0:00:03 > 0:00:05Hi. What would you like today?
0:00:07 > 0:00:10Nowadays we've all got a favourite coffee.
0:00:10 > 0:00:12- One shot.- Flat white.- Mocha.
0:00:12 > 0:00:14- Americano.- Cappuccino.
0:00:14 > 0:00:18Since the 1990s, when branded coffee bars first hit the UK,
0:00:18 > 0:00:21we've embraced their caffeinated delights.
0:00:21 > 0:00:25We can't get away from the fact that caffeine is an addictive product.
0:00:25 > 0:00:28It's something that we crave on a daily basis.
0:00:28 > 0:00:32They have lured us away from our traditional haunts
0:00:32 > 0:00:34and changed the way we socialise.
0:00:34 > 0:00:38Coffee shops created more places for people to stop, take time to snack
0:00:38 > 0:00:41use their laptops and computers.
0:00:41 > 0:00:43And the pub wasn't always a fashionable place to be.
0:00:43 > 0:00:47Three brands dominate the fight for the coffee pound.
0:00:47 > 0:00:52We have to have great product, great stores in great locations
0:00:52 > 0:00:55cos if we don't, there'll be someone else that will.
0:00:55 > 0:00:57I don't think Starbucks are at all frightened of us.
0:00:57 > 0:01:01We are a microscopic blip on their proverbial posterior.
0:01:01 > 0:01:05We didn't look at Costa or Starbucks and try to mimic them at all
0:01:05 > 0:01:08and, for better or for worse, we kind of march to our own drum.
0:01:10 > 0:01:13But not everyone is head over heels about the boom
0:01:13 > 0:01:15in big name coffee shops.
0:01:15 > 0:01:17The big corporates control everything.
0:01:17 > 0:01:19It's almost the Big Brother scenario.
0:01:19 > 0:01:20And one company in particular
0:01:20 > 0:01:23has got itself into very hot water over tax.
0:01:23 > 0:01:26I'm not going to buy Starbucks coffee tomorrow.
0:01:26 > 0:01:28I think everybody should go and buy Costa.
0:01:28 > 0:01:32This is the inside story of the branded coffee shop world,
0:01:32 > 0:01:35where coffee making is an exotic art...
0:01:35 > 0:01:36HE SLURPS
0:01:36 > 0:01:38..where pricing is an exact science...
0:01:38 > 0:01:40If you really want the cheaper deal,
0:01:40 > 0:01:43if you know what you are doing, you can pay less.
0:01:43 > 0:01:47..and where the coffee shop hot shots are raking in millions
0:01:47 > 0:01:49from our love affair with coffee.
0:02:09 > 0:02:11At Starbucks in Colinton Road in Edinburgh,
0:02:11 > 0:02:15the baristas, Ross, Jason and Louise, have an early start.
0:02:17 > 0:02:21Even at this hour, there's a steady stream of bleary-eyed locals.
0:02:23 > 0:02:26People tend to order lattes, cappuccinos,
0:02:26 > 0:02:29the stronger sort of drinks with more espresso
0:02:29 > 0:02:32just to sort of boost their day.
0:02:32 > 0:02:33A latte for James.
0:02:35 > 0:02:37Starbucks has 750 stores in the UK
0:02:37 > 0:02:41and over 20,000 more around the world.
0:02:41 > 0:02:46Last year, its international takings hit a mammoth 14.8 billion.
0:02:46 > 0:02:49Do you want the Ethiopia espresso in that as well, yeah?
0:02:52 > 0:02:56But Starbucks is keen to stress that it cares about the personal touch.
0:02:56 > 0:03:00We chose Colinton Road because it's a great opportunity to
0:03:00 > 0:03:02work within a really good local community.
0:03:02 > 0:03:05They serve so many regular customers that just come in
0:03:05 > 0:03:07and that's really great cos they really are a part of that
0:03:07 > 0:03:09local community.
0:03:09 > 0:03:10Hello. Usual.
0:03:11 > 0:03:15Usually, every morning, we can at least tell a good few people
0:03:15 > 0:03:17exactly by name. We'll know what they're up to.
0:03:17 > 0:03:19We'll know what they've been up to at the weekend. So it's good.
0:03:19 > 0:03:21We know our customers really well.
0:03:21 > 0:03:23A latte for Kirsty. Cheers.
0:03:27 > 0:03:29Starbucks is not the only show in town.
0:03:29 > 0:03:33More than 150 coffee shops grace Edinburgh's streets.
