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Spilling the beans about coffee franchises

Written by Eric Johansson on Monday, 07 August 2017. Posted in Analysis

While traditionally a nation of tea drinkers, thanks to the efforts of franchises Britons have increasingly turned to coffee as their beverage of choice over the last two decades

Spilling the beans about coffee franchises

From baristas serving up steaming cappuccinos to franchisees selling lattes out of vans, there certainly seem to be plenty of opportunities to make a killing peddling coffee in the UK. “We’ve seen an explosion in coffee shops,” says Carl Reader, affiliate forum chairman of the bfa, author of The Franchising Handbook and director at Selling a Franchise, the franchise-purchasing website. And the numbers back him up: Allegra World Coffee Portal, the consultancy researching the global coffee industry, recently estimated that coffee shops are poised to outnumber pubs by 2030, effectively making them the new local. And this trend has been spearheaded by franchises. “They’ve changed the public expectation from paying 50p or £1 for coffee served in a really small cup to a £4 experience,” says Reader.

However, franchises like Starbucks and Costa Coffee would have been unable to transform the UK’s dietary preferences if the market hadn’t been ripe for disruption in the 1990s. “If you’d swung by a traditional café back then your options would’ve been between tea and bad-tasting instant coffee,” says Reader. Coffee does have a long history on these shores with the first coffee house opening as early as 1651. Nevertheless, tea became the warm brew of choice because few colonies occupied by the British Empire could grow the beans. This left Britons with a poorer coffee culture than the ones enjoyed by their neighbours on the continent. Fortunately, it also provided the perfect opportunity for franchises to deliver the shot of creativity that would wake up the market. “Costa in particular deserves a lot of credit for changing this,” says Reader. “The way it franchised allowed Costa to open lots of stores with revolutionary, great-tasting coffee fast and quickly build massive brand awareness.”

And it’s not difficult to see why these shops became so popular. “There are a lot of reasons why it happened,” says Jeffrey Young, managing director of Allegra World Coffee Portal. “Coffee bars created an extension of people’s homes where – thanks to mobile phones and laptops – people increasingly chose to hang out and work.” He’s hardly the only one pointing out coffee shops’ rise as social venues. Back in 2014, Andy Harrison, then-CEO of Costa-owner Whitbread, stated that the java boom was caused by women having more spending power and that they’d rather socialise over a latte than spend time in male-dominated pubs. Another reason could be that modern coffee houses actually provide a better bang for your buck. “People may feel a bit ripped off when they have to pay £2 for a cup of warm water and bag of tea when they could get a hand-crafted latte from a barista,” says Young. “Tea may still be a national treasure but there has definitely been a migration from tea to coffee.”

But an industry cannot change an entire nation’s beverage of choice by simply providing a place for people to meet. To be truly successful vendors have to be close to their customers, which is something franchising lends itself particularly well to. “Franchising allows companies to scale much faster to where their customers are than brands that just grow organically,” says Reader. While coffee shop franchises excel at rapid expansions, mobile franchises like Coffee-Bike and Cafe2U have taken it one step further by literally bringing their stores to customers. “And they also benefit from franchising because the franchisee is usually the one operating the bike or the van,” Reader says. “That means that they are far more motivated to complete their rounds than regular employees would be.” Given their ability to grow exponentially and the drive of their franchisees, it’s hardly surprising that franchises have had such an impact.

However, despite the British public’s new taste for high-quality coffee, it has become increasingly hard for franchises to make the cut as the market is slowly becoming saturated. “There’s no room to be mediocre in today’s world,” says Young. Not only are big chains facing competition from independent artisan coffee houses but smaller franchises are also skimming some froth off their profits. “The companies that used to be one-offs are becoming boutique chains,” says Young. “And as they scale they take market share from the big chains and from people who may have a shop but who lack the professional skills to run bigger businesses.” In other words: there’s still room for franchisors with the right skills to brew success even if the market is crowded.

And it's not difficult to see just why new franchises have the edge over the competition. “There may have been a backlash against the big chains but people still don’t want to risk going into an independent shop where a barista could take half an hour to make coffee,” says David Hodgetts, co-founder and director at Triple Two Coffee, the coffee franchise. He doesn’t just think that nimbler franchises have an advantage over standalone brands but also that they can be more agile than larger chains. “The reality is that companies like Starbucks and Costa are too big to change,” he says. “They won’t be able to adapt fast enough.”

But even though coffee franchises are going from strength to strength, that doesn’t mean that they aren’t worried about the future. “Brexit will affect every business in the UK,” Hodgetts says. “We’ve met a lot of people who have doubts about starting a franchise because they fear Britain’s divorce from the EU.” It’s easy to see why there may be some trepidation as putting an end to free movement could make it harder to source talent. In fact, the British Hospitality Association warned in March that the hospitality sector is so reliant on workers from the EU that it would take ten years for chains like Pret A Manger to replace its current talent pipeline if it was cut off from the continent. And that’s not the only hurdle coffee franchises have to overcome. “Brexit also has a short-term effect on supplies,” says Hodgetts. “Obviously a lot of them come from abroad and their prices have increased a lot.”

On the other hand, Brexit may actually provide British franchises with a golden opportunity to boost their profits. “Whenever there’s an economic downturn, the spending on some products goes up,” says Reader. Researchers at Texas Christian University dubbed it the ‘lipstick effect’ after they noted that people buy more beauty products during recessions. Similar trends have been noted in the UK where people enjoy more cheap thrills like sparkling wine, fashion and takeaway coffee when they were on a tight budget. “People may eschew dining out and treat themselves to a coffee instead,” Reader says. In fact, the coffee-shop market grew by over 6.9% in 2016 despite the economic downturn, according to Allegra World Coffee Portal.

So even though there may be some clouds on the horizon, the industry still has plenty of reasons to remain bullish about its future. It’s clear that not only is this simmering coffee culture here to stay but that franchises have a huge role to play in satisfying the nation’s caffeine cravings.

About the Author

Eric Johansson

As web editor and resident Viking, Johansson ensures Elite Franchise is filled with engaging and eclectic entrepreneurial stories. While one of our most prolific franchise writers, he has sharpened his editorial teeth by writing about entertainment and fitness. Follow him on Twitter at @EricJohanssonLJ to catch up with his stream of consciousness.

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