Coffee-to-go: how to cash in

Bleary-eyed Brits are now knocking back 70 million coffees to get them through each day. It’s a caffeine addiction fuelled by the boom in coffee shops on UK high streets, with more than 16,500 outlets serving up steaming mugs of premium bean coffee.

The opportunity to cash in on this booming market, which is growing at £1bn year on year according to hot drink to go specialists Expresso Plus, isn’t limited to the likes of Costa and Starbucks, though. 

The “biggest prize” in the industry, according to Barry Kither, sales and marketing director at Lavazza UK, lies with takeaway premium coffee served up at local convenience stores or petrol forecourts in specialist vending machines. 

And yet research for The Grocer reveals just 20% of independent retailers currently offer this facility in store. They’re missing out on a “massive opportunity” says Budgens director Mike Baker. “People want their caffeine fix and morning pastry without going out of their way and they expect to be able to do this in their local store,” adds Baker. 

Out-of-home coffee is now worth £7.2bn in the UK, according to the latest figures from the Allegra World Coffee Portal , a prospect that has left brands and operators of the latest hi-tech coffee machines vying for retailers’ attentions. So who are the major players? How should a retailer choose between them? And just how profitable an investment can they be? 

Phenomenon

With 3,400 coffee machines across the UK, Costa Express is a familiar presence in the premium coffee-to-go market. An offshoot of the highly successful coffee shops, Whitbread acquired 870 machines from Coffee Nation in 2011. It hasn’t looked back. “Costa Express is a phenomenon,” says Kither. 

Starbucks followed in 2012, with its first vending machines placed in Sainsbury’s supermarkets, petrol forecourts, office blocks and airports and announced plans for “thousands” of machines. 

These high street café brands now compete for space with established vending players such as Tchibo (which developed its first machine in 1999 and now has 800 machines in c-stores); Nescafe (since 2007), which claims 10,000 independent retailers stock its entry level model or its latest offering, the larger and fancier Nescafe Alegria model; Expresso Plus (since 2013), with 160 machines; and coffee giants Lavazza (since 2014), now in an estimated 100 c-stores (see box, p30).

In choosing the right provider, retailers need to remember that an “inferior product that you just add hot water to” won’t do for consumers any more, says Manish Shah, managing director of Expresso Plus. 

Spoilt by the likes of Starbucks, they now expect premium brews. And that means the cheapest option in the market is unlikely to stand up to consumer taste tests, says Kither. But what is premium exactly? 

Increasingly it means providing that “bean to cup” experience, says James Lowman, chief executive at the ACS. However, Shah insists instant coffee can still be of “high quality” while offering a cheaper price tag.

RRP for an instant cappuccino from Nescafe & Go costs as little as £1.10 for instance, compared to £2 for a “bean to cup” version from Tchibo to go, or £2.10 at a Costa Express bar. A soluble solution is also perfect for retailers looking for less maintenance, he argues. “Beans are great for having the coffee shop experience but it means more moving parts in the machine, and thus more cleaning, which takes up a retailer’s time.”

Opting for a branded machine can also boost appeal, says Baker. “With customers becoming increasingly brand-savvy it does often help to have a recognised brand though it’s not essential,” he says. 

Around 40% to 50% of Budgens stores now have a branded coffee to go offering, he adds, with the majority opting for either Costa Express or Tchibo. 

Despite concerns over the premium, Ilyas Munshi, commercial director at Euro Garages, sees brands as the only way to go. “It is very important to choose a premium product offer and a brand name that people are familiar with and are loyal to,” he says. 

Munshi reports a 30% uplift in sales achieved by replacing other branded coffee machines with Starbucks On The Go. Indeed such has been their success that by the end of 2015, the forecourt trader plans to have 430 machines installed across its 370-site estate. 

Investment

Mention any high street coffee brands to Bestway retailer Kay Patel, however, and he laughs. “I can’t even think about Costa now,” he says, after investing £26,000 in four Rijo coffee machines at his East London convenience stores. For him the “quality and look” of the machines provided by the commercial coffee provider (as well as a “really good deal” for purchasing four) overruled the need for a brand. Ultimately the decision is “about matching the offer to your customer’s needs,” agrees Baker.

And ensuring it’s worth the investment, of course. 

