Coffee & Sandwich Shops

Market Assessment 2012 Seventh Edition January 2012 Edited by Lucy Bishop ISBN 978-1-84729-800-3 Coffee & Sandwich Shops

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Contents Contents Executive Summary 1 1. Introduction 2 BACKGROUND...2 DEFINITION...3 2. Strategic Overview 4 MARKET DYNAMICS AND SEGMENTATION...4 Factors Affecting the Market...4 Demographics...4 Table 2.1: Visitors to Coffee Shops in the Last 12 Months by Frequency of Visit by Sex, Age and Social Grade (% of all adults), Year Ending March 2011...5 Table 2.2: Visitors to Sandwich Bars in the Last 12 Months by Frequency of Visit by Sex, Age and Social Grade (% of all adults), Year Ending March 2011...6 Table 2.3: The Actual and Projected UK Population by Age Group (000), 1951-2026...8 Table 2.4: Visitors to Coffee Shops in the Last 12 Months by Frequency of Visit by Family Income (% of all adults), Year Ending March 2011...10 Table 2.5: Visitors to Sandwich Bars in the Last 12 Months by Frequency of Visit by Family Income (% of all adults), Year Ending March 2011...11 Table 2.6: Income Tax Liabilities by Income Range (, 000 people and %), Financial Year Ending 5th April 2008 and Projected Financial Year Ending 5th April 2012...12 Regional Variations...12 Table 2.7: Visitors to Branded Coffee and/or Sandwich Shops in the Past 3 Months by Region (% of all adults), September 2011...14 Table 2.8: Resident Population of the UK by Region (000 and %), Mid-Years 2001 and 2010...15 Table 2.9: Selected Leading Coffee Shop Operators by Number of Outlet by Region, 2010/2011...16 Table 2.10: Selected Leading UK Sandwich Shop Operators by Number of Outlets by Region, 2010/2011...17 Table 2.11: Visitors to Coffee Shops in the Last 12 Months by Frequency of Visit by Working Status (% of all adults), March 2011...19 Table 2.12: Visitors to Sandwich Bars in the Last 12 Months by Frequency of Visit by Working Status (% of all adults), March 2011...20 Table 2.13: Number of Full-Time and Part-Time Workers in the UK (000), 2006-2010...21 Key Note Ltd 2012

Contents Evolving Role of Coffee and Sandwich Shops...21 Increase in Rail Travel...22 Table 2.14: Passenger Journeys on the National Rail Network in Great Britain (millions and %), 2004/2005-2008/2009...23 Household Expenditure on Restaurant and Café Meals...23 Table 2.15: Household Final Consumption Expenditure on Restaurant and Café Meals ( m), 2006-2010...23 Retail Price Indices...24 Table 2.16: Retail Price Indices Annual Average Percentage Changes for Coffee and Other Hot Drinks and Bread, 2001-2010...25 COMPETITIVE STRUCTURE...25 Coffee Shops...25 Sandwich Shops...26 Competition from Other Retailers...26 Table 2.17: Selected Major Retailers with Cafés by Number of Outlets, 2011...26 MARKET FORECASTS...27 Table 2.18: Forecast Number of Outlets Operated by the Leading Coffee and Sandwich Shops Brands in the UK, 2011-2015...27 Figure 2.2: Forecast Number of Outlets Operated by the Leading Coffee and Sandwich Shop Brands in the UK, 2011-2015...28 3. Coffee Shops 29 THE LEADING COFFEE SHOP OPERATORS...29 By Number of Outlets...29 Table 3.1: Leading Operators of Branded Coffee Shops by Number of Outlets in the UK and the Republic of Ireland (number and %), 2010/2011...30 By Turnover...30 Table 3.2: Selected Leading Operators of Branded Coffee Shops by Turnover ( m), 2006-2010...31 Figure 3.1: Selected Leading Operators of Branded Coffee Shops by Turnover ( m), 2006-2010...31 4. Sandwich Shops 32 THE COMMERCIAL SANDWICH MARKET...32 LEADING SANDWICH OPERATORS...33 By Number of Outlets...33 Table 4.1: Leading Operators of Branded Sandwich Shops by Number of Outlets in the UK and the Republic of Ireland (number and %), 2006-2010...34 By Turnover...34 Table 4.2: Selected Leading Operators of Branded Sandwich Shops by Turnover ( m), 2006-2010...35 Key Note Ltd 2012

Contents Figure 4.1: Selected Leading Operators of Branded Sandwich Shops by Turnover ( m), 2006-2010...35 5. Advertising and Promotion 36 MAIN MEDIA ADVERTISING...36 OTHER PROMOTIONAL ACTIVITIES...36 6. An International Perspective 37 LOCATIONS ABROAD...37 Table 2.15: Selected Leading Coffee and Sandwich Shops with Locations Outside the UK and the Republic of Ireland, 2011...37 THE EUROPEAN MARKET...38 Coffee Shops...39 Sandwich Shops...39 THE ASIA-PACIFIC MARKET...40 7. PEST Analysis 41 POLITICAL...41 ECONOMIC...41 SOCIAL...42 TECHNOLOGICAL...42 8. Consumer Dynamics 44 OVERVIEW...44 Table 8.1: Attitudes Towards Coffee and Sandwich Shops (% of respondents), 2011...45 DETAILED RESULTS...46 I Have Visited a Branded Coffee Shop, Such as Starbucks, Costa or Caffé Nero in the Last 3 Months...46 Table 8.2: I Have Visited a Branded Coffee Shop, Such as Starbucks, Costa or Caffé Nero, in the Last 3 Months by Socio-Demographic Group (% of respondents), 2011...46 I Have Visited a Branded Sandwich Shop, Such as Subway, Pret A Manger or Greggs, in the Last 3 Months...49 Table 8.3: I Have Visited a Branded Sandwich Shop, Such as Subway, Pret A Manger or Greggs, in the Last 3 Months by Socio-Demographic Group (% of respondents), 2011...50 Key Note Ltd 2012

