1.

Introduction

2. The UK Coffee Market

Coffee is the second most traded commodity in the world after oil and is worth billions in annual revenue. It is also one of the most popular drinks with a consumption of about two billion cups daily. According to Franchise Direct UK, people in the UK, drink approximately 70 million cups of coffee a day. Coffee is the nation's third-favourite non-alcoholic beverage, consumed by 70% of adults. Furthermore, researches from Mintel have found out that coffee drinking is becoming more sophisticated and consumers are seeking more frequently after posh coffee, such as roast, ground, instant premium and super-premium.

2.1. The In-home Coffee Market

As reported by Mintel, sales of coffee in the UK are on high, as the nation is trading up to a posher cupper. The Increase of premiumisation as well as the hike in raw coffee and production costs has led to a 17% growth in value sales in the UK market for in-home coffee over the period between 2005 and 2009. The in-home coffee market has benefitted from the economic downturn and the price increase in the UK, as consumers are trying to replicate the coffee shop experience at an in-home price. Overall, the in-home coffee market is currently worth 55.3 million kg in volume sales and 831 million value sales and as per Mintels forecast 2010 a growth in the coffee market of 25%, hitting the 976 million mark is predicted by 2014. With a market share of 80% and a value sale of 670 million in 2010 instant coffee remains the Britains favourite in-home coffee type. The British are the biggest consumers of instant coffee in Europe, driven by the desire for speed and convenience.
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However, Mintels researches show that the traditional cup of coffee has become more sophisticated than ever before, as consumers tend to seek more frequently for roast, ground, instant premium and super-premium coffee. Sales of roast or ground coffee (149 million) account for 19%, which is an increase of 49% between 2005 and 2009. Sales of premium (freeze-dried) coffee rose 44% over the same 5 year period, valued at 201 million in 2009, accounting for 36% of the total instant value sales. Sales of speciality coffee, like decaffeinated coffee, have witnessed an 8% decline in the past year, accounting for 11% (62 million) of instant sales in 2009. Lastly, regarding at coffee sales as a whole, it has been observed that the trend of Fairtrade coffee is becoming the norm in the coffee market as more and more of the major coffee and coffee shop brands are switching their supply to Fairtrade sources. Fairtrade Coffee was worth 41 million in 2009, accounting for around 5% of total coffee sales. (Mintel 2010)
UK consumption of coffee, February 2011

% 7

Instant coffee Ground coffee Any branded Any supermarket own-label Instant cappuccinos/latte/mocha coffee Any fair trade Any decaffeinated

1 3 Mintel 2010 6 2 4 2 0 1 7 1 6 1 5 1 0

Coffee pods (e.g. Nespresso, Tassimo, Dolce Gusto, Senseo)

2.1.1.

Market Segmentation

According to Mintels researches the biggest consumer group of coffee in the UK represent the over 55s, which has been seen as a powerful buying group. However, there is a crucial proportion of drinkers among the young consumers which the coffee market is risking to lose if they dont develop a taste for coffee. Further on, it has been discovered that the turning point for coffee drinking is at the age of 35, where a considerable coffee consumption increase has been observed, amongst the 35 to 44 years-old and steadily after. As per Mintel 2010 only 39% of 25 to 34 year olds and 17% of 16 to 24 year olds drink coffee which they make at work, compared to 50% of those aged 35 to 44. Meanwhile, 33% of those aged 16 to 24 and 57% of those aged 25 to 34 drink coffee at home, this compares to three quarters (75%) of those aged 35 to 44 years old. The problem with the younger generation is that they dont drink instant coffee, which is the largest part of the market. For that reason big coffee brands have to strive more to make coffee more appealing to young people. Another consumer group that the industry is also concerned about, are the over 65s. The coffee consumption of this age group falls from 13.4 cups per week to 11.9 cups as soon as they reach 65, which is worth millions of pounds as they account for a fifth of the adult population. In this case coffee brands should promote the health benefits of instant coffee or develop healthier brand extensions to prevent older consumers from falling out of the market. Coffee shops like Starbucks and Costa have the opportunity to enter the in-home coffee market much more aggressively than is currently the case by focusing on youth-targeted products. In terms of the quality of in-home coffee, a quarter of 16-24 year old drinkers believe that branded coffee shops make better coffee than the established supermarket brands like Nescafe and Kenco (Mintel 2011).

