Costa Coffee began life in 1971 London as a small roastery. It has since developed into one of the main players in the coffee sector. Historically, over the decades, it grew explosion with now over 4,000 stores in 50 different countries. In light of recent events, including reports that its parent company, Coca-Cola, is looking to sell the rising chain, its future has come into uncertain question.
Coca-Cola’s £4.9 billion acquisition of Costa in 2019 now looks overpriced, with the company looking to sell it on for around £2 billion. This substantial drop in value reflects not only market conditions but the challenges Costa faces in adapting to emerging consumer preferences. The coffee market is evolving at a breakneck pace. In reply, Costa—with the help of investment bank Lazard—is hardly curled into a fetal position.
In fiscal year 2023, Costa generated £1.2 billion in revenue. It posted an operating loss of £14 million, mainly due to the impact of inflation on costs. This window into their financial struggle reveals an important consideration. Costa needs to rethink its strategy in a UK market increasingly led by health-conscious consumers and a proliferation of independent coffee shops.
Costa serves a variety of non-coffee drinks such as frappés and fruit-based coolers in addition to its coffee shop mainstay menu. These health-related offerings may not necessarily align with the demonstrated health-oriented desires of their customers, according to some big-picture analysts. These patrons are growing more wary of flavored syrups and whipped cream. Clare Bailey, an independent retail analyst, points out that for many consumers, a straight-up latte has transitioned from being a treat to a necessity.
We know consumer preferences are changing, especially among younger generations. Danni Hewson, head of financial analysis at AJ Bell, notes that her late teenage children do not consume caffeinated beverages at all. “If you think about a lot of Gen Z, they’re looking at matcha, they’re looking at brews, they’re more healthy,” she remarked.
That health consciousness is a particularly unwelcome development for chains such as Costa given the growing popularity of high-street refreshments. 47-year-old customer Mimoza Emsa always liked Costa. Nowadays, she’s loyal to Pret A Manger instead, as it’s nearer to where she works and has appetizing subscription savings. “It’s really convenient. It’s one of the things that persuades me to have coffee here,” she explained.
At the same time, residents like Rafik Khezmadji, 37, still go to Costa because it provides him with the option of drinking coffee outside. It’s nice to get this moment with just me,” responded McCormick. Even he admits that convenience is a key factor in where he chooses to go for coffee.
The competitive environment for coffee in the UK has changed radically in the past half-decade. Independent coffee shops, specifically, have jumped from 11,700 to nearly 12,400. This robust growth is a testament to the changing consumer preference towards supporting the smaller businesses with a focus on quality and unique products. Clive Black, vice chairman of Shore Capital, suggests that Costa and similar chains are struggling to keep pace with these changing market dynamics.
Lucy Williams can usually be found seeking out the next best coffee shop. She frequently selects her favorites based on the new trends and unique elements of production. “There are only certain places I’d go for a coffee,” she said. Her feelings mirror what we hear from many consumers who are seeking out new options instead of just going to the big-name brands all the time.
Where some customers are still the purists sticking to their espresso and drip products, others are turning to the creativity and diversity across beverage categories. Megan Penfold stated, “Trends don’t affect me as much. I like what I like,” demonstrating that while some consumers may resist change, there is a clear shift among others.
As Coca-Cola evaluates its investment in Costa Coffee and the company navigates an increasingly competitive market landscape, its future remains uncertain. The bottom line is that as consumer preferences increasingly demand healthier fare, the time to innovate is now. We need to look at new experiences in the coffee category.