Contents I Have Visited Branded Coffee or Sandwich Shops Less in the Last 3 Months Than Previously...52 Table 8.4: I Have Visited Branded Coffee or Sandwich Shops Less in the Last 3 Months Than Previously by Socio-Demographic Group (% of respondents), 2011...53 I Tend to Choose the Major Chains of Branded Coffee Shops if Possible in Preference to Smaller Independents...55 Table 8.5: I Tend to Choose the Major Chains of Branded Coffee Shops if Possible in Preference to Smaller Independents by Socio-Demographic Group (% of respondents), 2011...56 I Tend To Choose the Major Chains of Branded Sandwich Shops if Possible in Preference to Smaller Independents...59 Table 8.6: I Tend to Choose the Major Chains of Branded Sandwich Shops if Possible in Preference to Smaller Independents by Socio-Demographic Group (% of respondents), 2011...59 I Think Foods and Drinks at Coffee or Sandwich Shops is Competitively Priced...62 Table 8.7: I Think Food and Drink at Coffee or Sandwich Shops is Competitively Priced by Socio-Demographic Group (% of respondents), 2011...62 I Think Food and Drink at Coffee or Sandwich Shops is Expensive...65 Table 8.8: I Think Food and Drink at Coffee or Sandwich Shops is Expensive by Socio-Demographic Group (% of respondents), 2011...66 I Would Visit Coffee or Sandwich Shops More if Prices Were Lower...68 Table 8.9: I Would Visit Coffee or Sandwich Shops More if Prices Were Lower by Socio-Demographic Group (% of respondents), 2011...69 I Have Cut Back on Visiting Coffee or Sandwich Shops Because of the Economic Downturn...72 Table 8.10: I Have Cut Back on Visiting Coffee or Sandwich Shops Because of the Economic Downturn by Socio-Demographic Group (% of respondents), 2011...72 I Think the Number of Outlets Major Branded Stores Have Can be Excessive...75 Table 8.11: I Think the Number of Outlets Major Branded Stores Have Can be Excessive by Socio-Demographic Group (% of respondents), 2011...76 I Worry About the Effect the Dominance of the Major Brands Has on Smaller, Independent Shops...78 Table 8.12: I Worry About the Effect That the Dominance of the Major Brands has on Smaller, Independent Shops by Socio-Demographic Group (% of respondents), 2011...79 When Visiting a Coffee Shop to Order Drinks, I Always Order the Same Thing Without Looking at a Menu...81 Table 8.13: When Visiting a Coffee Shop to Order Drinks, I Always Order the Same Thing Without Looking at a Menu by Socio-Demographic Group (% of respondents), 2011...82 Key Note Ltd 2012

Contents When Visiting a Sandwich Shop, I Always Pick Up/Order the Same Thing Without Looking At the Menu...84 Table 8.14: When Visiting a Sandwich Shop, I Always Pick Up/Order The Same Thing Without Looking at the Menu by Socio-Demographic Group (% of respondents), 2011...85 The Use of Faitrade and/or Rainforest Alliance-Certified Coffee in an Outlet is Important to Me...87 Table 8.15: The Use of Fairtrade and/or Rainforest Alliance-Certified Coffee in an Outlet is Important to Me by Socio-Demographic Group (% of respondents), 2011...88 I Prefer to Visit One Particular Major Chain of Coffee or Sandwich Shop Above All Others...90 Table 8.16: I Prefer to Visit One Particular Major Chain of Coffee or Sandwich Shop Above All Others by Socio-Demographic Group (% of respondents), 2011...91 9. Company Profiles 94 BACKGROUND...94 COFFEE SHOPS...94 AMT Coffee Ltd...94 Table 9.1: AMT Coffee Ltd Financial Performance, 2007-2010...95 BB s Coffee & Muffins Ltd...95 Café Thorntons...96 Caffè Nero Group Ltd...96 Table 9.2: Caffè Nero Group Ltd Financial Performance, Years Ending 31st of May 2007-2011...97 Caffè Ritazza...97 Coffee Republic...97 Costa Ltd...97 Table 9.3: Costa Ltd Financial Performance ( 000), 2006-2010...98 Esquires Coffee (UK) Ltd...98 Krispy Kreme...99 Table 9.4: Krispy Kreme UK Ltd Financial Performance ( 000), Years Ending January 2007-2011...99 Muffin Break...99 Puccino s Worldwide Ltd...99 Starbucks Coffee Company (UK) Ltd...100 Table 9.5: Starbucks Corporation Global Financial Performance and Store Numbers (number, $bn and $m), 2006-2010...101 Key Note Ltd 2012

Contents Table 9.6: Starbucks Coffee Company UK Ltd Financial Performance ( 000), 2006-2010...101 SANDWICH SHOPS...102 Baguette Express...102 Benugo Ltd...102 Table 9.7: Benugo Ltd Financial Performance ( 000), 2007-2010...102 EAT Ltd...103 Table 9.8: EAT Ltd Financial Performance ( 000), 2006-2010...103 Greggs PLC...103 Table 9.9: Greggs PLC Financial Performance ( 000), 2006-2008, 2010 and 2011...104 Philpotts Ltd...104 Table 9.10: Philpotts Ltd Financial Performance ( 000), Years Ending March 2006-2009 and 65 Weeks Ending 30th June 2010...105 Ponti s Group Ltd...105 Table 9.11: Ponti s Group Ltd Financial Performance ( 000), Years Ending January 2007-2011...106 Pret a Manger (Europe) Ltd...106 Table 9.12: Pret a Manger Europe Ltd Financial Performance ( 000), 2006-2010...107 The Quiznos Corporation UK Ltd...107 Subway Realty Ltd...107 Table 9.13: Subway Realty Ltd Financial Performance ( 000), Years Ending December 2006-2010...108 Upper Crust and Pumpkin Café...108 10. The Future 109 MARKET FORECASTS...109 Table 10.1: Forecast Number of Outlets Operated by the Leading Coffee and Sandwich Shops in the UK, 2011-2015...109 Figure 10.1: Forecast Number of Outlets Operated by the Leading Coffee and Sandwich Shops in the UK, 2011-2015...110 11. Further Sources 111 Publications...111 General Sources...111 Government Publications...111 Other Sources...112 Key Note Sources...113 Key Note Ltd 2012