Only less than half (47%) of in-home drinkers agree that coffee provides a welcome energy boost, in this case coffee brands could do more to promote the energy-giving benefits of the product, something which has been key to growing energy/sports drinks into a billion pound market as consumers look for help in navigating increasingly busy lifestyles.

2.1.2.

Issues in the UK Coffee Market

As reported by Mintel 2010, the rising cost of the coffee beans has been a problem for the UK market since 2005. One of the reasons for the price increase is the fact, that wealthy developing countries such as China and Russia are increasing their imports of the higher-quality Arabica beans, which is pushing up the prices as a result. In 2009 the price of imports rose to their highest level in the UK since 1998 and producers did not have another choice but to pass on costs to consumers at a time of domestic recession. The price increase of the Arabica bean, as well as the high cost of transport and utilities will almost certainly lead to another price increase in 2011. In order to maintain their 2010 price points, UK coffee makers used up the majority of their preexisting coffee stocks. Unfortunately, this is poor timing, as high inflation, the recent budget and the prospect of interest rate rises mean that consumer incomes are more stretched this year than has been the case over the past three years.

2.2. The Coffee-Shop Market

Allegra, a strategic research consultancy, found out that the recession in the UK has not major affected the visiting frequency of UK coffee-shops. With 5.0 billion turnover and 14,022 outlets in 2010, including branded chains, independents and non-specialist operators the coffee shop market in the UK is still in the boom (Allegra Project Cafe10 UK, 2010). Many
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people in the UK see visiting coffee shops as an affordable regular treat that will not stretch their budget too much. Anya Gascoine Marco (head of food and beverage insight at Allegra) was cited in the Independent (18th December 2010): Coffee has become an Integral part of the fabric of British way of life. Coffee is almost like lipstick. You want something in your life that is a treat and make you feel better. In another consumer research carried out by Allegra, in December 2009 consumers admitted that going to coffee shops is either habitual or an important treat, that they would not give up. As per Mintel only 9% of the coffee consumers had drunk more coffee at home since the start of the recession in order to save money (Mintel Coffee UK, February 2010). Furthermore, Mintel reports that around 57% of consumers now use coffee shops, with amongst them 47% sitting in and only 8% buy taking coffee away. Usage has only minimally increased in recent years, with sit-in growing at a faster rate than takeaway (Mintel Coffe Shops UK 2011). Costa Coffee is the largest and most popular coffee shop in the UK with 1,069 outlets and 27% visits of the population aged 15+, compared to Starbucks with 23% and 700 outlets and Caff Nero with 12% and 400 outlets. The Independent, a British Newspaper, refers to Allegras report Project Caf10 UK, a definitive annual study of the UK coffee shop market where impressive sales growth of 12.9% in 2010 by the branded coffee shop segment (including Costa, Starbucks, Caff Nero and Pret A Manger) have been exposed, exceeding 1.94 billion in revenue (The Independent 2010). Jeffrey Young the Managing Director of Allegra Strategies was cited in the Independent on December 18th 2010:
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I have never seen such exciting developments in the UK coffee shop market. This year the market grew by more than 12% compared to 2.5% for the UK retail sector, adding more than 800 outlets in 2010 in challenging economic times. With increasing quality of coffee, better environments from both chains and independents and greater consumer appreciation of coffee and coffee houses, the market is poised for significant further growth over the next 3-5 years. In 2010 the branded coffee shop segment in the UK was estimated at 4,650 outlets with growth stable at 6.1%. Branded coffee chains, including coffee-focused and food-focused operators, account for 33% of outlets and 39% of total market revenue. However, as the number of value-driven non-specialists like McDonalds and JD Wetherspoon, department store cafes and motorway forecourt operators and high quality artisanal independents is increasing, the established coffee chain operators are facing pressure on quality and price. Together these have added 468 outlets, accounting for 54% of overall outlet growth in 2010.