0:03:35 > 0:03:38But here, as in most places up and down the UK,
0:03:38 > 0:03:42Costa Coffee, Caffe Nero and Starbucks are the main attraction.
0:03:42 > 0:03:46They each seem to have what it takes to pull us in.
0:03:46 > 0:03:49Customers like being in places that serve good coffee, where you can
0:03:49 > 0:03:51get your wifi, you can have your meetings
0:03:51 > 0:03:53and you can catch up on a bit of work
0:03:53 > 0:03:56and in a rather cool and maybe
0:03:56 > 0:03:58happy and friendly ambience.
0:04:01 > 0:04:06Last year, we handed over £6.2 billion to UK coffee houses -
0:04:06 > 0:04:10an increase of 400 million on the previous year.
0:04:11 > 0:04:14Retail sales grew by 2.6% last year
0:04:14 > 0:04:18but branded coffee sales went up nearly four times as much.
0:04:20 > 0:04:22The average coffee shop customer spends over
0:04:22 > 0:04:26£450 a year on their habit.
0:04:27 > 0:04:30And the annual bill for a really enthusiastic drinker
0:04:30 > 0:04:33can be up to £2,000.
0:04:34 > 0:04:38On a two-coffee day, that's a fiver easily.
0:04:38 > 0:04:42So that's, what, 35 quid a week? That's 140 a month.
0:04:42 > 0:04:44Look at me doing the maths.
0:04:44 > 0:04:47So we're looking at a grand and a half, two grand a year.
0:04:47 > 0:04:51And that's quite a lot of money. I don't regret it for a moment.
0:04:53 > 0:04:55With so many big spenders amongst us, there is
0:04:55 > 0:04:57plenty of money to be made.
0:04:57 > 0:05:00Here's how the margins shake down.
0:05:00 > 0:05:02Take a regular Cappuccino. The raw materials -
0:05:02 > 0:05:07the milk, water and, of course, the coffee - cost about 15p.
0:05:07 > 0:05:10The cup and a napkin cost another 15 pence or so.
0:05:10 > 0:05:13Then there's staffing, electricity, the shops themselves
0:05:13 > 0:05:15and of course wifi and sofas.
0:05:15 > 0:05:18Those fixed costs add about another £1.20.
0:05:18 > 0:05:21Plus there's about 45p of VAT.
0:05:21 > 0:05:26The average price of a regular Cappuccino is around £2.30.
0:05:26 > 0:05:29so the stores are making a comfortable profit
0:05:29 > 0:05:31of around 35 pence per cup.
0:05:37 > 0:05:40Not surprisingly, competition for the coffee pound is intense.
0:05:40 > 0:05:43Especially between Starbucks and Costa.
0:05:45 > 0:05:49Costa may not rival Starbucks' status as a vast global enterprise
0:05:49 > 0:05:53but this successful British company is top of the pile in the UK.
0:05:55 > 0:05:56Costa has been, by far and away,
0:05:56 > 0:05:59the most successful in player in the market,
0:05:59 > 0:06:02with now 1,700 outlets across the country.
0:06:02 > 0:06:05It's growing at about 150-200 stores a year,
0:06:05 > 0:06:07which is phenomenal success.
0:06:16 > 0:06:20Almost all of the coffee Costa brews comes from its roastery
0:06:20 > 0:06:21in Lambeth, South London.
0:06:24 > 0:06:289,000 tonnes of raw coffee beans are processed here every year.
0:06:31 > 0:06:33This is the domain of Gennaro Pelliccia,
0:06:33 > 0:06:35Costa's chief coffee taster.
0:06:37 > 0:06:39Once the coffee comes into the factory,
0:06:39 > 0:06:42depending on which origin we need at that moment in time,
0:06:42 > 0:06:44it'll come in, it gets split open
0:06:44 > 0:06:48and it goes straight up into our holding silo,
0:06:48 > 0:06:50where we have all the different origins.
0:06:50 > 0:06:54It's Gennaro's job to make sure the different types of raw coffee
0:06:54 > 0:06:58beans are blended and roasted to make a standard Costa flavour.
0:06:59 > 0:07:03Each individual silo will open up, one after the other,
0:07:03 > 0:07:06first Brazilian and then Columbian, then some Vietnamese,
0:07:06 > 0:07:09depending on what the composition is today.
0:07:09 > 0:07:12That coffee is then sent upstairs to one of the two roasters.