Contents Understanding TGI Data 115 Number, Profile, Penetration...115 Social Grade...116 Standard Region...116 Key Note Research 117 The Key Note Range of Reports 118 Key Note Ltd 2012

Executive Summary Executive Summary Despite the recession and the ongoing economic instability, the number of branded coffee and sandwich shops increased between 2009 and 2010. Taking into account the top 12 brands of coffee shops and the top 12 brands of sandwich shops, there were 3,041 branded coffee shops in the UK and the Republic of Ireland, while the number of sandwich shops reached 3,748. These are dominated by the coffee chains Starbucks, Costa and Caffè Nero, and the sandwich chains Greggs and Subway. Expansion has been a key feature of the market for branded chains of late, especially outside of London and the South East of the UK, where much of the expansion had previously been based. Exclusive consumer research conducted by NEMS Market Research on behalf of Key Note suggests that only 30.7% of people had cut back on visiting coffee or sandwich shops because of the recession. This is a positive indicator for the industry and is the main reason for the expansion seen within the market in recent years. These statistics also reveal that demand is not significantly falling, at least not by enough to deter more outlets from opening. The popularity of coffee shops is indicated by the increasing number of retailers which now have their own in-store coffee outlet. In particular, department stores and supermarkets have been keen to include a coffee store within their outlets as a way of encouraging customers into their shops, having seen the success of coffee shops on the high street and the appeal that they provide to the general public. Oftentimes, branded outlets were found in these locations; however, many stores now include more generic cafés run by the stores themselves rather than by outside chains. Many coffee and sandwich shop operators have set their sights on foreign markets, with key regions for expansion being Eastern Europe, as well as the Asia-Pacific market, including countries such as the People s Republic of China (PRC) and India. Key Note has forecast a positive outlook for the market over the next 5 years. Having survived the worst of the recession relatively unscathed in most cases, the major coffee and sandwich shop chains will continue to expand, albeit at a more cautious rate than was seen before the recession. It is true that many of the major branded chains have scaled back outlet openings and revised planned numbers downwards in order to weather the economic crisis, although, given that the financial downturn now seems to be easing, there is no reason to suggest that the major branded chains, at least, (possibly at the expense of the smaller stores) will not continue to grow. Key Note is therefore predicting that store numbers will reach 3,800 for branded coffee shops in 2015, an increase of 25% on 2010; while the number of branded sandwich shops will continue to expand relatively quickly, rising from 3,748 in 2010 to 4,511 in 2015. Key Note Ltd 2012 1

Introduction 1. Introduction BACKGROUND Coffee-houses first came popular in the UK in the mid-17th century (around the point at which coffee first appeared outside the Ottoman Empire), with the first ones being established in Oxford in 1650. Over the next decade and a half, 82 shops opened in London and, by 1700, there were 500 such outlets. At the time, coffee-houses were major hubs for the local community, playing host to discussions between writers, politicians, businessmen and scientists, with the disciplines and discussion topics of the patrons being determined by the particular coffee-house. Some published their own newsletters and had newspapers read aloud. However, as trade became more globalised thanks to the British Empire, which annexed nations, such as India and Kenya regions that produced large amounts of tea and coffee imports of such products became more affordable and thus many more people were able to consume tea and coffee in their homes instead of at specific shops. Other factors, such as the improvement in communications, in terms of national newspapers and a better postal and transport system during this period meant that the social need for coffee-houses was dampened and, as a result, they began to fall out of favour. Nevertheless, during the first two decades of the 20th century, establishments such as Lyons Corner Houses, which was run by J Lyons and Co, experienced a resurgence of popularity. These outlets were classed as cafés, and served tea, coffee and food, such as cakes or sandwiches. However, this small boom period was put paid to by the onset of the Second World War (WWII), as rationing meant that ingredients for cakes were scarce and expensive, as was tea and coffee, with much of the general public unable to afford such luxuries. Shortly after the end of WWII in 1945, high-vacuum freeze-dried coffee was developed, as a result of applying the technology created during wartime efforts which used vacuum packing as a practical way to produce penicillin, blood plasma and streptomycin for US military use. Freeze-dried coffee was much more convenient than fresh and, as a result, coffee shops had another rival to contend with. Coffee shops were not to see real recovery until the mid-1990s, at which point Seattle-based coffee shop conglomerate Starbucks entered the UK market. The gradual success of Starbucks resulted in other chains making similar moves and, by the end of the 20th century, the coffee shop sector had experienced a boom, with a multitude of chains appearing on the market, including major players, such as Costa and Caffè Nero, as well as Greggs, Subway and Pret a Manger (in the sandwich shop sector). These chains have recently undergone a significant period of activity in terms of opening new UK outlets, as well expanding abroad. Key Note Ltd 2012 2

Introduction This Key Note Market Assessment tracks the progress of the major branded coffee and sandwich shop chains, and focuses on their expansion in the UK, the Republic of Ireland and abroad, as well as their profitability and the extent to which the recession has affected their trade and business. DEFINITION Due to the dominance of the major chains and their ever-increasing share of the market, in terms of both value and volume, i.e. the number of outlet, most of the analysis in this report focuses on the major players in the industry. There are, however, a fairly significant number of smaller chains and independent operators within the market, especially in the sandwich shops sector. In the past, coffee shops have had to compete with retailers in-store coffee outlets, including those in department stores, supermarkets and bookshops. However, recently, a number of branded coffee chains have set up concessions in these locations. Other locations where coffee and sandwich shop outlets have become increasingly prevalent include transportation hubs (railways, airports and seaports), motorway service stations, cinemas, garden centres, museums, leisure parks, universities, hotels, hospitals and business centres. Key Note Ltd 2012 3

