CoffeeChainsThe Irish coffee trade will get a jolt soon when major UK chain Costa opens here at the end of May, writes Gretchen Friemann
Ireland's cappuccino wars are set to intensify next month when Costa, the UK's largest coffee chain - and Starbucks' biggest global competitor - opens its first two Irish stores in Cork as part of a rollout strategy that will see 15 outlets across the country within 12 months.
Costa is owned by the listed hospitality group, Whitbread, but the parent company has franchised out its Irish operation to Scottish-based firm, Tuli Holdings. Tuli already manages the KFC, Pizza Hut and Jean Scene brands here and intends to invest up to €20 million developing the Costa chain north and south of the Border. The expansion is expected to create between 500 and 700 jobs.
The arrival of the UK's largest coffee chain comes at the same time as the US corporate giant Starbucks is finalising the design of its flagship Irish store at College Green in Dublin 2, which is due to open within the next few weeks.
However, Costa, which markets itself as a modern Italian coffee brand, is adopting a radically different approach to its Irish rollout strategy than Starbucks. Rather than opting for a high-profile store in Dublin's city centre, the UK chain is opening its first outlets in the cheaper rental locations of Cork city's Blackpool and Douglas Court shopping centres. The new 139sq m (1,500sq ft) cafés are due to begin trading by the end of next month and were signed for an annual rent of around €75,000 each.
There are no plans to open a Costa outlet in Dublin until early next year although it's understood the company has already secured five sites around the city.
According to Michael Conroy of CB Richard Ellis Gunne and a property adviser to Tuli Holdings, the Dublin market is not seen as the "make or break" area for the brand and he claimed the potential for sales growth was just as high in urban centres outside the capital.
In contrast, Starbucks is forking out €220,000 in annual rent for its 176.5sq m (1,900sq ft) site at College Green and is in talks about opening more of its cafés in the Harcourt building on Harcourt Street and in Dundrum Town Centre.
Industry sources warn that Ireland's coffee sector is about to be given a "severe jolt" with the arrival of two of the biggest coffee brands in the world and many question whether the multinationals will consider acquiring existing operators.
When Starbucks expanded into the UK it paid a massive £49 million (€72 million) for 50 Seattle Coffee Company stores to secure instant market penetration. But Costa has ruled out any merger and acquisition strategy within the first year of its Irish rollout. According to Mr Conroy, the brand is adopting a "measured approach" to the expansion with three stores planned later this year for Limerick, Galway and Waterford.
He claimed any acquisition of a current incumbent - the top four are O'Briens, Insomnia, West Coast Coffee and Café Sol - had "negative cost implications" due to the high rental commitments that "would be built into a deal".
And he argued the same factors would deter Starbucks from pursuing such a strategy. "Most of the local chains have rapidly increased their store networks over the last few years in the hope they would be bought out by a larger company.
But the high rentals most of these brands are committed to means this isn't a realistic option for us in the short-run. "The cost of these brands is another reason why we're not interested. The sale price is normally factored at what the projected turnover is and that's not an attractive strategy for us at this point in time." Although Mr Conroy didn't rule out a takeover further down the line he stressed it "would not be at an inflated value based on a moment of time, because in 12 months we will be eating into that chain's market share with our own 15 stores".
He added that Costa's priority in the immediate future was to achieve its rollout target. "Costa likes to be able to assess how each outlet is performing so we're not going to be hurried into this expansion. We're following a well-thought out strategy." However, Costa's approach may be overwhelmed by the multi-billion dollar behemoth, Starbucks.
The listed company's strategy in both the US and the UK has been to cluster-buy sites in order to eradicate local competition, enabling it to swiftly dominate the market. Mr Conroy said that while Costa would be "watching Starbucks' moves" there was "no concern" at the Seattle-based company's potential to overrun the sector.
He said Costa's sophisticated café design - the company's spends around €200,000 on fit-out costs for each outlet - together with its award-winning coffee would drive the growth of market share "more effectively and more profitably" than its competitors. "At Costa, we believe that when the brand is established in Ireland, as it was in the UK, consumers will have the choice between two of the world's leading coffee houses and they will ultimately choose which product they prefer."
Costa is the largest coffee chain in the UK with 380 outlets compared to its closest competitor, Starbucks, which has 360 stores. The brand opened its first Northern Ireland outlet last December at Belfast airport and Whitbread, which operates the UK business, has just approved a 25 per cent expansion plan, which will bring its British store network total to 450. Whitbread's accounts show the Costa brand made an operating profit of £10 million (€14.7 million) last year, making it the UK's most profitable coffee chain.