0:07:14 > 0:07:17Whilst the coffee is in the roaster, it turns from the green colour
0:07:17 > 0:07:20that we've seen to that brown colour.
0:07:21 > 0:07:25Costa Coffee's roastery is a very modern facility
0:07:25 > 0:07:27but the history of the company goes back to a time
0:07:27 > 0:07:31when decent coffee was pretty hard to track down.
0:07:33 > 0:07:35Ah, that's better.
0:07:35 > 0:07:37Never felt more like a cup of tea in my life.
0:07:39 > 0:07:43Not for nothing do we consider ourselves a nation of tea drinkers.
0:07:43 > 0:07:48In the post-war years, Britain's tea consumption was 50 times
0:07:48 > 0:07:53that of coffee, and tea houses adorned our metropolitan centres.
0:07:53 > 0:07:54There were coffee bars
0:07:54 > 0:07:57but they were the preserve of Italian ex-pats.
0:07:59 > 0:08:02Well, I was around in the '50s but very, very young.
0:08:02 > 0:08:08But I gained from my mother who was operating as a restaurateur in Soho.
0:08:08 > 0:08:12There were just pockets, pockets of Italian immigrants
0:08:12 > 0:08:16that wanted to bring that culture into the UK.
0:08:16 > 0:08:18# Now I like my coffee
0:08:18 > 0:08:20# And I like my brew
0:08:20 > 0:08:24# But each has its own little job to do. #
0:08:24 > 0:08:27These Italian espresso bars in stylish Soho
0:08:27 > 0:08:29drew a new audience to coffee.
0:08:29 > 0:08:32They became bohemian hang-outs for artists and beatniks.
0:08:33 > 0:08:36You prefer a coffee house, do you?
0:08:36 > 0:08:39Well, truthfully speaking, I do, yes.
0:08:39 > 0:08:42- Are you an abstract artist, may I ask?- No. Not yet.
0:08:42 > 0:08:45I'm glad to hear that. I'm very glad to hear that.
0:08:48 > 0:08:51It was about the coffee bar and the music scene around the coffee bar.
0:08:51 > 0:08:55So I think it was hip, to take a word from the time,
0:08:55 > 0:08:59fashionable and not so much about the quality of the coffee that was there.
0:08:59 > 0:09:01And that's why it never expanded
0:09:01 > 0:09:04and stood pretty still like that for about 20 years.
0:09:08 > 0:09:12Enter two Italian brothers with a hankering for coffee.
0:09:15 > 0:09:19Costa was founded in about 1971 by two brothers,
0:09:19 > 0:09:21Sergio and Bruno Costa,
0:09:21 > 0:09:24who were Italian immigrants who came
0:09:24 > 0:09:29over to the UK, couldn't find the taste of home here
0:09:29 > 0:09:32so decided that they would set themselves up
0:09:32 > 0:09:34as a roasting and wholesale business.
0:09:37 > 0:09:41At one point all the hotels in Park Lane were serving Costa Coffee.
0:09:41 > 0:09:44It became a very, very popular, very, very successful business.
0:09:47 > 0:09:50But the Costa brothers wanted a bigger piece of the coffee action.
0:09:50 > 0:09:53They started to open their own cafes.
0:09:55 > 0:09:58- Good to see you. Been shopping? - Coffee.
0:09:58 > 0:10:02The middle classes, though, were not interested in Italian style coffee.
0:10:02 > 0:10:04The special blend and roast.
0:10:04 > 0:10:09- Precisely.- That gives you that richer, smoother, Nescafe taste.
0:10:09 > 0:10:13By now, Brits were infatuated with a totally different type of drink.
0:10:13 > 0:10:15In the '80s the UK was the biggest market
0:10:15 > 0:10:17for instant coffee in the World.
0:10:17 > 0:10:20Make sure you're serving coffee at its best.
0:10:20 > 0:10:21Excuse me, I'd like a coffee, please.
0:10:21 > 0:10:26- Cappuccino? Espresso? - Cappuccino.- Cappuccino.
0:10:26 > 0:10:27THUMPING
0:10:28 > 0:10:32We had heard of exotic Italian coffees.
0:10:32 > 0:10:36But, as the Not the Nine O'clock News team showed in 1982,
0:10:36 > 0:10:39we definitely didn't take them seriously.
0:10:39 > 0:10:41HE MAKES PERCOLATING SOUNDS
0:10:50 > 0:10:57Just bring you back to a story. This is early 1979, 1980.
