Riding the third wave

07 May, 2010
With indie artisan retailers making waves in the UK's coffee shop sector, Andrew Williams follows proceedings at the recent Allegra Coffee Leader Summit and finds the fourth wave might be just around the corner
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A lot of the hype in the coffee shop market at the moment surrounds the much-trumpeted so-called 'third wave' of coffee shops. In case you missed the memo, the third wave refers to a band of quality-obsessed indie artisans currently germinating in the capital. These follow the second wave the emergence of the big chains, Costa, Starbucks and Caffè Nero. And the first? Pretty much everything that came before. "The third wave is about real authenticity, it's about love for what you do. It's about environment and theatre. For the first time in a long time this is being led by independents," said Jeffrey Young, MD of market analyst Allegra Strategies.

"In Huddersfield we're still struggling with the 'first wave'," noted esteemed coffee shop consultant Paul Meikle-Janney, putting this somewhat London-centric observation into context. Nevertheless, he believes the phenomenon of artisan coffee shops will spread beyond the ghetto-ised clusters of coffee nerds in London. So what does this mean for food sold in coffee shops? The high-quality ethos driving the successful emergence of the third wave is, in turn, shaking the big three from their complacency to the point where we could finally gasp see them move on from done-to-death muffins and paninis.

"I've never made a panini at home," stated Meikle-Janney. "It's a product that has grown with the café chains, which don't really want to be based in food. You can buy them in, slap them on the contact grill and you don't need to have any catering skills or knowledge. Yet is it really what our customers want?"

John Derkach, MD of Costa, does not shy away from the question of an over-reliance on tired products. "The issue we face in the category is that although the average quality of food in coffee shops has improved over the last few years, we've probably been too internally focused and spent too much time copying and leapfrogging each other," observed Derkach at the Allegra Coffee Leader Summit in London. "We need to break out of that paradigm and there are great independents showing how that can be done. Usually it's with more skilled people than we can engage in all of our stores, doing more preparation in the store itself. I'm not sure we could do that. Nonetheless, we could be bolder than we have been and get out of the silly cycle of launching a meatball panini and calling it an innovation, because it's not. It's just another panini."

About 25-35% of people visiting Costa buy food, but its dependence on lunchtime trade stands in the way of a breakout from the rut, he said. "We so desperately need that lunchtime business to make the economics work that we end up with a broad range of sandwiches that, to some extent, stops us from really exploring the opportunities for better breakfast products and more imaginative afternoon cake-type products. [Bakery] Konditor & Cook, for example, has shown how far you can drive coffee shop food."

Outside competition

The coffee chains are finding more competition from the likes of Pret A Manger, a sandwich chain that is winning plaudits for its coffee. It was the most admired brand among coffee shop executives, according to Allegra's research, notching up double-digit like-for-like growth in the first quarter of this year. It grew comparable store sales by 2.6% last year and EBITDA by 11%. "The fast food or sandwich-based coffee shop operators are critical, because they seduce new users into the category new users who will continue to fuel growth in the future," said Derkach. "That's absolutely vital, because 53% of people don't currently visit a coffee shop."

It's no wonder coffee drinkers are viewed as "users", given the market for this addictive drug grew 5.6% in a recession, accor-ding to Allegra's analysis of the branded coffee shop market; penetration was 47% of British adults; they visit about twice a week and are very loyal. Around nine out of 10 visits are made by people who visit coffee shops weekly about 27% of the population.

Despite this, the market could be reaching a tipping point. A sign of market maturity is fragmentation a classic indication being one artisan coffee shop in London opening solely to cater for cyclists. "That's a sign of a mature market and it plays to the strengths of the independents, who will find it easier to create that type of environment," said Paul Ettinger, head of international food and beverage at Caffè Nero.

"We all assume it is going to carry on growing forever, and there's no law that says it will. Is the market saturated? The UK has about 1.8 coffee shops per 10,000 people, so we're getting close." In London this rises to 3.5. "Maybe we're in a mature part of the market and growth will slow down. What are the implications? It certainly means profits will be harder to make. New players are going to enter the market and the independents will drive quality and new ideas."

The successful indies, such as Kaffeine, Taylor St Baristas, Tapped & Packed, Flat White, The Espresso Room and Sacred in London, are thriving by tempting customers to spend more per visit. "They're as good at food as they are with coffee," said Meikle-Janney. "If you look at Kaffeine's website, its display and merchandising of food really draws you in. [Bakery] Ottolenghi has great displays of food."

Where does this leave those bakeries not yet up to speed with their coffee offer? "The risk is if you do the bread extremely well and the coffee is rubbish, it lets the whole brand down," cautioned Barry Kither, sales and marketing director for coffee supplier Lavazza. "Le Pain Quotidien and other foodservice brands are getting better and better and better at coffee."

But before you get set to jump on the third-wave bandwagon, hold your horses. Inevitably, we're already talking about the fourth wave. "I want to get there before anyone else does!" exclaimed Allegra's Young. "The coffee wave, which is some years out, is about the science of coffee, the perfecting of coffee through machinery, vacuum-packing and playing around with roasts."

And the fifth wave? Down-loading caffeine directly into your brain via an iPhone. You heard it here first!


Why focus on coffee when you make bread?

Given the competition for coffee on the high street, Le Pain Quotidien (LPQ), the bakery café-restaurant with 15 outlets in London and over 140 worldwide, is raising its game. Director of operations Steven Whibley said that while bread was the company's passion, there was a black seam of coffee running through the business, accounting for a big chunk of profits: 40% of LPQ's sales are from beverages, 60% of which is from coffee. "That means we're in the beverage business," he said. Twenty-five pence in every pound spent in LPQ is on coffee; the gross profit effect of that means coffee accounts for a third of profits. "The average coffee shop takes in around £7,500 per week. We take in four times that, so our average shop is selling as much coffee as your average coffee shop."
One of the challenges is providing a quality coffee when it's not the core business focus. "I'm not 100% proud of our coffee," he admitted. "Most days it's pretty good, some days it's very good it's never as good as we want it."
LPQ currently sells triple-certified (Fairtrade, organic and World Land Trust) Puro coffee, made on Faema X5 bean-to-cup machines, with the supplier providing two-hour service call-outs and barista training. "After five years we have a very good relationship and we're pretty happy with the coffee; now we're starting to look at really improving it and getting up to the level of the indie guys. I don't think we'll get there, but at least we're going in the right direction," he said. This means a switch to manual machines for its next store, opening in Borough Market, London Bridge.





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