in complexity. The major players are struggling to maintain their foothold, seeing brand loyalty fall by 5% year-on-year. With consumers choosing to trade down, rather than cut down, this market share is being won by locations such as high street retailers, who sell lower-priced coffee and increasingly offer a greater choice of quality drink1.

Customer attitudes reveal a shift in mindset underpinning this behavioural change. Almost half agree that coffee quality is important but they don’t need to drink the best all the time. Meanwhile 2 in 3 agree that the price of drinks affects their visit frequency, up 9% on last year2.

“I spend £2.70 on my daily coffee. But if I was paying £1.80 I would definitely consider visiting twice a day or more.”

Male accountant, 18-241

‘On-the-go’ is on the grow

The growth in coffee consumption is also reflected in the on-the-go market. 1/3 of consumers now buy takeaway coffees, with 1/5 buying 8 or more cups per week, contributing to a booming market worth £1.6bn a year.

The biggest fans of coffee to go are 25-38 year olds. Busy work and home lives mean 58% of this age group describe themselves as heavy or moderate consumers of takeaway coffee2.

Operational simplicity is key

How can new entrants seek to maximise profits from their coffee offerings? The data suggests targeting their operational efficiency is crucial. Product ingredients represent only 8% of the consumer cost of a coffee. Much more important to a retailer’s margins are the operational costs of staffing (24%), overheads (15%) and rent (15%), which collectively account for more than half the price of a coffee.

The cost of staffing in particular is significant, with many retailers finding that high staff turnover leads to a situation where new staff fail to meet the expected standards for coffee quality but the cost of training them is unsustainably expensive3. Increasingly, automated solutions are filling this void by delivering consistent standards of quality without the expenses associated with barista training.

“We sold half a million coffees each week… we got our equipment right, it was automated and seamless.”

Retail pub chain

Know your customers

Targeting the right audience at the right time with the right message is crucial to success. Coffee shops tend to be populated by different age groups throughout the day, each showing very different tastes and needs:

  • The early morning rush is dominated by 25-34 year olds. These habitual drinkers are usually on their way to work and require fast service. They tend to order coffee to go and show a preference for skimmed milk2.
  • Mid-morning tends to see more of the 55+ market. This group tend to favour coffee over other drinks and will often eat as well as drink2.
  • After the lunchtime rush, afternoons are dominated by under 24s. This group is more adventurous with their drink choices and consume a wider range of coffee and non-coffee based beverages. Given the option, they like to customise their choices with syrups and will vary the size of their drink2.

There is also a noticeable difference in the behaviour of men and women. Men are 20% more likely to visit a coffee shop every day. However, they’re also a lot less adventurous.  Women are 17% more likely than men to vary between coffee and non-coffee based beverages2.

In terms of customisation, men are primarily functional. Women are motivated more by their need state, and will vary their drinks, such as choosing  skimmed or soya milk or an “indulgent” customisation choice such as adding a syrup or having a larger size cup2.

You’re only as good as your last experience

Succeeding in the out-of-home coffee market ultimately comes down to earning repeat business. The key to achieving high volumes of repeat customers is consistency. 43% of customers citing great-tasting coffee as the number 1 factor encouraging revisits, followed by loyalty cards and value for money2.

1Allegra Project Café, 2014

2Allegra Project Café, 2016

3Allegra World Coffee Portal Research and Analysis, 2015