Costa Coffee Targeting South East Asia

Costa Coffee, the UK's leading coffee house chain by number of outlets, is becoming increasingly important to owner Whitbread, which also has interests in the hotel sector. Costa continues to more than hold its own in the UK, where it is mainly challenged by Starbucks Coffee and Café Nero, while also pursuing growth in China. It has also been building a business in India on a lesser scale. The company will now look to take its business to Thailand, where Starbucks has been a first mover. No details on specific expansion plans in the region have been disclosed yet. Whitbread has used Costa as its main entry point into international growth markets, as its hotel business is a bit more mature.

Costa's contribution to group sales has increased from about 10% in 2006 to around 33% in 2013, as the first chart illustrates. Costa and Starbucks have been able to pursue growth in primarily tea-drinking nations such as China by selling a lifestyle experience. The companies have targeted a specific demographic and income bracket that is willing to spend US$2-3 on a hot beverage, ultimately providing a modern branded location for people to meet up. As such, the wider coffee angle is much less relevant.

Costa has more than 300 stores in China, and, as the second chart illustrates, the proportion of capital expenditure spent on the Costa business as percentage of the company's wider asset base has grown strongly over recent years, to around 23% in 2013 - up from about 13.5% in 2011. This has been primarily put towards new stores and underlines the growth-focused role Costa plays for Whitbread. We still expect the company to focus on China for at least a few more years. However, entering and growing its brand in some of South East Asia's main markets is important given the head start Starbucks in particular has had.

Costa Has Come A Long Way
Costa Coffee & Whitbread Hotels And Restaurants Annual Sales (GBPmn)

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This article is tagged to:
Related sectors of this article: Food & Drink, Drink
Geography: Asia, China, United Kingdom, India, Thailand

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