2.2.1.

Market Segmentation

According to Mintel, coffee shop users in general tend to be more women and they are also those who most likely would sit in, compared to men, who tend to take away. Age is also an important factor that affects the usage of coffee shops. For example those who sit in (predominantly women) tend to be older consumers and third age/retired or part-time worker, whilst takeaway drinkers (predominantly men) tend to be aged 15-34, single in full-time work. The biggest usage of coffee shops is in Greater London and consumers tend to be split between younger pre-/no family consumers and older retired consumers. However Mintel reports that coffee shops are arguably failing to engage with older consumers. These consumers tend to be over6

55s, socio-economic group D, Moderate Means, third age single/retired single. Older people may struggle to engage with the selection of fancy coffees and may prefer the traditional black coffee. In order to reach this target group, coffee shops could offer a wider range of more straight forward drinks and focus more on simplicity. It is also reported that there is a small percentage (17%) of consumers who do not drink tea/coffee/other hot drinks out of home. These consumers are more likely to be men, over-75s, socio-economic group E, Hard Pressed, however, this has been also observed amongst families, particularly with children aged 10-15. Around 7% of consumers do not drink tea/coffee/other hot drinks. These consumers tend to be aged 15-34, pre-/no family/family, socio-economic group E. With alternate venues such as Pret A Manger and Eat generally offering consumers a wide range of cold drinks as well, it can be difficult to create a USP to attract these consumers into coffee shops instead. There are more than 3,000 branded coffee chain outlets in the UK, with a turnover of around 1.3b. The coffee market in the UK has grown for the past eight years at more than 15% annually, and is set to expand to 6,000 outlets with an estimated turnover of over 2.5b within seven to 10 years. (Franchise Direct)

2.2.2.

Consumer Purchasing Behaviour

Based on a nationally representative survey amongst 1,962 adults aged 15+ in December 2010, Mintel has analysed consumer behaviour in the UK coffee shops.

1. What do consumers order in coffee shops?

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Drinks

50% of those consumers who have visited a coffee shop in the last 3 months have ordered cappuccinos, lattes and mochas; those products are the most popular hot drinks UK coffee shops, followed by 26% choosing hot chocolate, 25% filter coffee and 24% traditional tea (eg English breakfast tea). Espresso, Espresso Machiatto and Americano are less popular, chosen by only 16% of coffee drinkers. Only 4-6% of consumers tend to choose drinks such as herbal tea, decaf tea/coffee, speciality tea (eg Earl Grey, Chai) or iced coffee/tea. Besides cold drinks are slightly more popular although they still represent only a small section of sales: 12% of diners have chosen soft drinks such as water or juice, whilst 9% have chosen pure fruit juice/smoothies.
Food

Sandwiches, baguettes and paninis are most popular amongst younger consumer. Around a quarter have ordered one of those products in a coffee shop in the last three months, whilst 22% who have ordered a cake/pastry/biscuit are aged 35-44.

Enticements for visiting coffee shops

One of consumers main reasons of choosing one venue over another is the number of comfortable seats available in a coffee shop. This is one of the enticements that will attract and persuade a customer more to stay over other coffee shops. When it comes to enticements, consumers seem to look more for interiors and design. There is no more need in suggesting menus as they are already extensive enough, although more hot food options do seem to appeal. Other popular enticements include free newspapers, magazines, books, free Wi-Fi and loyalty/reward schemes.

Overall, however, the biggest drive of consumers purchasing behaviour is experience, with areas such as long holidays and days out achieving the fastest growth in terms of consumers spending priorities in the last year. In comparison, consumers continue to sideline commodities such as books/DVDs/CDs.

Moreover, Mintels consumer research shows that younger consumers are potentially easier to target with pre-/no families interested in hot food options, free Wi-Fi, loyalty

cards, speciality teas, in-house entertainment, low-calorie products, smoothies and flavoured syrups. In comparison, the third age and retired are the least easy to influence and families are more demanding of more comfortable seating and free magazines/newspapers.

