In the UK the big coffee chains – Costa, Starbucks, Pret – are under pressure. Latest symptom: while Coca Cola bought Costa from Whitbread for £3.9bn, they’ve just turned down an offer for less than half of that.
But it’s not that consumers have fallen out of love with coffee, or that prices have just got too high. After all, the FT reports that premium upstarts are growing fast.
What can we learn?
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On the surface, the woes of the big coffee chains look like a simple story. Poor harvests in Brazil and Vietnam have driven coffee prices up, taxes have increased labour costs, margins are squeezed. The going rate for a “cappuccino” is now four quid.
So: cost-conscious people leave Costa and go to Greggs or bring a flask from home, and coffee aficionados think, “Well if I’m already spending that much on a cup, I’ll go to one of those fancier places.”
Small and regional players like 200 Degrees are growing because they make coffee feel like more than a purchase. Their shops feel like places you actually want to sit in, not just somewhere to grab a drink and leave. They train their staff well, run barista courses for customers, and pay attention to details. At the counter, they don’t make you feel like you’re being passed down a production line.
Compared to Greggs, a flask from home, or the likes of 200 Degrees, Costa and their peers find themselves in a classic “stuck in the middle” strategy trap – neither low cost, nor sufficiently differentiated to command a premium price.
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If you want to put prices up, a very good way is to surround your product with value-adding elements (I call this Profit Amplification – see my article When is an egg not an egg? [https://bassclusker.com/when-is-an-egg-not-an-egg/ ] and my book Start With What Works [https://bassclusker.com/start-with-what-works/ ].
I remember my first cup of Starbucks in its heyday, in New York one bright cold Sunday. I had a wonderful morning sitting by the window, watching the steam rise from the Manhattan street corner while I read my book. I bought a reasonably nice drink for a lot more than the cost of the coffee beans and had a great experience.
Fast forward to last summer – my most recent visit to a NYC Starbucks. It will be my last. The decor was hard beige tiles, like the changing rooms of a public swimming pool. In the unlikely event you wanted to hang out, there was nowhere to sit.
As chains have scaled, they’ve relied increasingly on what I call Management By Algorithm: apps, impersonal touch screens for ordering, standardisation, rollout, process, consistency. The whole machine that makes “coffee everywhere” possible (I remember a Whitbread executive at a conference once telling me that they would literally put a Costa anywhere).
All this High Tech Management By Algorithm makes sense if you think all you’re selling is a hot drink: focus on optimising delivery of the core product.
But the customer thought they were buying something more (that was once the point of Starbucks, right?). So when prices rose, and the coffee product was all you were getting, something changed psychologically.
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Tech-Touch lessons:
- People are baulking at £4 for an “efficiently delivered hot drink”. But many will pay more that that for a drink presented with a human touch.
- When you drive efficiency to protect margin, you often destroy the very thing people would have paid more for.
- You can’t automate your way out of a value gap.
Tech enables you to scale the system. Fair enough, but don’t forget that Touch is often what makes the price feel justified. And that’s what amplifies profit.