As John Derkach, the boss of Costa, Britain’s biggest coffee-bar 
chain, gets up to greet his guests at one of the business’s newest outlets in London’s Holborn, he surveys the room.
It might be three o’clock in the afternoon, long after the morning peak has subsided, but the place is packed with a mixture of students, business people and tourists. No wonder Derkach looks relaxed as he sips a large cappuccino topped with chocolate sprinkles.
Costa, part of the Whitbread leisure empire that includes Premier Inn budget hotels, has been growing at an unnerving rate. The hotels arm may have been considering eye-catching acquisitions such as Travelodge, but the coffee bars’ growth has been exclusively organic.
It added 142 new outlets last year, a feat Derkach believes is unprecedented in the British leisure industry. According to Costa’s parent company’s most recent trading update, sales were ahead 6.3% for the 50 weeks to February 14.
The management expects to achieve similar growth in the coming 12 months, with overseas outlets also becoming an increasingly important part of the business. The chain will make its Russian debut this week when Costa opens a branch in Moscow. The idea that an economic slowdown in Britain might put a brake on this progress seems of little concern.
The coffee-bar market has grown up since the last recession in Britain in 1992 so nobody quite knows how it will perform in straitened times. Some analysts believe it could fare badly because a “latte to go†is something easily sacrificed by consumers looking to save money.
Matthew Gerard of Investec Securities said: “Costa is one of those businesses that would feel the strain in a widespread consumer downturn.â€
This is not a view shared by Derkach, a Whitbread veteran who previously ran its Pizza Hut division. “We are very aware of the economic situation. I would say that what we are talking about, though, is ￡2.25 for a cappuccino and for an espresso, less than ￡2. It’s important to register that. I’m not saying that’s an insignificant amount of money, by any means, but to a lot of customers it’s incidental. A nice cup of coffee is a treat, but it’s a treat that costs ￡2.
“On average, people spend about 25 minutes in one of our stores. I think we deliver astounding value for ï¿¡2.25. I can’t control the economy, but I can control what we do. We have to make the experience as good as we can and we will take our chances along with everybody else.â€
The coffee-bar industry has not been without its problems. Starbucks, the American world market leader, has undergone a back-to-basics approach with Howard Schultz, its founder, assuming day-to-day control once more to give the company the sort of boost its customers usually get from a double espresso.
In a high-profile initiative, Costa added 142 outlets to its chain last year and will make its Russian debut this week with a Moscow branch Schultz recently closed all the group’s American outlets for three hours so staff could be retrained. Derkach cannot resist a little dig at his rival, pointing out that Costa “typically trains its staff before they start workâ€.
And despite the perception that the mark-up on coffee leaves plenty of headroom, Derkach insists the industry is “not an easy way to make moneyâ€, pointing out that with sky-high rents, particularly in central London, each site has to sell a huge number of cups of coffee to make the economics stack up.
Part of Derkach’s strategy to keep customers is to ensure the coffee shops offer a smart and inviting experience.
Critics argue that one of the chain’s problems is the inconsistency of its product. The smart, new Holborn store is an infinitely different experience from the more tired-looking Costa outlets at motorway service stations.
Upgrading stores is “a never-ending cycle†said Derkach. While there are about 100 outlets with the latest design, about 95% of the rest have a look dating back to the last revamp in 2004.
Although it seems as if every high street in Britain sports at least half a dozen coffee shops, Derkach believes there is still scope for Costa to expand.
“You can’t walk down many high streets without seeing several coffee shops, but you can walk down many high streets and not see a Costa coffee shop,†he said. “Inside the M25 we have 135 shops and our competitors have twice that number. Costa is significantly underrepresented in London.â€
Derkach takes heart from the fact that there is little sign of sales cannibalisation even though the company opened so many new stores last year, while there is also strong potential from tie-ups with retailers, including Waterstone’s, the bookseller, and Tesco, where Costa has concessions.
Jeffrey Young, managing director of Allegra Strategies, a management consultancy that has studied the coffee market, agrees there is plenty of room for growth by the incumbent operators. “There are thousands of places that still don’t have a branded coffee-shop chain on their high street,†he said.
All this growth has prompted talk among City analysts that Whitbread would be better off demerging Costa, an idea that would have gathered extra momentum had a proposed deal to acquire the rival Travelodge hotel chain gone ahead. Those talks, revealed in The Sunday Times, foundered last week, while Derkach said there were no current plans by Whitbread to spin off the coffee business it has owned since 1995. “Costa has been a tremendous success story under Whitbread’s ownership; I can’t see any reason to change that at all,†he said.
Derkach also argues that there are greater synergies between Costa and Premier Inn than people might initially suppose. There are a number of Costa outlets in Whitbread’s budget hotels and, perhaps more importantly, as Premier Inn begins to expand internationally, it can tap the expertise built up at Costa, which has a presence in 21 overseas markets.
Its foreign business is big, with a lot of untapped potential, but Derkach knows that Britain remains all-important. He just wants to make sure that the British consumer – if not the economy – remains perked up.
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