Costa Coffee An Overview What Market Is Essay

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Costa Coffee: An Overview

What market is it in?

As one of the premium espresso chains in the United Kingdom, with a price point higher than that of Starbucks or standard pub coffee, Costa Coffee is clearly focused in its efforts toward the consumer market.[footnoteRef:1] It primarily sells coffee and accompanying sandwiches and beverages. It also sells beans and other coffee products to consumers, but these aspects of its trade are a relatively minor segment of the business, and it does not sell directly to retail businesses. It sells a service, in the form of the brewing of its coffee, the experience of dining out, and other intangible aspects of the experience of dining in a Costa Coffee location. Ultimately, the shop is a service-based business with a focus on the consumer. [1: Costa Coffee -- United Kingdom, accessed July 23, 2012 at]

What business sector is it in?

Costa Coffee is clearly in the 'tertiary' sector of the economy.[footnoteRef:2] It does not harvest coffee beans, nor does it manufacture most of the products sold in stores. The service-based aspect of Costa Coffee is what transforms the beverage into something desirable in the eyes of the consumer. Costa is owned by Whitbread "the UK's largest hotel and restaurant group.[footnoteRef:3]" Whitbread's brands include such well-known tertiary enterprises in the hospitality industry as Premier Inn, Beefeater and Table. [2: Matt Rosenberg, "Sectors of the economy,", accessed July 23, 2012 at] [3: Dan Welch, "Fairtrade beans do not mean a cup of coffee is ethical," The Guardian, February 28, 2011, accessed]

Why did it grow?

Despite the belt-tightening by many UK consumers in the wake of a shaky economy, Costa Coffee has shown impressive growth. "Despite the squeeze on discretionary spending, premium coffee is increasingly emerging as a surprise success story in an era of austerity. Costa parent group Whitbread said comparable sales at its espresso chain in the UK rose by 6.7%" recently.[footnoteRef:4] One of the main reasons cited for the surge in sales is Costa Coffee's aggressive promotion of its loyalty program, which offers one free coffee for every 20 the consumer purchases. 40% of all transactions, the company estimates, "are used to build up loyalty points.[footnoteRef:5]" Given the super-saturation of Costa Coffee all over the United Kingdom, a consumer will 'cross the street' to buy an espresso at Costa and win loyalty points, versus patronizing a Starbucks. [4: Simon Bowers, "Costa Coffee defies economic gloom and surging inflation," The Guardian, October 18, 2011, accessed July 23, 2012 at] [5: Bowers, 2011]

What methods did it choose to grow or change direction?

Much like Starbucks during the early years of its growth into an international company of renown, Costa Coffee has been pursuing an aggressive expansion strategy. While conventional thinking used to advise companies to expand slowly, Costa is determined to make its coffee a 'habit' for consumers through its ubiquitous presence throughout the UK, and it allows stores to compete against other stores. "After adding 85 UK stores in six months Costa now has than 1,302 outlets in Britain -- considerably more than its closest rival Starbucks and a higher number of sites than McDonald's," the latter of which also sells premium coffee.[footnoteRef:6] Costa has also been aggressively acquiring the chain's competitors, to reduce competition, such as Coffee Nation which has now been rebranded Costa Express. This rapid expansion and acquisition strategy has seen a 20% uplift in the number of coffees sold as a result of the incorporation of Coffee Nation into Costa Express alone.[footnoteRef:7] [6: Bowers, 2011 ] [7: Bowers 2011]

Are they successful?

Costa's strategy has thus proven to be extremely successful. Costa is one of the few high street retailers with revenues growing at a faster rate than inflation. Given that concerns about inflation and unemployment remain at the forefront of the national consciousness in the United Kingdom, Costa's financial strength speaks well of its ability to sustain demand even in a challenging market environment. Costa continues to defy expectations, "outstripping the consumer price index (CPI), which hit 5.2% in September" and showing sales growth three times higher than predicted.[footnoteRef:8] The UK economy is improving somewhat -- unemployment recently hit a 9-month low -- but even during the worst of the recession, Costa Coffee was thriving.[footnoteRef:9] [8: Bowers, 2011] [9: Scott Hamilton, "UK unemployment hits 9-month low," Bloomberg July 18, 2012, accessed July 23, 2012]

What does the future hold?