2.2.3.

Porters 5 Forces for the UK Coffee Market

1. Bargaining power of buyers The force of the buyers bargaining power corresponds to the ability of buyers to force down prices, bargain for higher-quality products or more services and pit competitors against each other. (Essential of Strategic Management, 2000, p. 41) In the coffee-shop industry a single buyer usually purchases coffee for its personal consumption and not in large volumes. Besides, the cost of buying a cup of specialty coffee does not represent a significant fraction of the buyers individual living costs. This makes buyers less sensitive to price fluctuation and gives players within the coffee-shop industry more control power over pricing. Buyers are less sensitive to price fluctuations, once costumers loyalty has been built up. Therefore, it is important for the coffee retailer to build its brand around quality and service, in order to increase its customer base and customer loyalty. Individual consumers are willing to pay extra cents for good quality coffee. All of these factors reduce the relative bargaining power of buyers in this industry. Unlike the basic coffee industry, the amount of differentiation in the specialty coffee industry plays a decisive role. This further dilutes the bargaining power of buyers through the brand premium that specialty coffee retailers offer. However, consumers are getting more knowledgeable about coffee. They are able to access more easily information than ever, about the taste and the quality of the different coffee types the competition offers, through the Internet and other media. In addition, customers can freely
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switch from one coffee brand to another, as there is no or low switching costs and there is a very large selection of retailers in the coffee-shop industry. This increases the bargaining power of buyers (Kotler 2008). Lastly, the expansion of the coffee-shop industry has created a wider array of competitors who offer high quality specialty coffee. This has made it much harder for the players in the coffee-shop industry to differentiate themselves through the quality and turned that into the industry standard. (Wikinvest, PEET)

2. Bargaining bower of suppliers Suppliers bargaining power has intensively changed, with the extensive growth in the specialty coffee industry. In the late 1980s, when the first specialty coffee retailer Starbuck was conceived, the farmers from whom they purchased its premium coffee beans were numerous and unrelated to one another. Most coffee producers were small to medium-sized family owned farms located in Latin America, the Pacific Rim and East Africa. They did not have unionization and had very little collective bargaining power (Lee, 2007). Currently, many of the farmers who sell premium coffee to coffee chains are united by an initiative called Fair Trade, which was organized by Trans Fair USA. This initiative gives companies of the coffee-shop industry the opportunity to advertise their coffee as being fair trade certified when they purchase from coffee suppliers that are democratically owned cooperatives (Argenti, 2004). Fair Trade was designed to ensure that the coffee farmers would be compensated fairly for their crops. Despite the fact, that the farmers are still numerous and small they are now connected through this initiative and are able in unity to exert bargaining power over their buyers. Although the farmers of premium Arabica beans are still in constant competition with the substitute Robusta coffee bean, it does not decrease their bargaining power by this threat as it is very unlikely that a premium coffee retailer would adopt this substitution. (Argenti, 2004)
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big