Strategic Overview 2. Strategic Overview MARKET DYNAMICS AND SEGMENTATION Factors Affecting the Market Demographics Visitors to Coffee Shops Data from Kantar Media s Target Group Index (TGI) survey for coffee and sandwich shops is included below. In the year ending March 2011, 55.2% of adults had visited a coffee shop. This is slightly down from the 56.4% of adults who did so in March 2008, which was around the beginning of the recession. Women were much more likely to frequent coffee shops than men, with 61.7% of women having done so, compared to only 48.3% of men. Penetration by age was fairly uniform apart from in the 15 to 24 age bracket, with less than half of respondents in this category having visited a coffee shop in the past 12 months. However, this could be because a large number of 15 to 24 year-olds are currently unemployed and, as such, may not have enough money to visit coffee shops, as products purchased from them are more expensive than alternatives, such as instant coffee, which can be made at home. Visits to coffee shops declined alongside social grade, with those in grade A the most likely to have visited one (71.1%), while those in grade E were the least likely (38.8%). Respondents were most likely to visit a coffee shop less than once a month (17.5%) and or 2 to 3 times per month (12.2%). Men were more likely to be heavy users of coffee shops (4 times a week or more) than women, with 1.9% of men revealing that this was the case, compared to 1.5% of women. In all other categories, however, women were more likely visit such outlets than men. Those aged between 45 and 54 were the most likely to be heavy users of coffee shops, with 2.3% of adults in this age bracket visiting them 4 times a week or more. However, this age group was also the most likely to be the lightest users of coffee shops, with 20% of them visiting such outlets less than once a month. Perhaps unsurprisingly, given their larger incomes, those in social grade A were the most likely to be among the heaviest users of coffee shops (2.6%), with those in social grade D were the least likely to be heavy users (0.6%). Key Note Ltd 2012 4

Strategic Overview Table 2.1: Visitors to Coffee Shops in the Last 12 Months by Frequency of Visit by Sex, Age and Social Grade (% of all adults), Year Ending March 2011 Less than Once a Month Once a Month 2 to 3 Times a Month Once a Week 2 to 3 Times a Week 4 Times a Week or More Any Visit All adults 55.2 1.7 3.8 7.3 12.2 9.7 17.5 Sex Men 48.3 1.9 3.4 5.4 10.4 8.4 15.8 Women 61.7 1.5 4.3 9.1 14.0 10.9 19.1 Age 15-24 45.6 1.9 2.6 6.4 12.2 7.6 12.0 25-34 57.3 1.5 4.7 6.2 14.5 10.1 17.7 35-44 56.5 2.0 3.8 6.2 11.6 11.6 19.2 45-54 55.5 2.3 3.9 7.0 11.2 8.6 20.0 55-64 59.3 1.1 3.2 8.8 13.0 10.6 19.7 65+ 56.7 1.2 4.5 9.0 11.4 9.4 16.6 Social Grade A 71.1 2.6 5.8 11.4 13.3 13.2 23.9 B 68.8 2.1 4.9 8.9 16.1 12.0 21.7 C1 59.2 2.2 3.8 7.3 14.1 10.6 18.6 C2 48.8 1.3 2.9 6.3 10.8 7.6 16.4 D 41.1 0.6 3.5 5.9 7.4 8.4 12.5 E 38.8 1.2 3.1 6.0 8.1 6.0 11.1 Source: Target Group Index (TGI) Kantar Media 2011, Quarter 3 (April 2010-March 2011), 2011 Key Note Ltd 2012 5

Strategic Overview Visitors to Sandwich Bars 31.1% of adults had visited a sandwich bar at some point in the 12 months ending March 2011, which is considerably less than those who had visited a coffee shop. In terms of gender, penetration for sandwich bar visitors was relatively even, with 30.2% of men having done so, compared to 32% of women. In terms of age, those in the 25 to 34 age bracket were the most likely to have visited a sandwich shop, with 41.2% having done so, compared to just 18.2% of those aged 65 and above. Respondents in social grade E were the least likely to use such establishments, with only 24.9% having done so, while those in grade B were the most likely to have visited one, at 35.3%. Respondents were more than four times less likely to be heavy users of sandwich bars as they are to be heavy users of coffee shops, with just 0.4% of the population using such places 4 times per week or more. As with coffee shops, men were more likely to be heavy users than women. Those aged between 45 and 54 were the most likely to be very heavy users of sandwich shops, while those aged 65 and over were the least likely. Respondents belonging to social grade C1 were the most likely to visit sandwich bars often, while those in social grade A were the least likely to do so. The penetration of respondents who visited sandwich bars less than once a month was highest among those in social grade A and then declined alongside social grade. Table 2.2: Visitors to Sandwich Bars in the Last 12 Months by Frequency of Visit by Sex, Age and Social Grade (% of all adults), Year Ending March 2011 Less than Once a Month Once a Month 2 to 3 Times a Month Once a Week 2 to 3 Times a Week 4 Times a Week or More Any Visit All adults 31.1 0.4 1.8 2.4 5.2 4.8 9.0 Sex Men 30.2 0.5 2.3 2.3 5.1 5.0 8.2 Women 32.0 0.3 1.4 2.5 5.4 4.6 9.8 Table continues... Key Note Ltd 2012 6

Strategic Overview Table 2.2: Visitors to Sandwich Bars in the Last 12 Months by Frequency of Visit by Sex, Age and Social Grade (% of all adults), Year Ending March 2011...table continued Less than Once a Month Once a Month 2 to 3 Times a Month Once a Week 2 to 3 Times a Week 4 Times a Week or More Any Visit Age 15-24 40.8 0.3 3.6 2.8 8.9 8.5 9.6 25-34 41.2 0.7 2.5 3.4 8.2 6.2 11.5 35-44 33.5 0.6 2.3 2.7 4.8 5.1 11.3 45-54 30.0 0.8 1.7 2.3 4.6 3.7 9.3 55-64 25.8 0.2 0.8 2.2 3.9 3.4 7.8 65+ 18.2 0.1 0.2 1.4 1.9 2.5 5.3 Social Grade A 34.9 0.1 2.5 2.3 4.9 6.2 12.0 B 35.3 0.5 2.0 3.0 6.2 5.6 11.6 C1 33.5 0.6 1.8 2.7 6.0 5.5 9.8 C2 29.0 0.4 2.1 1.9 4.8 3.9 8.2 D 25.9 0.3 1.3 2.0 4.3 4.0 6.3 E 24.9 0.2 1.4 2.0 3.4 3.7 5.3 Source: Target Group Index (TGI) Kantar Media 2011, Quarter 3 (April 2010-March 2011), 2011 Key Note Ltd 2012 7