0:10:57 > 0:11:02So we're in Ponti's, we've introduced espresso machines behind the bar.
0:11:02 > 0:11:06We're in the middle of Covent Garden, loads of construction work going on.
0:11:06 > 0:11:09I'm behind the counter, early morning. A guy's been sent from
0:11:09 > 0:11:12the building site to come in to order coffees for the construction site.
0:11:12 > 0:11:15He's seen the machine, it's stumped him.
0:11:15 > 0:11:17He said, "Can I have five desperados, please?"
0:11:17 > 0:11:19So I said, "Certainly, sir,"
0:11:19 > 0:11:22and gave him five cappuccinos. He was absolutely delighted
0:11:22 > 0:11:25but I had this vision that he'd be going back to the building site
0:11:25 > 0:11:28and saying, "I've got the desperados, boys."
0:11:28 > 0:11:32Across the pond, things were not much better
0:11:32 > 0:11:35but coffee was about to get a massive make over.
0:11:35 > 0:11:37MUSIC: "Smells Like Teen Spirit" by Nirvana
0:11:37 > 0:11:41Seattle in the 1980s and '90s was the tech capital of the world,
0:11:41 > 0:11:44the home of Microsoft, Nintendo, Amazon and Boeing.
0:11:46 > 0:11:50And it was the birthplace of the grunge alternative rock scene,
0:11:50 > 0:11:54propelling bands like Nirvana onto the international stage.
0:11:54 > 0:11:57# Here we are now Entertain us. #
0:11:57 > 0:12:00Into this hotbed of counter culture and innovation,
0:12:00 > 0:12:04burst the biggest thing to hit coffee since the espresso machine.
0:12:04 > 0:12:06It came in the form of Howard Schultz,
0:12:06 > 0:12:10the man who would become the godfather of modern coffee shops,
0:12:10 > 0:12:12the man who made Starbucks.
0:12:12 > 0:12:17This is the in-house design centre, in terms of all the creative ideas,
0:12:17 > 0:12:19everything you see in the packaging
0:12:19 > 0:12:22that ultimately ends up in the stores.
0:12:22 > 0:12:25When Schultz joined Starbucks in 1982,
0:12:25 > 0:12:28the company only sold beans, not cups of coffee.
0:12:29 > 0:12:32It was a trip he took to Italy that same year
0:12:32 > 0:12:34that changed coffee culture for ever.
0:12:36 > 0:12:39As he's walking along the streets in Milan,
0:12:39 > 0:12:43he's noticing just the culture of these Italian coffee bars
0:12:43 > 0:12:47and not so much the coffee as the community that they're creating
0:12:47 > 0:12:50and the buzz that, all hours of the day,
0:12:50 > 0:12:53you've got people coming in and out of these shops, you know,
0:12:53 > 0:12:55standing having their morning or afternoon espresso
0:12:55 > 0:12:59and having great, very animated conversation
0:12:59 > 0:13:03in, er, the streets of Milan and he falls in love with this idea.
0:13:03 > 0:13:06I raced back from Italy
0:13:06 > 0:13:10with this wonder in my eye
0:13:10 > 0:13:14about recreating the Italian coffee bar in my own image
0:13:14 > 0:13:15and bringing it to America.
0:13:18 > 0:13:21So convinced was he, that Schultz took over the company
0:13:21 > 0:13:26and he opened his first Starbucks cafe in 1987.
0:13:26 > 0:13:27In the very beginnings, you know,
0:13:27 > 0:13:30at Pike Place in Seattle, where they began,
0:13:30 > 0:13:35they were a very home-made, homespun business and that was the appeal.
0:13:35 > 0:13:39Tall caramel macchiato. Double.
0:13:39 > 0:13:42Schultz shrewdly realised that Americans would not take
0:13:42 > 0:13:45to the short, bitter espressos favoured by Italians,
0:13:45 > 0:13:49so he invented a new kind of coffee for his coffee houses.
0:13:49 > 0:13:52If you think about the battle for the American coffee market,
0:13:52 > 0:13:57it was to try to get the younger generation away from soft drinks,
0:13:57 > 0:14:01Pepsi and Coke, and introduce them to coffee.
0:14:01 > 0:14:04So here we have a drink that's got a caffeine kick, but it's bitter.
0:14:04 > 0:14:07Let's put a syrup in, let's make it milkier,
0:14:07 > 0:14:09so now we've got the caffeine kick,
0:14:09 > 0:14:12we've got the sugar content and that was driven by the Americans.