Originally, the majority of sales made by the premium coffee farmers comprised perdominantly specialty coffee retailers. As the industry has grown, more companies and restaurants, specializing in a wider range of products than just specialty coffee, have begun to purchase from the premium coffee farmers. This has made the relative size and importance of the companies within the coffee-shop industry less significant to the farmers. Now that there are other customers to supply, the coffee farmers are less dependent by the specialty coffee industry and its specific demand. This acts to increase the bargaining power of the coffee suppliers. Coffee beans are the most important input to the brewing process of a specialty coffee retailer. As competition increases within the coffee-shop industry, the focus on differentiating products through superior quality becomes a greater meaning. For many specialty coffee companies their success lies on their ability to produce higher quality coffee than competitors, which acts to further increase supplier bargaining power. Currently, many coffee-shops are locking their coffee suppliers into longterm contracts to decrease potential price volatility. These contracts have specific terms and conditions, which place a financial burden on the coffee suppliers if they choose to supply a different company. With these switching costs, resulted from the contract, the premium coffee suppliers, do not have many possibilities to play buyers against each other, which decreases their bargaining power. (Lee, 2007) A last component to the analysis of supplier bargaining power within the current specialty coffee industry environment is the threat of forward integration (Kotler, 2008, p. 305). Overall, the bargaining power of suppliers today in the specialty is becoming more powerful. 3. Threat of substitute products Caffeinated drinks are primarily coffee, tea, soft drinks and energy drinks. The main substitute products posing a potential threat to the specialty coffee industry are soft drinks and energy drink offered by the company such as Pepsi and Coca-Cola. However, coffee has gradually gained
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preference by the consumers over soft drinks because of health concerns associated with carbonated soft drinks and new evidence showing that coffee is a relative healthy alternative. Therefore, these substitute products pose little threat to the premium coffee industry which decreases the force created by substitute products. (Wikinvest- PEET)

4. Threat of new entrants Newcomers are threats to an established corporation, because they bring new capacity, a desire to gain market share, and substantial resources (Hunger, D. 2000, p.39). The main obstructions to newcomers into any industry are the various barriers to entry. The higher the barriers to enter an existing industry are, the smaller the threat of new entrants to that industry will be (Kotler, P. 2008, p. 305). One of the possible barriers to entry are the economies of scale within the specialty coffee industry. The larger coffee retailers, like Costa Coffee, Starbucks and Cafe Nero are able to acquire high economies of scale through their purchasing by negotiating long term contracts with coffee farmers and purchasing coffee beans in bulk quantities at discount prices. Another possible barrier within the specialty coffee industry is product differentiation, which is not any more defined by the coffee taste, store convenience and prices but rather by the store ambience, the companies social responsibility and the brand identification. Many of the leading coffee retailers have developed a very loyal customer base resulted from previous advertisements, customer services, product differentiation and early entry into the industry, which makes it more difficult for newcomers to gain a solid customer base. Moreover, there is no large capital requirement for the specialty coffee shop industry. This analysis shows that there are many barriers for new companies wanting to enter the specialty coffee industry, which on the other side decreases the potential threat of new entrants.

