Sales growth at Costa’s established outlets has almost ground to a halt, in a sign UK coffee drinkers may be turning away from the large chains in favour of artisan alternatives.
Costa’s like-for-like sales rose just 0.1% in the three months to the end of August, compared with the 1.1% in the previous quarter. Three years ago sales were soaring by 7% a year.
The flat sales growth at established Costa stores helped push parent company Whitbread’s shares down nearly 5% to £37.58 by mid afternoon on Tuesday, the biggest faller in the FTSE 100. The share price was also hit by disappointing numbers from Whitbread’s Premier Inn hotel chain, where the growth of UK revenue per available room slowed to 1.8%.
The slowdown in sales has come at the same time as costs are rising. The cost of importing coffee has gone up as a result of the fall in the value of the pound since the Brexit vote, while the chain is also facing higher labour costs linked to the introduction of the national living wage and apprenticeship levy, and higher business rates. As a result first-half operating profit at the chain fell 4.6% to £61m.
The decline was despite an 8.3% rise in total sales as Costa opened 108 new outlets in the UK. It now has a total of 2,326 British stores and has installed hundreds more coffee machines in locations such as offices and petrol stations.
The massive expansion in the number of coffee shops on UK high streets over the past 20 years was initially driven by large chains such as Costa and Starbucks. However, Whitbread’s chief executive, Alison Brittain, said the UK is “now entering the ‘third wave’ of coffee” when coffee lovers develop more sophisticated tastes and “are willing to spend more per cup for higher quality and innovative drinks.”
Industry analysts Allegra have predicted there will be further growth in the market, and are predicting annual increases of up to 6% in the number of UK coffee shops for the next few years.
But growth will be harder to find for the big chains. The rise of internet shopping and low consumer confidence have led to quieter high streets, which is affecting all coffee shops, cafes and some restaurants as well as retailers. McDonald’s, Marks &Spencer, department stores, Waitrose and even petrol forecourts are all competing for a slice of the coffee market.
Jeffrey Young, an analyst at Allegra , said Costa had not done enough to cater to the more demanding tastes of younger shoppers amid the rise of small chains which offered better quality coffee and food such as Caravan, Grind, Gail’s or Taylor St Baristas.
He said that while Costa was considering the third wave of coffee, the market had already moved on. “We are in the fifth wave of coffee, a new era of professional, well-funded businesses set up by smart people that appeal to millennials and people with discerning tastes who want quality and fresh food and nice design.”
He said Costa and Starbucks had tried to adapt to the third wave shift towards artisan coffee shops by introducing flat whites, brick walls and beaten-up sofas, but this was no longer enough.
Young added: “The coffee industry needs to put its foot on the innovation accelerator and to work a lot harder to deliver value,” he said. “Brands like Costa have become a little bit ordinary.”
Whitbread said it planned to continue opening stores in the UK and would also be expanding in China and Germany.
Pretax profits for the whole Whitbread group, including Premier Inn, rose 20% to £316m in the six months to the end of August as total revenues rose 7.4%. Sales growth at established Premier Inns slowed in the second quarter, falling to 2.6% from 4.7% in the previous three months. But the company opened 2,000 more rooms over the period, via new hotels and extensions.
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