Because while installing a coffee system can “encourage new business, increase in-store dwell time and basket spend” according to Tchibo, profitability is governed by store location, retailer commitment and, perhaps most significantly, the finance agreement. 

Providers have now created a number of finance options for c-store owners, who can now choose to purchase a machine upfront, sign a lease or hire purchase agreement, or enter into a revenue share model for closer involvement from the brand, or operator. All these options come with their own perks and pitfalls.

Opting for up-front capital investment can certainly be a pricey option (from £99-£18,000 per machine), but for Patel it offered greater control over his profits. On a slow day he may sell as few as 10 cups in one store - just enough to break even, he says - but at 15 and above he’s into profit and there’s no need to split the proceeds.

It also gives him the option to disregard RRP. This flexibility meant that when one of his stores found itself surrounded by no fewer than five coffee shops, which “really affects” the appeal of a coffee machine, Patel was able to set a low price of a round pound for a premium cup of coffee in order to “uphold sales”.

Revenue sharing

It’s a luxury not afforded to retailers opting for a revenue share model. On this basis a c-store owner avoids the up-front outlay but they face handing over a sizeable proportion of their sales, and sticking to the RRP determined by the provider. Tchibo insists its own profit share scheme is “profitable with sales of just 15 cups per day” however. And at only 30 cups a retailer can generate profits of £9,027 a year, it calculates. 

Some vendors offer flexible financing options. On the other hand, Costa Express requires all retailers to adopt its revenue share model. 

How much a retailer holds onto depends on cups sold, and the individual agreement in place, adds MD Murray McGowan. “We provide the machine, coffee, branded sugar sticks, marketing support and so forth,” he says, while the retailer provides the floor space, utility services, and fresh milk. 

With a typical Costa Express agreement in place, Costcutter retailer Baz Jethwa says he makes no money if he sells fewer than 20 cups a day. Above that he will share profits on a progressive scale, from 25% for less than 39 cups, to 45% for 40 plus. Costa collects their share on a standing order which for Jethwa equates to about £450 a week. 

Stores in locations with a low footfall would thus be “unlikely to work” for the brand, McGowan admits.

High maintenance

The other key variable in making cash from coffee is a retailer’s commitment to proactive selling, and keeping up appearances. “If I walk into a c-store and the machine doesn’t look credible and it looks untidy I won’t use it,” says Kither. “It’s one of the key learnings from the success of Costa Express,” he adds, in contrast to the “unloved” machines left neglected in c-stores previously. 

“We bring a lot to the retailer in terms of the Costa Express brand,” says McGowan. “We want to make sure it’s not just sitting in a corner unused. It’s in everyone’s interests to sell more.” As a result the Costa Express model provides an incentive to take the opportunity seriously, requiring strong retailer input via “a rigorous programme to make sure machines are maintained to a high standard”, which it says drives average daily sales north of 50 cups. “At which point the retailer does very well,” points out McGowan. 

Kither also advises against leaving the machine to do all the work in driving sales. “If I’m recommended a product by the staff when I go into an establishment I’ll give it a try and that means a retailer can work up to their required volume of cups,” he says. 

Get all these variables right and sales can steam ahead, with annual turnover ranging from £6,000 to an estimated £35,000 per machine at high footfall sites. 

And that’s not including the opportunity for incremental sales spend. “If you start selling coffee, retailers see an uptake in sales of other items, it’s a real hero product to bring people in,” says Shah. 

Baker agrees. “Our flagship Budgens at Crouch End features a Costa Coffee machine, which averages around 30 cups a day,” he says. “There’s no doubt it drives additional sales.”

Indeed, at Euro Garages, where sales have risen 47% year on year to £646m, the growth of their food-to-go offering, including alignment with the likes of Starbucks, “has fundamentally driven our growth over the past decade”, says Munshi. He adds that more than 75% of customers are now buying additional items, as well as their fuel, at the forecourt trader. 

With growth like that, it’s clear that coffee is the obvious category to surpass tobacco as a source of footfall and revenue in convenience. 

“Busy lifestyles are driving a convenience revolution,” says Lynn Little, category business unit lead for standard ingredients at Nestlé Professional. 

“With work, socialising, children and hobbies taking priority, we now expect our favourite drink anywhere, any time. This poses a huge opportunity for convenience stores to cash in.”