5. Threat of intense segment rivalry

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Increasing competition is one of the coffee shop industrys greatest threats. The coffee shop market in the UK is a very mature and high competitive. The UK is the most developed branded coffee shop market with 4,871 outlets and represents 41% of the total European market (Allegra Project Cafe 11, Europe). In the last few years the number of non-specialists who are trying to copy the success of the specialty coffee shop market has intensively increased. These non-specialists, together with department store cafs and motorway and forecourt operators, accounted 54% of overall outlet growth in 2010 and are the main driver of total outlet growth in the UK coffee industry (Allegra Project Cafe10). Amongst the non-specialist operators are in-store restaurants in shops and supermarkets, sandwich shops, fast food outlets and pubs. For example in September 2010 the McDonalds fast food chain launched a full bean espresso for 79p (Mintel, UK-Coffee Shop 2011). In the same month the company had seen a rise in the number of coffee cups sold by 39% over a period of two years, since the reintroduction of the coffee range in 2007. Some of its growth was attributed to a focus on sustainability and fair trade sourcing. It was also reported that McDonalds is now the biggest seller of coffee in Britain, selling 84 million cups of coffee in 2010 (with Costa, Tesco, Caffee Nero and Starbucks following in consecutive order). In 2010 Pret A Manger, a British sandwich chain, launched the flat white and in October of the same year an article in the Guardian confirmed that coffee accounted for 20% of the companys sales (compared to 20-25% of sandwiches, baguettes and bloomers sales) (Mintel, UK-Coffee shop, 2011). The pub and restaurant JD Wetherspoon is another non-specialist operator that increased its coffee sells up to 40% with 600,000 coffees sold each week in 2010 (JD Wetherspoon Annual Report, 2010). The company also claims to be worldwide the number one seller of Tierra, Lavazzas Rainforest Alliance Certified sustainable coffee and recently it became the only pub company to be made an honorary lifetime member by the Rainforest Alliance. However, the three leading players within the UK coffee-shop industry are
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Costa Coffee, Starbucks Coffee Company and Cafe Neros. These three top branded chains compete directly against each other and have a combined market share of 52% (Allegras Project Cafe11 UK). With 1,342 outlets and an estimated 531 million annual turnover in 2011, Costa Coffee continues being the coffee shop leader and the largest coffee chain in the UK branded coffee shop market (Allegras Project Cafe11). With 27% visits it is also the most popular coffee shop in the UK, followed by Starbucks (23%) and then Caff Nero (12%). The company was found in London in 1971 and now is a subsidiary of the leisure group, Whitbread PLC. Costa Coffees image of social responsibility has been promoted by using only coffee beans from certified farms by the Rainforest Alliance, the use of recyclable coffee cups and energy-efficient coffee machines. Furthermore, the company helps with the improvement of coffee-growing communities in developing nations through its Costa Foundation (Mintel, UK-Coffee Shop 2011). Costa Coffee differentiates itself from its competitors through its coffee beans blend called Mocha Italia. Due to the rising number of non-specialists, the pressure to compete in the market is increasing and like many other coffee brands Costa Coffee is now focusing more on marketing and advertising. In October 2010 the company launched its first TV advert with the campaign Monkeys and Typewriters which aimed to demonstrate the brands skill in coffee making. The Starbucks Corporation is the largest coffee shop chain in the world. The international coffeehouse company, based in Seattle, entered the UK market for the first time in 1998, 27 years after Costa Coffee was founded. With regard of brand awareness Starbucks (93%) is the most recognised coffee shop brand in the UK, followed by Costa Coffee (92%) and Cafe Nero (84%), according to Allegras Report 2009. However, with 742 shops in 2011 in the UK the coffee giant is way behind Costas 1,342. The Guardian News and Media Ltd reported that Starbucks losses in Britain in the year 2010 had grown to almost 10 million, closing 45 stores in
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October 2010 in order to save margins. The company accounts the loss to the economic downturn, unfavourable media coverage and increased market competition. The Guardian also adds that Starbucks has been losing ground to its rival and strongly performing Costa Coffee. In order to acquire more market share in the UK the Independent reported in an article appeared on the 18th June 2011 that Starbucks was planning to spend 24 million pounds to refurbish 100 stores a year to adapt them to the needs of their neighbourhoods. Over the next five years the coffee retailer is opening 300 new outlets in the UK, and Starbucks lattes could soon be available on planes and trains across the UK, and through vending machines (Financial Times, 2 March 2012). Another newspaper reported that out of the 300 new outlets Starbucks will 200 will be drivethrus (Channel 4 News, 02 March 2012). Caff Nero Group Ltd. was founded by Gerry Ford in London in 1997. Gerry wanted to bring an authentically Italian-style Cafe to Great Britain; serving premium espresso based coffee, fresh high quality food and to become a neighbourhood gathering spot. By the end of 2001, Caff Nero joined the London Stock Exchange and with 80 outlets in 24 different cities, it became the largest publicly listed coffee house in the UK (Caffe Nero - company Profile). In 2008, the company began expanding internationally, entering new markets in Turkey and the Middle East. With 50 new stores opened in 2011, the company now operates a total of 490 outlets in the UK and has achieved 57 consecutive quarters of like-for-like sales growth in 2011 (Allegra Project Cafe11). Besides, in 2009 Allegra reported that it was Caffe Nero who were ranked highest overall by Key Performance Indicators. In seven out of 10 KPIs (coffee quality, atmosphere, value for money, speed of service, friendly service, food quality and cleanliness) the coffee chain achieved the first place, whereas Starbucks was ranked first in three out of 10 KPIs (ethical, practices, convenient location and food choice). Caff Nero claims to use a special blend of seven coffee bean varieties for its espresso-based coffee, a portion of which is obtained from sustainable
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farms. In addition, the coffee shops also offer iced coffee drinks and a food selection. To appeal to health-conscious individuals, the company states that it uses natural ingredients with minimum additives and colorants. In order to keep regular customers interested, Caff Nero offers seasonal and monthly specials. According to Mintels researches, another trend and at the same time another threat that the coffee shop market is facing, are the home coffeemaking systems and coffee vending machines which also creates competition to coffee shops. Coffee Nation is the leading provider of self-serve gourmet coffee bars to garage forecourts and motorway service areas (MSAs). The company operates 65% of its business through its partners, selling over 1.8 million cups of coffee a month. (Coffee Nation 2010). http://www.coffeenation.com/our-company/want-to-become-apartner/sectors/forecourts-convenience/ According to the guardian (2 March 2011), Coffee Nation has been acquired by the Hotel and restaurant group Whitbread, who owns the Costa Coffee chain, in a 60 million deal. http://www.guardian.co.uk/business/2011/mar/02/whitbreadfooddrinks

