Caffeine – the drug that’s boosting hundreds of new SMEs
7 min read
27 March 2015
The growth of the coffee shop is one of the biggest changes to our high streets in recent years. Over the last decade or a host of new places to drink coffee ranging from big chains to independent boutique shops have dotted every street, as well as shopping centres, stations and airports.
Next month the London Coffee Festival, followed immediately by UK Coffee Week (4th to 10th May), will see a celebration of the country’s love of coffee and showcase the work that the industry is doing to help the most vulnerable contributors to its success around the world.
According to consultancy Allegra Strategies, the branded coffee chain sector had a turnover of £2.6bn across 5,531 outlets in 2013. Its report, Project Café13 UK, showed that the sector enjoyed a growth in sales of 9.3 per cent and outlet growth of 5.9 per cent. Allegra forecasts that the total UK coffee shop market will have more than 20,500 outlets and a turnover of £8.7bn by 2018.
Tesco’s decision to put a major investment into medium sized coffee shop chain Harris and Hoole, originally set up by three siblings, Nick, Andrew and Laura Tolley, and to take a non-controlling interest further demonstrated the appeal of coffee shops, especially those in the smaller end of the market.
Peter Dore-Smith had enjoyed a career in the catering industry before he set up his own coffee shop business, Kaffeine, in August 2009, having arrived in the UK from Australia in 2005.
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“I’d seen good quality coffee shops working well in Australia and I was sure that they could work here too,” he said. “I’d noticed here that people were getting used to drinking good coffee instead of going to the pub, for instance, and making better coffee at home.”
As well as the quality of the coffee Dore-Smith believed there was gap in the market for a shop that had a great atmosphere, high quality good and better service than was typically available in many cafes at the time.
The business has grown “steadily not exponentially,” he said. The first branch of Kaffeine is in Great Titchfield Street, above Oxford Street in London’s garment district and the second is nearby in Eastcastle Street.
Although making coffee all day and chatting to customers might sound like something of a charmed life for many harassed SME owners, running a coffee business is hard work, Dore-Smith is keen to stress. It’s worth noting that Harris and Hoole have closed some shops since it joined forces with Tesco.
Dore-Smith and his wife, who doesn’t work for the business, saved up for nearly four years to raise at least some of the capital for their business. They then approached the banks. Given that this was late 2008 the response was not encouraging.
“We’d raised 40 per cent of what we needed and we asked them for the remaining 60 per cent,” he explains. “NatWest said ‘no’ and so we approached HSBC who were interested but wanted us to put in 60 per cent against their 40 per cent.” A well written business plan with detailed information about costs financial projections as well as his 20 years’ experience of the hospitality industry, helped he believes.
The strategy was to differentiate Kaffeine from the large chains that were already well established at this stage. This included using around 20g of coffee for a standard cup rather than the 14g norm. The company also pays close to the London Living Wage.
The current coffee shop culture reflects changes in the way people live and work, according to Jeffrey Young, managing director of Allegra Strategies, which has been studying the sector for 16 years.
“We’re more mobile and the coffee shop is a third space for many of us,” he said. This new generation of coffee entrepreneurs come from a wide variety of backgrounds. Some have escaped from a big company and decided to do their own thing although a background in hospitality and catering is more typical.
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“The key to success is to invest in the product and create a space that people really want to visit.”
Coffee shop owners are more likely to come unstuck, his research shows, when they under estimate the initial outlay and when they try and cut corners on elements such as décor and investing in properly trained staff and experienced baristas.
The actual coffee in your latte or cappuccino accounts for around just five per cent of the total price you pay – usually less than the milk, Young reveals, but coffee shop owners have to cover the usual business costs such as wage bills, rent, utilities and insurance among others.
Paper cups cost around 12p each. Issues such as cash flow and getting the margins right are familiar to any coffee shop owner, he says. Coffee shops usually have to be on expensive, high street locations.
Money often comes from angel investors, either those already in the hospitality business or entrepreneurs who simply like the idea of investing in something that they see as interesting.
“The sums involved don’t usually attract interest from Venture Capitalists but we do find that coffee shops are often profitable,” he says. “We’ve got about 185 on our data base and we haven’t seen many closures. Some businesses can have profits or around £100,000 a year while others are just washing their faces but it’s still a good business to be in.”