0:14:16 > 0:14:19Almost overnight, frankly, in a city that had never
0:14:19 > 0:14:23heard of a cappuccino or a latte, it just goes...it just goes wild.
0:14:23 > 0:14:25You've got queues out the door
0:14:25 > 0:14:28and suddenly people in Seattle are drinking cappuccinos.
0:14:28 > 0:14:31That was the start of what was going to be a very big movement.
0:14:33 > 0:14:37Pretty soon Starbucks cafes were opening on every street corner.
0:14:38 > 0:14:40Schultz wanted his stores to provide
0:14:40 > 0:14:44a unique new environment - a "third place".
0:14:47 > 0:14:50The third place was that place in people's lives that was
0:14:50 > 0:14:53somewhere between work and home,
0:14:53 > 0:14:55giving people a place to come together,
0:14:55 > 0:14:58giving people a reason to come together,
0:14:58 > 0:15:01and facilitating community,
0:15:01 > 0:15:04through something as simple as a cup of coffee.
0:15:04 > 0:15:08It was such an original idea to incorporate soft furnishings,
0:15:08 > 0:15:11things that we take for granted today -
0:15:11 > 0:15:13sofas, bookcases -
0:15:13 > 0:15:16allowing consumers to feel like they are in their own home.
0:15:16 > 0:15:18That was Howard Schultz's moment of genius.
0:15:24 > 0:15:26The model of the cafe as the third place
0:15:26 > 0:15:29has been adopted by all the successful brands.
0:15:29 > 0:15:31If you look carefully,
0:15:31 > 0:15:35you will see that all coffee shops are planned out with precision.
0:15:37 > 0:15:40In this store, there's about four different zones.
0:15:40 > 0:15:43At the front of the store you'll see there is
0:15:43 > 0:15:44some seating right by the windows.
0:15:44 > 0:15:48The customers can enjoy the view outside but also as important,
0:15:48 > 0:15:50other customers can see there are people in there,
0:15:50 > 0:15:52"This is a great place to be, there are other customers,
0:15:52 > 0:15:54"I'm going to go in and join."
0:15:54 > 0:15:57Behind me, over my shoulder, there's perch seating.
0:15:57 > 0:16:01This is very reminiscent of the traditional espresso houses in Italy,
0:16:01 > 0:16:04where you have your espresso, you stand, you perch,
0:16:04 > 0:16:05you drink it and you go.
0:16:07 > 0:16:11We have big community tables where customers can come and sit,
0:16:11 > 0:16:13either as groups or individually,
0:16:13 > 0:16:15working on their laptops, reading, whatever.
0:16:15 > 0:16:18Then we have softer seating, it's a little bit more intimate.
0:16:23 > 0:16:28Back in 1990s America, the third place became part of the zeitgeist.
0:16:28 > 0:16:30American sitcoms like Friends
0:16:30 > 0:16:35cast the coffee shop in a central role as a stylish home from home.
0:16:35 > 0:16:3895, 96, 97...
0:16:38 > 0:16:42See, I told you - less than 100 steps from our place to here.
0:16:42 > 0:16:44You've got way too much free time!
0:16:44 > 0:16:48When Friends first aired in the UK, lounging on sofas in a cafe
0:16:48 > 0:16:52with your nearest and dearest seemed like an exotic new concept.
0:16:52 > 0:16:54- Happy birthday, pal. - We love you, man.
0:16:54 > 0:16:57# Stick a pony in me pocket... #
0:16:57 > 0:17:00In Britain, we already had a centuries-old venue
0:17:00 > 0:17:02for meeting friends and socialising,
0:17:02 > 0:17:05a place that formed the essential backdrop of British sitcoms
0:17:05 > 0:17:07like Only Fools And Horses.
0:17:07 > 0:17:09The local boozer.
0:17:09 > 0:17:11All right, Rodney?
0:17:11 > 0:17:14- How did you get on at Hampton Court? - Don't want to talk about it.
0:17:14 > 0:17:16- Why, what happened?- Cassandra gave him the elbow him in the maze.
0:17:16 > 0:17:18Oh, that sounds painful.
0:17:18 > 0:17:23While Del Boy and Uncle Albert were "sympathising" with Rodney
0:17:23 > 0:17:26down the Nag's Head, all was not well in the pub world.
