Costa Coffee Market Analysis and PESTLE Review

Overview of Costa Coffee

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. 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 represent 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 visiting a Costa Coffee location. Ultimately, the shop is a service-based business with a focus on the consumer.

Costa Coffee operates in the tertiary sector of the economy. 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. Whitbread's brands include such well-known tertiary enterprises in the hospitality industry as Premier Inn, Beefeater, and Table Table.

Growth Strategy and Expansion

Despite 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 has increasingly emerged as a surprise success story in an era of austerity. Costa's parent group Whitbread reported that comparable sales at its espresso chain in the UK rose by 6.7% in a recent period. One of the main reasons cited for the surge in sales is Costa Coffee's aggressive promotion of its loyalty programme, which offers one free coffee for every twenty the consumer purchases. The company estimates that 40% of all transactions are used to build up loyalty points. Given the widespread presence of Costa Coffee across the United Kingdom, consumers will cross the street to buy an espresso at Costa and earn loyalty points rather than patronising a Starbucks.

Much like Starbucks during the early years of its growth into an international company, Costa Coffee has been pursuing an aggressive expansion strategy. While conventional thinking once advised 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 individual stores to compete against one another. After adding 85 UK stores in six months, Costa came to have more than 1,302 outlets in Britain — considerably more than its closest rival Starbucks, and a higher number of sites than McDonald's, which also sells premium coffee.

Costa has also been aggressively acquiring its competitors to reduce competition. Coffee Nation, for example, has been rebranded as Costa Express. This rapid expansion and acquisition strategy produced a 20% uplift in the number of coffees sold as a direct result of the incorporation of Coffee Nation into Costa Express alone.

Market Success and Future Outlook

Costa's strategy has 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. Although the UK economy was improving — with unemployment recently hitting a nine-month low — even during the worst of the recession, Costa Coffee was thriving.

Costa Coffee is also looking to expand internationally, where 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 in order to intensify its competition with international chains like Costa. 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, overall profits are rising. However, Starbucks remains dominant in the global coffee market with a 69.8% share of the international marketplace.

What Is PESTLE and Why Is It Used?

PESTLE analysis is an instrument in strategic planning used to better understand the immediate market position of an organisation. In effect, it is an audit of an organisation's environmental influences, with the purpose of using that 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 those changes. PESTLE is intended to be more comprehensive and specific than other tools, such as SWOT, because it more precisely classifies the impact of external forces on firm behaviour.