Costa Coffee is looking to expand internationally. Here it is in close rivalry with Starbucks, which has been aggressively pursuing an international expansion strategy, particularly in the Far East. In fact, Starbucks has been closing underperforming stores domestically to 'amp up' its competition with international chains like Costa.[footnoteRef:10] Costa seeks to open 3,500 sites worldwide within five years and recently opened its 100th store in China. While still not 'in the black' in China, profits overall are rising, from £41.8% to £27.8m.[footnoteRef:11] However, Starbucks remains dominant in the coffee market with a 69.8% share of the international marketplace.[footnoteRef:12] [10: Markio Sanchanta, "Starbucks plans major China expansion." The Wall Street Journal, April 3, 2010, accessed July 23, 2012] [11: Bowers, 2011] [12: Tulepbergenova Aigerim, "Starbucks global expansion," Business Today, November 18, 2010, accessed July 23, 2012 at]


What is PESTLE? Why is it used?

PESTLE analysis is an instrument in strategic planning used to better understand the immediate market position of an organization. "PESTLE analysis is in effect an audit of an organisation's environmental influences with the purpose of using this information to guide strategic decision-making. The assumption is that if the organisation is able to audit its current environment and assess potential changes, it will be better placed than its competitors to respond to changes.[footnoteRef:13]" It is intended to be more comprehensive and specific than other tools, such as SWOT, because it more specifically classifies the impact of forces on firm behavior.[footnoteRef:14] [13: "PESTLE analysis," CIPD Summary. accessed July 23, 2012 at] [14: Alan Chapman, "SWOT," Business Balls, accessed July 23, 2012 at]


Economically, the UK still remains on shaky ground, and while consumers still seem willing to pay a premium for the Costa brand, the company has been mindful of the fact that it cannot allow its price point to grow too high, for fear of alienating consumers. "Rising commodity prices, particularly of coffee, had cost the company an extra £2m in April, but he said there were no plans to pass the increase on to consumers.[footnoteRef:15]" Last year, the company was already forced to increase beverage prices by 5p per cup because of the increase of the VAT and rising commodity prices. [15: Rupert Neate, "Costa sales boosted as UK love affair with fancy coffee continues," The Guardian, June 21, 2011, accessed July 23, 2012 at]


On the surface, Costa Coffee's surging economic success in an era in which belt-tightening is epidemic may seem strange. However, some economists have suggested that Costa is benefiting from the so-called 'lipstick' effect. True, some economists have spoken of the 'latte' effect, which encourages consumers to cut back on small luxuries during recessionary times to save money.[footnoteRef:16] However, the lipstick effect suggests that "during an economic crisis, consumers give themselves less costly luxuries," many consumers still want to 'treat themselves'... "so as Britons decide not to buy a new car, they buy a Chanel lipstick (or nail varnish in my case), or a coffee?[footnoteRef:17]" [16: Rupert Neate, "Coffee Republic goes cold as customers cut back on luxury lattes," The Telegraph, August 20, 2008, accessed July 23, 2012] [17: Bowers 2011]


To outsiders, one of the most surprising aspects of the surge in popularity of Costa is the fact that Britons have been long known as tea-drinkers, rather than as coffee drinkers. However, in recent years, the United Kingdom has seen a rapid upsurge in interest in premium coffee.[footnoteRef:18] In the past five to ten years, access to good coffee has come to be seen as a birthright -- a far cry from a nation which used to consider Nescafe the height of coffee perfection. [18: Neate 2011]


Although coffee may seem to be a fairly 'old' beverage, in terms of its production, Costa has capitalized upon technology to increase service and convenience for consumers. As part of its acquisition of Coffee Nation, new Express Costa service stations will allow consumers to buy coffee through kiosks.[footnoteRef:19] Costa Coffee has even begun to introduce some 'drive-through' coffee service stations for customers who wish to get their beverages on-the-go. Technology also allows the company to target more budget-focused consumers. "As well as being quicker, it is also cheaper. The average cup of white coffee from the machines comes in at £2 compared with £2.45 from a walking, talking barista at Costa.[footnoteRef:20]" [19: Zoe Wood & Simon Bowers, "Costa Coffee chain to double in size," The Guardian, April 28, 2011, accessed July 23, 2012] [20: Zoe Wood, "Coffee Nation," The Guardian, March…[continue]

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