Coffee consolidation

Joining coffee shop loyalty programmes has never really been my thing as I tend to use many different venues, and having a wallet – virtual or real – stuffed with loyalty cards has always felt like too much of a faff. But I’ve reassessed this view as I’m now calculating that one free coffee for every ten purchased is clearly the equivalent of 10% off the price of each cup 

This wasn’t a particularly big deal until now. But when you are spending around £4 for a cappuccino in the morning, and maybe the same for a flat white in the afternoon, then the sums become meaningful. Prices for those regular caffeine fixes have been on a tear, and it’s hardly surprising when every cost involved in running coffee shops has been on the increase.

The one that stands out, and is a particularly big deal for the sector, is the cost of beans. Wholesale Arabica beans – the most popular variety – moved above $4 a pound for the first time last month, which represents a doubling over the past year. It was less than $2 a pound in January 2024 and hit a record $4.30 mid-February this year, according to futures contracts traded in New York. And the predictions are that the price has further to go on its upward trajectory. 

Around a year ago, the coffee shop industry was pretty bullish. The UK’s independent coffee shop market grew by 2.2% over the year to March 2024 to reach more than 12,200 outlets, according to World Coffee Portal. When it polled industry leaders, nearly twice as many believed trading conditions would improve for independent shops over the next 12 months, having survived a painful cost-of-living crisis, rather than anticipating a deterioration of sales.  

One year down the line, the outlook looks less appealing when combining the impending Budget increases to employment costs with the escalating coffee price potentially impacting sales. Coffee is undoubtedly an affordable luxury compared with a Hermés bag, but there is only so much that can be absorbed by consumers before they cut back consumption.

Against this backdrop, it will be increasingly tough for independents. That is why we are seeing the largest independent in the market, Caffe Nero, being approached by smaller operators. Gerry Ford, founder and group chief executive of Caffe Nero, told Propel: “You wouldn’t believe how many people are coming to us now. Some of it because of [our] reputation and some of it because they’re stuck, and they don’t have anywhere to go. If you are an independent operator trying to figure out what to do with your business, we have started to become a logical go-to player.”

Caffe Nero has good form, having recently acquired FCB Coffee and 200 Degrees, and prior to that Coffee#1, as the company has recognised the upside of running multiple brands in order to avoid becoming a ubiquitous single-branded gorilla that saturates the UK market. Ford has expressed his desire to avoid falling into the trap of Costa in the UK or Starbucks in the US, where they lose their “special” appeal from having far too many outlets.

Operating a multi-brand organisation was the strategy deployed back in the pre-covid-19 days by Coffeesmiths Collective. Utilising the roll-up approach, it rapidly purchased stressed branded coffee brands including Baker & Spice and Nordic Bakery, and various outlets from the failed Filmore & Union and CoffeeWorks Project businesses. These sat alongside its Department of Coffee and Social Affairs branded units.

What looked good on paper ultimately failed as a result of Coffeesmiths having insufficient back-office infrastructure and support services into which it could plug the various acquired brands. Caffe Nero is a very different beast and has the back-end operations to fully leverage synergies and enjoy scale benefits – whether that be purchasing in volume or centralising the roasting of beans and kitchen facilities for food production, along with finance, HR and other such essential functions.

As the pressure continues to mount on small independent coffee operators, we will undoubtedly see more consolidation in the sector, with Caffe Nero playing a starring role. And maybe we will see it joined by a well-funded vehicle that can succeed where Coffeesmiths Collective failed.

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.