0:17:28 > 0:17:32Britain's established brewers had become so successful
0:17:32 > 0:17:34that the Government decided it was time
0:17:34 > 0:17:36to loosen their monopolistic grip.
0:17:39 > 0:17:41Britain's pubs could be in for big changes
0:17:41 > 0:17:44after a report today by the Monopolies Commission
0:17:44 > 0:17:46criticising the breweries.
0:17:46 > 0:17:48The Commission says beer is too expensive
0:17:48 > 0:17:50and the breweries own too many pubs.
0:17:53 > 0:17:54One brewer, Whitbread,
0:17:54 > 0:17:59was forced to dispose of almost a third of its 6,000 pubs.
0:17:59 > 0:18:02The top brass decided Whitbread had to diversify
0:18:02 > 0:18:07and it identified female spending power as a huge emerging market.
0:18:08 > 0:18:11Women have literally come out of the home
0:18:11 > 0:18:12and that's meant, of course,
0:18:12 > 0:18:15that they have their own income, their own wherewithal,
0:18:15 > 0:18:16their own tastes
0:18:16 > 0:18:19and they weren't just going to be satisfied with having
0:18:19 > 0:18:23a Babycham down the pub now and again with their husbands.
0:18:23 > 0:18:28Whitbread wanted to appeal to all these new female spenders
0:18:28 > 0:18:31and it found the answer quite by accident.
0:18:31 > 0:18:37On a trip to Canada in 1993, I visited what was probably
0:18:37 > 0:18:40the first Starbucks outside of the United States,
0:18:40 > 0:18:42in downtown Vancouver,
0:18:42 > 0:18:47and was interested, but didn't think very much more of it,
0:18:47 > 0:18:53but seven or eight months later, going through the same intersection,
0:18:53 > 0:18:55I was absolutely amazed to see,
0:18:55 > 0:18:58on the opposite corner of the intersection,
0:18:58 > 0:19:03another Starbucks, and both Starbucks were trading well.
0:19:03 > 0:19:05It was a bit like a light bulb going on.
0:19:10 > 0:19:15Whitbread's coffee light bulb had not lit up quickly enough
0:19:15 > 0:19:18to satisfy two American expats who found themselves
0:19:18 > 0:19:22stranded in London in the '90s, longing for a decent cup of coffee.
0:19:24 > 0:19:27The very first morning Ally was in London, she walked me to work,
0:19:27 > 0:19:30we walked across Hyde Park and stopped at this little Italian cafe
0:19:30 > 0:19:32because she wanted to get a coffee.
0:19:34 > 0:19:37Scott and Ally Svenson had come to London from Seattle,
0:19:37 > 0:19:39where they had been Starbucks devotees.
0:19:41 > 0:19:44I was trying to explain to her that the coffee experience
0:19:44 > 0:19:47was going to be different from what she'd just come from.
0:19:50 > 0:19:53The coffee offering in Britain in the 1990s was abysmal.
0:19:53 > 0:19:58I mean, there was absolutely no reason for anyone to drink it.
0:19:58 > 0:19:59It didn't taste very nice,
0:19:59 > 0:20:02it didn't smell very nice, it didn't look very nice.
0:20:02 > 0:20:04Why would anyone drink that gloopy mess?
0:20:09 > 0:20:12Desperate for a proper latte, the Svensons decided that it was
0:20:12 > 0:20:15up to them to change the face of British coffee.
0:20:15 > 0:20:17They set up their own coffee bar
0:20:17 > 0:20:19and they called it the Seattle Coffee Company.
0:20:22 > 0:20:25We opened in April. It worked in about five minutes.
0:20:25 > 0:20:27We tinkered with that through that very hot summer,
0:20:27 > 0:20:30and at the end of that year, we opened two more in December.
0:20:30 > 0:20:32At precisely the same time,
0:20:32 > 0:20:35Whitbread found the ideal way to enter the coffee market.
0:20:38 > 0:20:42We thought briefly about perhaps approaching Starbucks
0:20:42 > 0:20:46for the UK franchise, but our main thrust
0:20:46 > 0:20:51was to find if there was an acquisition that we could make
0:20:51 > 0:20:56of a small company and drive forward from there.
0:20:56 > 0:21:00And Costa ticked virtually all of our boxes.
0:21:01 > 0:21:04People were just starting to get the idea that it might be part of
0:21:04 > 0:21:07their daily routine and what they did.