Strategic Overview Age As penetration of visits to coffee shops was quite high within the older age groups, the fact that the UK s population is ageing should have a positive impact on the coffee shop sector. Respondents aged 65 and above were the third-most likely to have visited a coffee shop in the year ending March 2011 and were the most likely to visit a coffee shop once a week. Between 2008 and 2016, the proportion of the population aged between 15 and 19 is set to shrink by 10.5% from 4 million to 3.6 million. However, according to figures from TGI, this particular age group were the least likely to visit coffee shops and, as such, a decline in this demographic should not have a substantial negative effect on the market. For sandwich bars, however, the opposite is true. According to TGI, those aged between 15 and 24 were the second-most likely to visit a sandwich bar, with over a fifth of them doing so in the year ending March 2011. Given the fact that the proportion of people aged between 15 and 19 is going to decrease up until 2016, this could cause potential problems for sandwich bars and perhaps threaten future expansion. Furthermore, adults aged 65 and over, the very sector of the population that is expanding significantly, are the least likely to use sandwich bars, causing further difficulties for the industry. Table 2.3: The Actual and Projected UK Population by Age Group (000), 1951-2026 % of Population Total Population 65+ 60-64 45-59 30-44 20-29 15-19 0-14 Actual 1951 11,325 3,175 7,154 11,125 9,558 2,422 5,468 50,225 1981 11,603 4,735 8,113 10,956 9,540 2,935 8,475 56,357 1991 11,009 3,719 9,138 12,125 9,500 2,888 9,059 57,439 2001 11,107 3,678 7,499 13,405 11,168 2,884 9,373 59,114 2008 10,754 3,988 8,302 12,978 11,792 3,639 9,930 61,383 Table continues... Key Note Ltd 2012 8

Strategic Overview Table 2.3: The Actual and Projected UK Population by Age Group (000), 1951-2026...table continued % of Population Total Population 65+ 60-64 45-59 30-44 20-29 15-19 0-14 Forecast 2011 10,891 3,832 8,758 12,646 12,288 3,746 10,488 62,649 2016 11,305 3,571 8,920 12,600 13,080 3,442 11,855 64,773 2021 11,795 3,585 8,471 13,408 12,951 3,840 12,906 66,958 2026 11,905 3,968 8,223 14,085 12,323 4,300 14,246 69,051 figures do not sum but are reproduced exactly from source Source: Annual Abstract of Statistics 2010, National Statistics Crown copyright material is reproduced with the permission of the Controller of HMSO (and the Queen s Printer for Scotland) By Income Family income also affected visitations to coffee shops, with the percentage of the population who visited such an establishment rising, as income rose up until the 30,000-39,999 category. Penetration then fell slightly to 59.9% for those earning between 40,000 and 49,999, before a large jump was observed in the percentage of visitors to coffee shops who had an income in excess of 50,000, with 73.9% of people belonging to this category visitng a coffee shop in 12 months to March 2011. This figure compares to 47% of those whose income was less than 10,000. Respondents with an income in excess of 50,000 were also the most likely to be heavy visitors of coffee shops, with 3% visiting 4 times a week or more, while those with an income of 30,000 to 39,999 were the most likely to be infrequent visitors. Key Note Ltd 2012 9

Strategic Overview Table 2.4: Visitors to Coffee Shops in the Last 12 Months by Frequency of Visit by Family Income (% of all adults), Year Ending March 2011 Less Than Once a Month Once a Month 2 to 3 Times a Month Once a Week 2 to 3 Times a Week 4 Times a Week or More Any Visit All adults 55.2 1.7 3.8 7.3 12.2 9.7 17.5 Income Up to 9,999 47.0 1.1 3.3 7.3 9.0 8.2 14.6 10,000-16,999 48.9 1.6 3.6 6.6 10.6 7.3 15.5 17,000-22,999 53.4 2.0 3.5 7.1 12.1 7.9 17.6 23,000-29,999 58.5 1.7 4.8 6.3 11.9 11.6 18.8 30,000-39,999 63.4 1.2 3.7 9.3 13.6 11.2 23.4 40,000-49,999 59.9 1.2 2.7 8.7 13.7 13.4 19.0 50,000+ 73.9 3.0 6.4 8.4 19.0 12.7 22.4 Source: Target Group Index (TGI) Kantar Media 2011, Quarter 3 (April 2010-March 2011), 2011 Respondents who visited sandwich bars in the 12 months ending March 2011 were the most likely to be the most affluent, with 45.7% of people in the over 50,000 income bracket having visited such an outlet, compared to 26.5% of those with an income between 10,000 and 16,999. The heaviest users of sandwich bars (those who visited 4 or more times per week) were those in the 40,000 to 49,999 category, while respondents with an income of less than 10,000 were the least likely to visit such places as frequently. Key Note Ltd 2012 10

Strategic Overview Table 2.5: Visitors to Sandwich Bars in the Last 12 Months by Frequency of Visit by Family Income (% of all adults), Year Ending March 2011 Less Than Once a Month Once a Month 2 to 3 Times a Month Once a Week 2 to 3 Times a Week 4 Times a Week or More Any Visit All adults 31.1 0.4 1.8 2.4 5.2 4.8 9.0 Income Up to 9,999 29.4 0.2 2.0 2.1 4.0 4.9 8.5 10,000-16,999 26.5 0.6 1.1 1.6 4.5 3.1 8.5 17,000-22,999 27.6 0.3 1.4 2.1 3.6 3.5 8.4 23,000-29,999 31.4 0.3 1.1 1.9 5.9 5.0 10.4 30,000-39,999 33.8 0.5 1.9 2.5 5.7 5.8 10.6 40,000-49,999 35.5 0.9 1.3 3.6 7.5 6.1 9.8 50,000+ 45.7 0.5 3.9 4.8 8.4 8.1 12.8 Source: Target Group Index (TGI) Kantar Media 2011, Quarter 3 (April 2010-March 2011), 2011 Due to the recession, the number of taxpayers in the UK is projected to fall by the financial year ending 5th April 2012, dropping by 8% from 32.5 million to 29.9 million, as unemployment remains high. However, despite this trend, the number of taxpayers for whom the lower limit of earnings is at least 50,000 is set to increase from 7.8% of the population in 2007/2008 to 10.1% in 2011/2012. As this is the income bracket which contains the most people who use both coffee shops and sandwich bars, these projections are potentially good news for the industry, despite the overall fall in employment reducing spending power. Key Note Ltd 2012 11

