Hot profits
Demand for hot drinks is giving pubs the chance to brew up extra trade, as Kelly Smith reveals
Hot drinks are becoming more important to the trade than just another business bolt-on; flexible opening hours, the smoking ban and the colossal coffee-shop market - Britain's fastest-growing business - have made them an accessible and bankable proposition.
The market is expected to swell by 50% in the next four years. But Mintel leisure analyst Helena Spicer says if licensees are to claim a slice of café culture, they must think carefully about how they set out their stall.
"Pubs need to show consumers they're selling good coffee and have the right atmosphere. While people, particularly women, feel comfortable drinking on their own in a coffee shop, they won't necessarily walk into a pub on their own, so it's about making a pub into a venue that can be used all day."
A gap in the market
Only a third of the UK's on-trade outlets are stocking hot drinks, according to research carried out in June by CGA Strategy. Regular coffee is the most widely sold and tea isn't far behind. Speciality coffees are the most popular hot drinks consumed out of home - yet cappuccino is on offer at just 20% of pubs and even fewer are catering for fans of hot chocolate and latte.
A large number of community locals still just serve instant or filter. Freshly ground or espresso is more likely to be found in town-centre pubs, café bars and food-led houses.
While a large proportion of the trade lags behind, some progressive pubcos are focusing on the profitability of these frothy bevvies which, like cask ale, can command a premium due to the quality of ingredients used and the skill involved in making them. The difference is that hot drinks are much cheaper to make.
JD Wetherspoon has been enjoying a caffeine hit for some time, undercutting the coffee chains with its 49p per cup offer and profiting from a breakfast boom following licensing reform. More recently, though, the managed company upped the ante, spending millions on upgrading its offer with Lavazza espresso machines and barista training for staff.
"It's more difficult to make a proper cup of coffee than it is to pour a glass of wine," says company spokesman Eddie Gershon. "We do it well and aim to offer the best products at the best prices." Wetherspoon is certainly delivering them. With about 50,000 cups (at 99p for a regular cappuccino) being sold each day, Gershon says it is outstripping Caffé Nero in volume and price.
Gaining customer loyalty is not necessarily about big branding. Medium-sized coffee and tea suppliers are providing pubs and bars with a range of tailored deals furnished with credible products as well as free training and other incentives. And thanks to advanced equipment and product innovations, such as espresso pods, it has got easier for pubs to make a quality cuppa.
Expand profit margins
Coburg Coffee Company managing director Chris Birkle believes licensees could be making as much as 80% gross profit on each drink: "There is an opportunity for those offering push-button or filter coffee to gain a better profit margin by moving on to something like a fully automatic espresso machine. If the right staff and training are in place, then
coffee chains provide a good benchmark in terms of what customers are willing to pay."
Operators are raising their game by harnessing the growing popularity and profitability of ethical brands. Volumes of Fairtrade coffee and tea are up 60%. Fairtrade, organic and "green" drinks are appealing increasingly to the consumer's social conscience and tendency to choose quality, premium products.
Sales of hot drinks in Fuller's 160-strong managed estate shot up 20% in the six months after Fairtrade coffee and tea were introduced. Plus a growing number of the London-based brewer's sites, specifically those located near the school run, are opening for breakfast.
The price of a Fuller's latte ranges, according to geography and trading style, from £1.70 to £2.20 and is a balance between value and the premium for the product and service.
"In some places, we've tried to launch coffee as a way of encouraging people to rediscover our pubs post-smoking ban," says operations director Jonathon Swaine. "Coffee chains have a standardised approach; we want to remain personal and have a leisurely atmosphere."
New industry player Orchid Pub Company has focused on making hot drinks a key part of its culture from day one, introducing Fairtrade coffee, tea and hot chocolate as standard and adopting an innovative approach to set its 289 managed houses apart from the competition.
"We're seeing significant growth," says marketing manager Adam Bower. "Hot drinks are incremental to our business and provide an opportunity to drive a good margin." A cappuccino in an Orchid carvery or restaurant costs between £1.75 and £2.50, and down to between £1.50 and £2.00 in its locals and mid-market dining venues.
The group has come up with an array of café-style services it believes will sit well within a pub experience. It has so far set up free wifi in 90 of its sites, with plans to put laptops into 15 of them. Mini delis are a new feature alongside espresso machines at five of its sites.
Get in there quickly
There is a prevailing notion among suppliers too, that pubs can be a quiet haven away from hectic coffee bars. A strong link with the community and the ability to be more chameleon-like in their offering could also be plus points when competing for coffee sales.
"Pubs have the advantage as they offer a more comfortable and homely environment. Our message is not to become a Starbucks or Costa - but for pubs to offer hot drinks in a way that works for them," advises Metropolitan Coffee managing director Angus McKenzie.
"There's been a surge in independent outlets waking up to food and coffee and seeing it as a big part of their offer," he continues. "It used to be a case of all or nothing but there's now a grazing culture and the gap between full-on food and wet trade is being filled.
"Even a small coffee menu, as long as the offer is right at entry point and is marketed well, could earn a licensee £750 per month, which is near on £9,000 a year."
But act quickly, warn industry observers. Mintel predicts that licensees won't be the only ones diversifying their businesses; coffee shops could become licensed venues, so pubs must ensure they're quick to exploit the advantages they have over the coffee chains.
key trends: What's hot?
How the hot drinks market is evolving
Consumers are spending more money on food and drink out of home than ever before
Speciality coffees are the most consumed hot beverage out of home, with 43% of adults drinking cappuccinos, lattes and espressos
Fairtrade coffee and tea sales are up by 60%, with more pub operators making the switch
After traditional tea, the most popular blend is decaf, which is enjoying 33% growth, proving that you don't necessarily need caffeine to boost hot drinks trade - though Tetley's research shows that 65% of consumers are frustrated at being unable to get decaf away from home
Independents have a 38% slice of the café market, against Starbucks and Costa Coffee at 24% each, yet in an Allegra survey only 12% of coffee drinkers chose an independent
The nation's 3,000 branded coffee shops could double to 6,000 within a decade. But Mintel forecasts that competition will grow as pubs and retailers diversify, such as Marks & Spencer, which has developed its own in-store hot drinks offer.