0:21:07 > 0:21:10So it was...you could argue, incredibly prescient
0:21:10 > 0:21:13or a little bit lucky as well,
0:21:13 > 0:21:16em, but equally it was the start of, you know,
0:21:16 > 0:21:19an enormous growth industry in the UK.
0:21:22 > 0:21:25In the 1990s coffee gold rush,
0:21:25 > 0:21:28Costa Coffee and the Seattle Coffee Company
0:21:28 > 0:21:30were joined by Coffee Republic, Caffe Nero
0:21:30 > 0:21:34and a host of wannabe coffee brands.
0:21:34 > 0:21:36Without a shadow of a doubt, we were in it for the logo
0:21:36 > 0:21:38and the paper cups early days.
0:21:38 > 0:21:40We didn't really care or know about the coffee,
0:21:40 > 0:21:42but we thought it looked great.
0:21:42 > 0:21:44I certainly was part of that, I thought I looked so cool.
0:21:47 > 0:21:51The coffee competition was about to get a lot more fierce.
0:21:51 > 0:21:55By now, Howard Schultz had conquered America and he wanted to go global.
0:21:57 > 0:22:02I want to be able to be one of those rare companies that is ubiquitous.
0:22:02 > 0:22:08Schultz had 1,600 stores in the US and he had his eye on Britain.
0:22:08 > 0:22:11In 1998, he made the Svensons an offer
0:22:11 > 0:22:14it would have seemed rude to refuse.
0:22:14 > 0:22:17It came down to Howard Schultz and I sitting in a restaurant
0:22:17 > 0:22:20in London and having a philosophical conversation
0:22:20 > 0:22:23and ultimately reaching across the table and shaking hands.
0:22:23 > 0:22:28The Svensons walked away £50 million richer
0:22:28 > 0:22:30and Starbucks had arrived in Britain.
0:22:36 > 0:22:40It's mid morning at Costa's roastery and a tasting is under way.
0:22:40 > 0:22:43Gennaro and his team regularly take batches they are planning to use,
0:22:43 > 0:22:48and sample them according to age-old tasting rituals.
0:22:48 > 0:22:51THEY SLURP NOISILY
0:22:51 > 0:22:54The slurping is not just for fun.
0:22:54 > 0:22:57It sprays the coffee all over the tasters' taste buds
0:22:57 > 0:23:01so they can profile each individual batch of beans.
0:23:01 > 0:23:04'Our job here is to maintain the consistency
0:23:04 > 0:23:06'of our in-store Mocha Italia blend.'
0:23:06 > 0:23:09We are using coffee from all over the world - Colombian coffee,
0:23:09 > 0:23:12Costa Rican coffee, Ecuadorian coffee...
0:23:12 > 0:23:13'Some of these origins are harvested,
0:23:13 > 0:23:15'obviously, at different times.
0:23:15 > 0:23:17'So different times throughout the year,
0:23:17 > 0:23:19'the coffee will perform slightly differently.
0:23:19 > 0:23:23'The danger is, if we do not constantly check the coffee,'
0:23:23 > 0:23:26not just at the end of the season, but throughout the season,
0:23:26 > 0:23:29we cannot guarantee the consistency in our stores.
0:23:29 > 0:23:31That's why it's so important that we do it all the time.
0:23:35 > 0:23:37Costa's flavour clearly plays well with us
0:23:37 > 0:23:40because it is Britain's number-one coffee brand.
0:23:40 > 0:23:45It's especially popular with women aged 35 to 54.
0:23:45 > 0:23:50Last year, the company turned over £648 million in the UK.
0:23:52 > 0:23:55I really like Costa Coffee because it's nice and spacious
0:23:55 > 0:23:56so I can get the buggy in.
0:23:56 > 0:23:59I actually really like their coffee, as well.
0:23:59 > 0:24:02It's quite mild and I like to have their decaf coffee
0:24:02 > 0:24:05and I like to sit down and read the paper while Laila's asleep
0:24:05 > 0:24:07and just have half an hour for myself.
0:24:11 > 0:24:15Starbucks is popular for its iced drinks and its American branding,
0:24:15 > 0:24:17and it's a favourite of young people.
0:24:17 > 0:24:23Its UK cash tills rang up £419 million last year.
0:24:23 > 0:24:26I love the staff in here, they're always so friendly and so lovely.
0:24:26 > 0:24:28Yeah, the food's really good here as well.
0:24:28 > 0:24:31They always make, like, a really good drink for you as well, so.
0:24:32 > 0:24:34Nero has a strong Italian image
0:24:34 > 0:24:37and it attracts a slightly more male audience.