Strategic Overview Table 2.6: Income Tax Liabilities by Income Range (, 000 people and %), Financial Year Ending 5th April 2008 and Projected Financial Year Ending 5th April 2012 2007/2008 2011/2012 Number of Individuals (000) % of Total Number of Individuals (000) % of Total Lower Limit of Range of Income ( ) 9,999 or less 5,690 17.5 2,320 7.8 10,000 6,600 20.3 6,390 21.4 15,000 5,430 16.7 5,220 17.5 20,000 6,850 21.1 7,050 23.6 30,000 5,340 16.4 5,930 19.8 50,000+ 2,547 7.8 3,017 10.1 Total 32,500 100.0 29,900 100.0 Note: projections by Her Majesty s Revenue & Customs (HMRC) are based upon the 2007-2008 Survey of Personal Incomes using economic assumptions consistent with the Office for Budget Responsibility s (OBR s) March 2011 economic and fiscal outlook; totals may not sum due to rounding at source. Source: Income Tax Liabilities Statistics, Her Majesty s Revenue and Customs, April 2011 Crown copyright material is reproduced with the permission of the Controller of HMSO (and the Queen s Printer for Scotland) Regional Variations An exclusive survey conducted on behalf of Key Note by NEMS Market Research shows the proportion of people who had used a coffee shop or sandwich shop in the 3 months prior to the survey by region in the UK. According to the data, 47.4% of all adults had visited a branded coffee shop during this period, while 44.6% of people had visited a branded sandwich shop. East Anglia had the highest penetration of coffee shop visitors, with 63.4% of the population based there having frequented such an establishment in the 3 months prior to the survey, while the lowest penetration was in Wales, where only 26.9% of the population had visited a branded coffee shop. As for sandwich shops, 44.6% of respondents had visited one in the 3 months prior to the survey, with the highest penetration reported in the North, at 62.3%. The lowest penetration of sandwich shop visitors was observed in the South West, at 33.4%. Key Note Ltd 2012 12

Strategic Overview Only 42.9% of respondents in Greater London visiting branded coffee shops in the 3 months ending September 2011, while 46.1% of people in this area visited sandwich shops. The Greater London area has traditionally been a major area of growth for the major coffee and sandwich shop brands and the fact that the figures for visitors to such outlets are relatively low compared to other areas of the country hints at a saturation of the market in this particular area. Due to the fact that the Greater London market has generally consistently shown excellent returns for the branded coffee and sandwich shop chains, there has been a great deal of acquisition and expansion activity in this area to meet what appeared to be spiralling demand. However, with the onset of the recession, employment has been affected, especially in the financial areas of the City, and thus it is likely that consumer numbers in Central London have dropped in the wake of the financial crisis. This is undoubtedly leading to difficulties for both coffee and sandwich chains, as many of their Central London locations are specifically located in order to make the most of trade in these areas. Such prime locations tend to come at a price premium and sales at an outlet in such an opportune location must be higher than sales from outlets in other regions, in order to afford the inflated rent in such an area. However, if this is not the case, the outlet is likely to fail, a phenomenon experienced by Starbucks in 2009 when several UK stores were forced to close. The chain has, however, since recovered in a number of ways. Key Note Ltd 2012 13

Strategic Overview Table 2.7: Visitors to Branded Coffee and/or Sandwich Shops in the Past 3 Months by Region (% of all adults), September 2011 I Have Visited a Branded Sandwich Shop, Such as Subway, Pret a Manger or Greggs in the Last 3 Months I Have Visited a Branded Coffee Shop, Such as Starbucks, Costa or Caffé Nero in the Last 3 Months All adults 47.4 44.6 Region North 52.7 62.3 West Midlands 55.8 58.9 Yorkshire and Humberside 48.2 56.9 Greater London 42.9 46.1 East Anglia 63.4 45.8 East Midlands 56.3 45.3 North West 53.8 43.8 Wales 26.9 41.6 Scotland 47.9 37.6 South East 43.7 34.0 South West 38.1 33.4 Source: Key Note The South East is the most populous region of the country in mid-2010, 13.7% of the UK s population resided there, which amounts to 8.5 million people. However, despite this, it was the fourth-smallest market in terms of penetration for branded coffee shops and the second-smallest market in terms of penetration for sandwich shops. Key Note Ltd 2012 14

Strategic Overview There are, however, a large number of branded coffee and sandwich shops based in these areas. Rapid expansion in London and the South East was experienced at the beginning of the millennium, led by the rapid increase in Starbucks outlets; however, this has resulted in a saturation of the market in this particular area. Nevertheless, growth is still likely to be observed in Greater London and the South East in the future, although it is now much more focused in other areas, particularly in the North, which has experienced prolific growth of branded sandwich shop outlets. Major town and city centres across the country have formed part of the growth strategy of coffee chains, with town centre locations outside of the saturated London and South East areas of particular importance. Sandwich shops are also growing in number, particularly in areas with a large working population. The main benefit of expansion outside of London and the South East also generally offers more favourable property prices. Table 2.8: Resident Population of the UK by Region (000 and %), Mid-Years 2001 and 2010 2001 2010 % of UK Population Mid-2010 South East 8,023 8,523 13.7 London 7,322 7,825 12.6 North West 6,773 6,936 11.1 East 5,400 5,832 9.4 West Midlands 5,281 5,455 8.8 Yorkshire and Humberside 4,977 5,301 8.5 South West 4,943 5,274 8.5 East Midlands 4,190 4,481 7.2 North East 2,540 2,607 4.2 Total England 49,450 52,234 84.0 Scotland 5,064 5,222 8.4 Wales 2,910 3,006 4.8 Northern Ireland 1,689 1,799 2.9 Table continues... Key Note Ltd 2012 15

