Unmanned coffee machines generate up to £40k in sales a year, which is why Costa – and retailers – want a bigger slurp of the action. Virginia Matthews reports
Barista-led high street coffee bars may already be well-established in the UK, but between now and 2016, it’s the unattended on-the-go sector that looks set to grab all the headlines.
In March, Costa Coffee’s parent company, Whitbread, acquired the self-service Coffee Nation vending machine company for £59.5m and announced plans to replace them with the company’s new self-serve Costa Express bars. From 1 June, Costa will start replacing the 900 Coffee Nation machines in c-stores and forecourts with Express bars, following successful trials at five Esso, Moto and Tesco sites.
The goal is to have 3,000 Costa Express sites up and running in the UK by 2016 not miles off the 3,500 standard outlets it hopes to have across the world. No-one can dispute how ambitious the target is, but the jury is still out on whether there’s an appetite among retailers or consumers for yet more coffee outlets.
Costa argues that there are not enough self-service machines at the moment and the coffee they serve is not always good quality. There is therefore scope for it to introduce machines to new outlets and in one fell swoop also raise the quality of what’s currently available.
“While garage forecourts, c-stores and motorway service stations will remain vital to our long-term growth, we are looking to a broader range of sites to establish ourselves and are directly targeting train stations, airports, car parks, hospitals, businesses, universities and libraries; places where we believe a great coffee offer is under-represented,” elaborates Costa MD John Derkach.
The rewards for retailers certainly sound enticing. Costa claims that machines can turn one metre of retail space into £40,000 of revenue. But retailers will need to boast sufficient footfall Costa is targeting sites that serve more than 50 cups of coffee a day at £1.75 to £2 per cup and some will benefit more than others.
“We’ll be sticking to the revenue-sharing model that we have already established, but in terms of proportion, that depends very much on the footfall at your particular premises,” explains Scott Martin, co-founder and former chief executive of Coffee Nation, who is now employed by Whitbread to help oversee the transition to Costa Express.
“It’s fair to say we are specifically targeting higher-volume locations though and while we will be incentivising our customers to sell as much coffee as they can, the range of return will vary from a 20/80 or 30/70 split for the customer who sells at the bottom end to a 50/50 arrangement; more perhaps, for the business that can sell far more than that.”
Welcome Break has an equal share of the revenue because it is “an anchor customer for Coffee Nation which sells upwards of seven million coffees per year”, says Martin, adding that although he “would love to talk to more symbol groups,” the complexities of site ownership have long proved a sticking point in negotiations and “after 11 successful years, our model is rigid”.
This rigidity presents opportunities to those offering lower price points or more favourable revenue-sharing models, claims Jason McNally, chief executive of rival operator, Simply Coffee.
“We’ve just signed up two of Coffee Nation’s key retailers, representing 80 sites in all, and both deals happened because we offered them a 20% greater return than they were getting previously,” he says.
Simply Coffee, which is sold through the likes of Spar and Morrisons, retails at around £1 per cup making it easier to generate higher volume sales. Pricier offerings, on the other hand, rely heavily on footfall, says McNally, who is not convinced there are enough retail outlets with sufficient footfall for a Costa Express to work.
“Given that the average c-store sells no more than 30 cups a day, I believe many will be too small to be of interest to the new brand and that could prove very disappointing.”
Derkach concedes that “smaller premises would struggle to operate at that sort of level”. But, he adds: “We believe that thousands of locations can achieve at least that number of sales per day.”
Between 50% and 75% of the existing Coffee Nation sites will be re-branded to Costa Express by summer 2012, with decisions about changing individual machines made on a case-by-case basis. “There’s no insistence on Whitbread’s part that all outlets should be re-branded as Express, but our feedback so far is that many customers will be very keen to adopt the hugely successful Costa name,” says Derkach.
While Whitbread will be introducing Costa Express machines to Premier Inns, “both our hotels and our pubs will decide on an individual basis what works best in their location”, he adds.
It is also looking beyond the UK, he says. “With Costa Coffee as it stands already established in 25 markets overseas, we believe it is likely that there will certainly be an export market opportunity for Costa Express at some stage in the future. Costa is already a very strong UK brand and we want to make this winning combination available overseas too.”
Martin is arguably even more ambitious; adding (non-Whitbread-owned) budget hotels, larger car parks and regional train operators to the Express wishlist.
“Coffee Nation has always had a fantastic relationship with Tesco and it is now my ambition to see a Costa presence either a full-scale coffee bar or an unmanned Costa Express machine at every single Tesco site in the country,” he says, adding that talks with Sainsbury’s are already underway.
Underpinning Costa’s ambitious expansion plans is Coffee Nation’s cutting edge 2G Touch machines, which dispense coffee and chocolate drinks but not the nation’s other favourite yet. “We’re already working on the replacement to 2G and hoping it may have the potential for iced drinks and even other hot beverages,” says Martin.
Freshly brewed tea: now that could really give forward-thinking c-stores an edge over the competition.
The nation’s favourite coffee shops
1. Costa Coffee 54%
2. Starbucks 27%
3. Caffè Nero 11%
4. Pret A Manger 1%
5. M&S 1%
6. Other 6%
Source: Allegra Strategies Project Cafe10
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