Coffee takes over the high street

Forget austerity: Britain's coffee shop boom continues, says James Thompson

Of the many wrongheaded forecasts made by economists about changes in consumer behaviour during the recession, the "latte effect" has proved widest of the mark.

The idea – logical enough – was that consumers would quickly give up on paying £2.50 for a cup of coffee when they started feeling the pinch. In fact, the opposite has happened.

A new report from the consultant Allegra Strategies forecasts that the UK's branded chains alone, includingCosta, Starbucks, Caffè Nero and Pret A Manger, will make sales of £1.94bn this year, almost 13 per cent more than in 2009, which was itself up 6 per cent on 2008.

"I have never seen such exciting developments in the UK coffee shop market," said Jeffrey Young, the managing director of Allegra. "This year the market grew by more than 12 per cent compared to 2.5 per cent for the UK retail sector, adding more than 800 outlets in 2010 in challenging economic times." According to Allegra's Project Café10 UK report, the total coffee market will deliver sales of £5bn in 2010.

This sort of stellar growth is reflected in figures from the UK's biggest chain, Costa Coffee. Last week it revealed a rise in sales of 11 per cent for the 13 weeks to 2 December, its 35th successive quarter of growth.

John Derkach, the managing director of Costa Coffee, said: "People thought the coffee shop was some sort of discretionary luxury thatpeople could cut back on. But for just £2.05 for a small cappuccino, you can get a great coffee and escape from the hurly-burly of life for half an hour."

Certainly, the big branded beasts are engaged in a land-grab and are on track to increase their number of outlets by 6.1 per cent to 4,650 this year.

However, the fastest growth is coming from non-specialist operators, such as McDonald's and JD Wetherspoon, department store cafés and motorway forecourt operators. Together these have added 468 outlets in the last 12 months: more than half the new coffee shops opened in 2010. According to Allegra, McDonald's now sells 84 million cups of coffee a year in the UK, a figure bettered only by Costa and Starbucks.

Happily for those who prefer to avoid the all-encroaching chains, many independent coffee shops also appear to be thriving: this sector is tipped to grow in numbers by 2 per cent to 5,336 this year.

Growth in the wider market has been fuelled, in part, by many operators upping their game with innovative drinks, such as the flat white, which is stronger than a latte but milkier than a cappuccino, and with warmer, more welcoming shops.

But there is a more basic reason for the growth in the market: British consumers have fallen for their lattes and cappuccinos on a huge scale. In doing so, they have created a market in which any decent operator has an opportunity to flourish.

Anya Gascoine Marco, the head of food and beverage insight at Allegra Strategies, said: "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 makes you feel better." But she is keen to stress that consumers have become much more demanding of coffee shops and that anyone who lets their standards slip will get punished by consumers.

Arguably, no operator felt this more than Starbucks a few years ago when its sales were falling and it closed some UK shops. In response, the chain started to introduce new products, such as its flat white and own-brand instant coffee, and to tailor the look of its UK shops to reflect the local market. After opening its first redesigned shop in London in November 2009, with bigger "community tables" to cater for business meetings, Starbucks UK will have renovated more than 200 by the end of this financial year. Its UK sales grew by 6 per cent in its last quarter.

For the humble independent, Ms Gascoine Marco believes the opening of a new branded chain in an area can be "synergistic" for them. "A branded chain brings footfall," she argued.

Mr Derkach agrees, adding that Costa has "made coffee a mainstream experience". He said: "We've encouraged more people to go to coffee shops and some of these people then go into independents. We don't take any trade from the good independents – it is a symbiotic relationship."

Although the branded and non-specialist players are set to expand more strongly over the next three years, the number of independents is also expected to rise – from 5,336 this year to 5,662 by the end of 2013.

And what of threats? Ms Gascoine Marco said: "There is talk of tea shops coming back but I firmly believe that coffee is the number one for UK consumers at the moment."