Strategic Overview Table 2.8: Resident Population of the UK by Region (000 and %), Mid-Years 2001 and 2010...table continued 2001 2010 % of UK Population Mid-2010 Total UK 59,113 62,262 100.0 does not sum due to rounding at source Source: Annual Mid-Year Population Estimates 2010 (June 2011) Crown copyright material is reproduced with the permission of the Controller of the HMSO (and the Queen s Printer for Scotland) Below is a list of selected branded coffee shop chains which have outlets based across the whole of the UK. Table 2.9: Selected Leading Coffee Shop Operators by Number of Outlet by Region, 2010/2011 BB s Coffee & Muffins Krispy Kreme Muffin Break Café Thorntons England North West 2 4 3 6 North East - - 2 3 Yorkshire and Humberside 3 1-4 West Midlands 1-8 - East Midlands 4 2 6 2 East Anglia 5-5 - Greater London 2 21 6 - South East 10 15 7 14 South West 2 3 1 4 Total England 29 46 38 33 Table continues... Key Note Ltd 2012 16

Strategic Overview Table 2.9: Selected Leading Coffee Shop Operators by Number of Outlet by Region, 2010/2011...table continued BB s Coffee & Muffins Krispy Kreme Muffin Break Café Thorntons Wales - 1 1 - Scotland 8-4 4 Northern Ireland 1 - - - Total UK 38 47 43 37 Source: Key Note Table 2.10 shows a number of selected leading sandwich shop operators by number of outlets by region. A clear geographical bias towards the Greater London and South East areas is evident, especially with Pret a Manger and EAT. However, sandwich shops are currently looking to expand further into other regions. For instance, Subway has a number of outlets based outside the South East and Greater London Table 2.10: Selected Leading UK Sandwich Shop Operators by Number of Outlets by Region, 2010/2011 EAT O Briens Pret a Manger Subway England North West 7 3 8 206 North East - 8 3 46 Yorkshire and Humberside - 1 6 81 West Midlands 4 1 7 160 East Midlands 1 1 1 104 East Anglia - - - 38 Greater London 92-171 191 South East 5 5 25 227 Table continues... Key Note Ltd 2012 17

Strategic Overview Table 2.10: Selected Leading UK Sandwich Shop Operators by Number of Outlets by Region, 2010/2011...table continued EAT O Briens Pret a Manger Subway England (cont.) South West - 8 4 116 Total England 109 27 225 1,169 Wales - 2 1 55 Scotland 3 20 6 229 Northern Ireland - 17-79 Total UK 112 66 232 1,532 Source: Key Note By Working Status Unsurprisingly, those who worked full time were the most likely to visit coffee shops frequently (i.e. more than 4 times per week). This is because they generally earn the most money and therefore have the most disposable income to spend in such outlets. Furthermore, those working a 5-day week are more likely to purchase coffee on-the-go, in the morning or for lunch. Respondents that were not working (excluding retired/invalid) were the least likely to visit a coffee shop frequently. This group contains a large number of students aged between 15 and 24, as well as those that are unemployed and, as such, people in this category are unlikely to have enough disposable income to spend in such outlets. Those who worked part time were the most likely to be occasional visitors of coffee shops, with 20.7% revealing that they visited such outlets less than once a month. Key Note Ltd 2012 18

Strategic Overview Table 2.11: Visitors to Coffee Shops in the Last 12 Months by Frequency of Visit by Working Status (% of all adults), March 2011 Less Than Once a Month Once a Month 2 to 3 Times a Month Once a Week 2 to 3 Times a Week 4 Times a Week or More Any Visit All adults 55.2 1.7 3.8 7.3 12.2 9.7 17.5 Working Status Full time (30+ hours per week) 56.1 2.1 4.0 6.2 13.1 10.0 18.2 Part time 61.3 1 4.2 8.2 12.6 11.9 20.7 Not working (excluding retired/ invalid) 46.4 1.9 2.5 6.3 10.7 8.2 14.4 Not working (retired/ invalid) 57.0 1.3 4.4 8.8 12.1 9.1 17.3 e.g. full-time student, not looking for work, unemployed Source: Target Group Index (TGI) Kantar Media 2011, Quarter 3 (April 2010-March 2011) Again it is full-time workers who were the most likely to have visited a sandwich bar in the 12 months prior to the survey, as well as those who were most likely to visit frequently, while part-time workers and those who were not working (retired/invalid) were the least likely to visit on frequent occasions. Part-time workers were most likely to visit less than once a month. This is principally because those working full time are more likely to purchase items from sandwich shops for lunch during their typical working day. Key Note Ltd 2012 19

Strategic Overview Table 2.12: Visitors to Sandwich Bars in the Last 12 Months by Frequency of Visit by Working Status (% of all adults), March 2011 Less than Once a Month Once a Month 2 to 3 Times a Month Once a Week 2 to 3 Times a Week 4 Times a Week or More Any Visit All adults 31.1 0.4 1.8 2.4 5.2 4.8 9.0 Working Status Full time (30+ hours per week) 35.9 0.9 3.3 3.2 6.2 5.4 10.3 Part time 35.2 0.1 1.3 2.4 5.0 6.1 11.5 Not working (excluding retired/invalid) 33.5 0.4 1.7 2.6 6.7 5.8 9.0 Not working (retired/ invalid) 20.9 0.1 0.3 1.4 2.9 2.7 6.1 e.g. full-time student, not looking for work, unemployed Source: Target Group Index (TGI) Kantar Media 2011, Quarter 3 (April 2010-March 2011) Between 2007 and 2009, the working population decreased because of the recession. Small growth in employment was seen in 2010, although not in the number of full-time employees, which has declined by 3.9% between 2007 and 2010 from 19 million to 18.2 million. This may have a negative effect on the coffee and sandwich shop market, as full-time workers are the most likely to visit coffee shops and sandwich bars on frequent occasions. Key Note Ltd 2012 20