From this force can be concluded that as there is intense rivalry in the coffee shop sector, branded players are urged to continue to proactively respond to consumer demands in order to retain leadership. As forecasted by Allegra the coffee shop market will continue growing with branded players increasing the numbers of their locations over the next five years and more non-specialists entering the market, as consumers are making coffee drinking to as part of their lifestyle (Allegra Project Cafe11). In this highly competitive environment the importance of customer loyalty is crucial. This has urged coffee companies to be more innovative and to invest more money in implementing reward programmes. For example, Costa has introduced a Costa Club card that allows customers to collect
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points for every pound spent and then exchange them for free food or drink in store. Starbucks operates a Starbucks Card which can be charged with money. Customers will receive rewards every time they pay with their Starbucks Card. Rewards vary from a free Wi-Fi to coffee for one pound. Caff Neros loyalty card is a simple stamp card. For every cup of coffee purchased customers get a stamp. Nine stamps entitle loyalty-card holders to a free coffee. http://www.cupoffun.net/branded-coffee-shopsand-loyalty-programmes/

2.2.4.

Positioning Map

An important marketing tool that can be used to plot the position of a brand against the competition is the positioning map (Kotler 2008). In order to maximise the potential benefit to a company it is highly recommended to establish a distinctive place for their brand in the minds of consumers. In this connection the company has to identify characteristics that are important to the potential/ actual customer. Two of those characteristics can be selected and based on two dimensions the brands can be plotted as the examples below. In figure 1 the positioning map is suggesting that two of the important characteristics used by consumers, when making judgements in this marketplace are based on the coffee quality and the service being offered. Starbucks and Costa Coffee are revealed as high quality and high price. Cafe Nero is revealed as high quality, but relatively cheaper than Starbucks and Costa. Non-specialists, such as McDonalds and JD Whetherspoons are offering good value for money coffee, but lower quality. The aim is to find out spot gaps in the marketplace and identify if the company is launching into a crowded marketplace. It helps to identify the closest competitors and to find out, which are the most important criterias customers' use when 'positioning' different brands in their mind.
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Figure 1

High price

Low quality

High quality

Whetherspoon

Low price

2.2.5.

PEST-Analysis

The PEST-Analysis is a marketing tool that helps marketer to monitor, evaluate and disseminate information from an organisations external environment in order to identify possible opportunities and threats. This tool can be used by organisations to avoid strategic surprise and to ensure long-term health. The variables of a societal environment include forces, such as political, economic, socio-cultural and technological forces. Those forces do not directly touch on the short-run activities of a company, but influence its long-run decisions. (Hunger 2000) Therefore knowledge of the global marketing environment is from great importance to the survival of the coffee shop market, as this knowledge could be a crucial source of competitive advantage.
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Political-legal Factor A political factor that influences coffee shops is the taxation imposed on coffee exports and imports. This means that coffee shops would pay a higher price for the coffee they purchase. Any fluctuations in taxation levels in the coffee industry will also lead to a price rise or decline in the coffee offered to the consumers. Tariffs and taxes are considered to be part of a broader group of legal, political and administrative barriers to coffee consumption and it has been recognized that they influence coffee consumption (International trade Centre). According to the International Coffee Agreement (ICO) 2007, have members committed of the International to Coffee the Organisation themselves recognize

