By Mark Wingett
So are you a NIMBY (Not In My Back Yard) or an IMBY when it comes to Costa Coffee? Up and down the UK it seems that battle lines are being drawn around this very question, the Whitbread-owned coffee brand has well and truly entered territory in the public-psyche usually only reserved for Tesco, something which it is probably happy about and prepared for.
The residents of Totnes in Devon have become the latest place alongside Burnham-on-Sea, Bishops Waltham and the Suffolk resort of Southwold to jump on the protest bandwagon against an imminent Costa opening on their high street. As The Guardian put it: “another chapter in the ongoing battle between places that pride themselves on their local character, and the great stomping boot of multinational capitalism”. The fact that Totnes already has 42 café outlets or one for every 178 residents seems to have gone unnoticed in the race for a headline.
Throw in a few MPs and an ex-Python (Michael Palin) and if nothing else the roll out of Costa is becoming a truly emotive subject and this isn’t about to change especially with plans for a further 350 openings recently announced to add to its existing c1,400-strong UK estate, not to mention another 1,000 Costa Express units to push that portfolio close to the 3,000 mark over the next few years.
As with its supermarket counterpart, Costa is now ubiquitous. From pubs, forecourts, roadside services, convenience stores, bookshops, supermarkets and most recently sports sponsorship, it is raising its profile and numbers, while Starbucks, which is still seen in many people’s eyes seen as the more emotive business, retrenches from some of its more prominent sites and refocuses on quality over quantity.
As Whitbread chief executive Andy Harrison points out: “People really don't want to walk very far for a coffee. We can have them a couple of hundred yards apart on a really busy high street, then another at a retail park and another at the station.”
And it is not just in the UK where it is making its mark, Costa is now truly a global brand. It currently operates more than 2,200 stores in 25 countries, including almost 200 in China and more than 100 in India, putting it ahead of rival Starbucks in both, with Thailand, Singapore and Cambodia recently signed up - as part of an expansion programme across South East Asia over the next few years. A dip Stateside into Starbucks’ home territory would be a bold statement and one that shouldn’t be written off with the momentum the group now has behind it.
Earlier this year, the group split Costa into four divisions: Costa UK Retail; Costa Enterprises (which includes wholesale, corporate franchise and Costa Express); Costa EMEI (which covers operations in Europe, Middle East and India); and Costa Asia, which it said reflected the “increasing breadth and globalisation of the brand and supports our growth strategy for the future”. Underlying profits at Costa climbed 38% to £69.7m during the year to 1 March, and worldwide system sales increased 24.3% to £819.3m.
On the back of the poor weather, the Olympics and much tougher comps, analysts expect a slowdown in sales when the group reports its second quarter update later this week, but they are still expected to be ahead by around 2%. Talk of a spin off will invariably raise its head on the update, but with a new chief executive in Chris Rogers chomping at the bit to prove himself at the top table, even that speculation has a bit of a half-hearted feel about it at the moment.
As Deutsche Bank’s Geof Collyer points out there is more benefit for shareholders in Whitbread keeping its Costa than selling or demerging now. He said: “We can see why some may get excited by the prospect of 15x EBITDA for a division of a group trading on nearly 10x, but we would point out that the FY’12 EBITA from Costa was 25% above our FY’12 forecast published in the October 2010 note, and that our FY’13 forecast for Costa now is 50% higher than it was back in 2010.
“As importantly, our FY’16E milestone year forecast is 170% above the FY’11A reported Costa EBITA. History suggests that Costa surprises positively over time so why sell now, and give all that upside to someone else?” Collyer argues that a sell-off of the group’s pub restaurants estate featuring Beefeater and Brewers Fayre would be a more “logical project”.
Heading back to that Guardian feature and the piece was ended by a voxpop of 16 to 21-year-olds in Totnes town centre, amongst the “not wanted here” and “corporate rubbish” stances, one other company’s name was thrown up “McDonald’s”.
The fact that it was put forward in a derogatory manner, will not bother Harrison, Rogers and Whitbread one bit, even in the public’s eyes Costa is now one of the big boys alongside McDonald’s and Tesco and that’s a backyard it increasingly looks comfortable in.