Strategic Overview Table 2.13: Number of Full-Time and Part-Time Workers in the UK (000), 2006-2010 2006 2007 2008 2009 2010 Employed full time 18,684 18,977 18,870 18,261 18,239 Employed part time 6,423 6,395 6,462 6,561 6,693 Self-employed full time 2,884 2,884 2,878 2,893 2,914 Self-employed part time 891 931 925 988 1,061 Total 28,882 29,187 29,135 28,703 28,907 Source: Labour Market Statistics, September 2011 Crown copyright is reproduced with the permission of the Controller of HMSO (and the Queen s Printer for Scotland) Evolving Role of Coffee and Sandwich Shops The main purpose of coffee and sandwich shops is slowly beginning to change. A major trend is the merging of the two disciplines, which has perhaps been led by McDonald s new offering of freshly-ground coffee in its fast food outlets, something which had only really been provided by coffee shops previously. Other food retailers and sandwich shops, such as Greggs, have since followed suit. A number of chains have also expanding the range of coffees that they serve by offering cappuccinos and lattes to go with the sandwiches that consumers purchase. In general, sandwich shop chains charge a much smaller price for their coffee than coffee shops, which has been a good selling point during the recession, as consumers look to reign in their spending. A similar expansion has been seen in the coffee shop sector, many of which have changed their menus to offer wider a much wider variety of food and snacks. Previously, coffee shops only used to serve snack foods to go with drinks, such as biscuits or muffins; however, many chains now have a much larger selection of food offering, which include sandwiches and other larger, more substantial meals. Key Note Ltd 2012 21

Strategic Overview Increase in Rail Travel Office workers have been partly driving these trends, enjoying the convenience of being able to pick up an entire lunch in one location. Such workers are currently experiencing shorter lunch breaks and thus need quick, convenient food and drink. Coffee and sandwich shops are good providers of such meals; however, the recession must be factored in, as it has left a legacy of high unemployment, resulting in fewer workers who would have normally purchased lunch at such outlets. Furthermore, workers may opt to bring in their own food and drink from home in order to save money. Despite the recession, however, outlets in travel locations, such as railway stations, are a popular investment for coffee and sandwich shops, with many opening kiosks at such places. This is an attempt to better tap into what remains of the commuter trade and, as such, these locations are so compact, that they are often much cheaper to run than a full-scale outlet, particular in the case of coffee shops. The recession has not really affected the expansion plans of the major chains either, although in some cases it has resulted in the scaling back of plans. This excludes Starbucks, which saw negative growth in the number of its stores in some areas of the world in 2009 and 2010. However, the chain has since recovered and is once again considering opening new stores. This expansion has come at the expense of smaller chains and independent outlets, which have been increasingly pushed out of the market in recent years due to the dominance of the major chains. Furthermore, the major chains now have outlets in so many parts of the country that competition for custom is very high among the chains themselves, as well as among their much smaller rivals. Giving something extra other than coffee and sandwiches to consumers has also been an important trend of late, with several companies beginning to roll out free wireless Internet connections (WiFi) for customers to use on laptops and smartphones while in-store. Other initiatives include loyalty card schemes and even pre-paid or credit cards. This has been part of an effort to retain customers throughout the difficult economic climate of late. Starbucks, for example, has expanded beyond high street retailers into supermarkets with the launch of its instant coffee. It is likely that other branded coffee shops could follow suit by introducing a range of products aimed at consumers who would perhaps never have visited a coffee shop, but may purchase branded coffee from retailers such as supermarkets. In 2008/2009, the number of passenger journeys in Great Britain increased to 1.27 billion, up from 1.23 billion in 2007/2008. This means that more passengers are passing through railway stations, which in turn means it has become more lucrative to operate smaller coffee and sandwich outlets at such locations. The increase of coffee and sandwich shops in travel locations, such as railway stations, is a way to capitalise on this. The fact that rail journeys have gone up despite the recession and high unemployment could be positive news for the industry, and may drive growth within this particular sector in the future. Key Note Ltd 2012 22

Strategic Overview Table 2.14: Passenger Journeys on the National Rail Network in Great Britain (millions and %), 2004/2005-2008/2009 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 Journeys on the national rail network (millions) 1,045 1,082 1,151 1,232 1,274 % change year-on-ye ar - 3.5 6.4 7.0 3.4 Source: Transport Statistics Bulletin Great Britain 2009 Edition, Department for Transport Crown copyright is reproduced with the permission of the Controller of HMSO (and the Queen s Printer for Scotland) Household Expenditure on Restaurant and Café Meals Between 2006 and 2009, household expenditure on café and restaurant meals fell by 10.3% from 68.07bn to 61.06bn. However, recovery was experienced between 2009 and 2010, when it increased by 0.7% to 61.46bn. Table 2.15: Household Final Consumption Expenditure on Restaurant and Café Meals ( m), 2006-2010 2006 2007 2008 2009 2010 Expenditure ( m) 68,074 67,788 65,500 61,063 61,462 % change year-on-year - -0.4-3.4-6.8 0.7 Source: Consumer Trends, Quarter 1 2011, National Statistics website Crown copyright material is reproduced with the permission of the Controller of HMSO (and the Queen s Printer for Scotland) Key Note Ltd 2012 23

Strategic Overview Figure 2.1: Household Final Consumption Expenditure on Restaurant and Cafe Meals ( m), 2006-2012 70,000 69,000 68,000 67,000 Expenditure ( m) 66,000 65,000 64,000 63,000 62,000 61,000 60,000 2006 2007 2008 2009 2010 Year Source: Consumer Trends, Quarter 1 2011, National Statistics website Crown copyright material is reproduced with the permission of the Controller of HMSO (and the Queen s Printer for Scotland) Retail Price Indices The retail price index (RPI) for coffee and other hot drinks has been increasing every year since 2005, when a 2.8% increased was experienced. The RPI for coffee and other hot drinks has been growing ever since, with a particularly large spike observed in 2009, when prices rose by 8.2%. Between 2005 and 2009, prices generally increased above the rate of inflation, thus making these goods more expensive. There was much smaller growth in 2010, however, when a 0.7% increase was registered, much lower than the general rate of inflation. Although this is not directly comparable to the price of coffee purchased from coffee shops at the consumer level, these prices do provide a very good indication of the overall cost of coffee. The higher the price of coffee, the more pressure is put on coffee chains margins and the higher the price that must be charged to consumers. Key Note Ltd 2012 24