exceptional importance of coffee to the economies of many countries and the sustainable development of the coffee sector. Many countries where coffee is produced are mainly dependent upon this commodity, for their export earnings and for the achievement of their social and economic development goals. With this new Agreement exporting and importing countries of coffee have agreed to undertake the removal of obstacles (such as export, import and domestic taxes (VAT)) which may hinder trade and consumption. Consequently there are no taxes on exports of green caffeinated coffee by importing members, such as EU. (International Coffee Council, September 2011) As consumer are demonstrating an increasing interest in economic, social and environmental aspects of coffee production, various sustainability initiatives, such as Fair-trade, Organic, Rainforest Alliance, have emerged and are becoming relevant to the coffee shop market.

Economic Factor

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Britains economy is recovering from the recession that started in 2008 very slowly. In fact as reported by Andrew Oxlade in the financial website This is Money, it looks like the UK economy is back in recession. According to Oxlade GDP dropped 0.3% in the last quarter of 2011, resulting in a total economy growth of paltry 0.8% for the full year, worse than t the below-par 2.1% expansion in 2010. Oxlade also adds that if the economy shrinks again in the first three months of 2012, Britain will experience the first double-dip recession since 1975. According to Oxlade the official definition of a double-dip recession is when recession returns before the economys even grown back to the size it was before the downturn began. However, Allegra Strategies declared in its press release Project Cafe11 UK that despite the recession the UK branded coffee shop market has shown incredible resilience, with growing sales by 10% to an estimated turnover of 2.1 billion with the market doubling since 2005. The recession has not affected the visiting frequency of consumers, with 1 in 10 UK adults now visiting coffee shops daily. As the coffee culture is becoming more and more engrained through the UK, coffee shops can expect to outperform the retail sector. Nevertheless, the fact that a number of weaker operators (BBs Coffee & Muffins, Coffee Republic, OBriens and Tchibo) failed during 2009, should not be left disregard. This highlights the importance of strong brands and operational excellence (Allegra Project Cafe09). Moreover, as the branded coffee shop market is expanding with a total of 1,342 new outlets, it is creating new jobs and boosting the economy (Allegra Project Cafe11).

Sociocultural Factor Consumer lifestyle in the UK is moving more and more towards a hectic lifestyle, which is creating a positive influence on the coffee shop market. The need for coffee as stimulant and convenience boosts coffeehouse
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market among skilled workers, young and professional with no family. As visiting coffee shops has become a well established habit amongst consumers, many people are seeing it now as an affordable regular treat, which is also driven by consumers continuing demand for convenience products (Mintel, 2011).

Technological Factor As more high quality espresso machines are being offered on the market, more branded coffee shops are coming under increasing pressure to provide an authentic experience that cannot be replicated in the home (Allegra ProjectCafe10). As the trends in global application development and social networking, is exceptionally increasing, Allegra predicts that many outlets will launch and use those marketing tools over the next 1-2 years.

2.2.6.

Opportunities and Threats

Strength The unstable economy in the UK is challenging the coffee shop market to continue their focus in creating a unique coffee experience with high quality coffee and service in order to retain custom and loyalty. Coffee shops are in danger of losing their USP as more and more non-specialists are focusing on expanding their hot drinks ranges and improving the product quality. The desire to replicate the coffee shop experience at home is increasing the demand for high quality espresso machines.
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Weaknesses

Consumers are seeking more and more for convenience products, as British lifestyle is becoming more busy and hectic. Coffee shops should emphasize the increase in alertness that coffee can provide, as they competing with sectors, such as energy and sports drinks, which are appealing to younger consumers.

Tea brands are marketing speciality and herbal teas based on functionality and matching consumer moods. This could be taken as an inspiration by coffee shops.

The trend in global application development and social networking, is exceptionally increasing. .

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