0:24:37 > 0:24:42In 2013 Nero had UK takings of £215 million.
0:24:44 > 0:24:49I've just had a routine for years where I've always wanted
0:24:49 > 0:24:53to have a coffee, reading my paper first thing in the morning
0:24:53 > 0:24:56before I literally hit the road,
0:24:56 > 0:25:00and for me personally I like Nero's coffee.
0:25:01 > 0:25:04Having a favourite brand of coffee shop
0:25:04 > 0:25:06would once have been unimaginable.
0:25:06 > 0:25:09But as the coffee shop phenomenon flourished in the '90s,
0:25:09 > 0:25:13so did our appreciation of good, strong coffee.
0:25:16 > 0:25:20Tasting a stronger flavour is all about, for me, moving up
0:25:20 > 0:25:24the ladder of taste, and once you're up that rung on the ladder
0:25:24 > 0:25:26it's almost impossible to go back.
0:25:26 > 0:25:30I started drinking what I believed at the time was called a Why Bother,
0:25:30 > 0:25:33which was a skinny decaffeinated cappuccino, no chocolate.
0:25:33 > 0:25:38Erm, so I started ordering that, just to be part of the gang,
0:25:38 > 0:25:40to have the cup largely.
0:25:40 > 0:25:43Erm, and at some point I must have gone,
0:25:43 > 0:25:45"What the hell, I'll have it caffeinated."
0:25:45 > 0:25:49And that was how, that was how my sort of addiction, fascination,
0:25:49 > 0:25:50obsession love affair began.
0:25:50 > 0:25:53It's almost like that legal drug that's hooked everybody.
0:25:53 > 0:25:55Once exposed, that's it for life.
0:26:01 > 0:26:04And it's not just the coffee that we have become hooked on.
0:26:04 > 0:26:09The whole theatre of coffee-making draws us in from the moment
0:26:09 > 0:26:10we walk in the door.
0:26:11 > 0:26:14The way that we run our service is that every barista
0:26:14 > 0:26:17engages with the customer and is an expert coffee maker,
0:26:17 > 0:26:20therefore the coffee machine has to be within their reach.
0:26:20 > 0:26:25They can't step more than one step over in order to make the coffee.
0:26:25 > 0:26:28We don't want to have the coffee machine at the front
0:26:28 > 0:26:30to be a barrier to you as the customer.
0:26:30 > 0:26:32We don't want to create an emotional block,
0:26:32 > 0:26:36we want to create an emotional freedom and engagement and ease.
0:26:36 > 0:26:38They want to stand and make the coffee and talk to you
0:26:38 > 0:26:41at the same time and then they turn back.
0:26:41 > 0:26:44If they happen to ever turn their back, then we do make sure that
0:26:44 > 0:26:48people see that we have, "The best espresso this side of Milan."
0:26:48 > 0:26:52This kind of rapport with chirpy baristas is a far cry
0:26:52 > 0:26:55from the British service culture of yesteryear.
0:26:56 > 0:26:59Service is now a competitive advantage
0:26:59 > 0:27:02and if you think about how the, you know, the ante is absolutely
0:27:02 > 0:27:06being upped and the service standards have improved in the UK.
0:27:06 > 0:27:09Coffee shops have definitely been an important part of that.
0:27:11 > 0:27:15By the time the new millennium dawned we had been seduced.
0:27:15 > 0:27:17We discovered that we could sit for hours
0:27:17 > 0:27:20nursing a single cup of coffee.
0:27:20 > 0:27:24Coffee shops created more places for people to stop and to take time
0:27:24 > 0:27:29to snack and use their ever-growing laptops and computers at the time.
0:27:31 > 0:27:36We even learned a whole new language just so we could put in our order.
0:27:36 > 0:27:37- One shot.- Flat white.
0:27:37 > 0:27:39- A chai tea latte.- Soya latte.
0:27:39 > 0:27:41- Espresso.- Mocha.- Americano.
0:27:41 > 0:27:42Cappuccino.
0:27:42 > 0:27:43Chai latte.
0:27:43 > 0:27:45A one-shot decaf cappuccino.
0:27:47 > 0:27:52Starbucks had brought to the UK a cornucopia of drinks
0:27:52 > 0:27:53that were already selling well in the US
0:27:53 > 0:27:56but were unheard of over here.
0:27:59 > 0:28:02Our number one drink is our skinny latte
0:28:02 > 0:28:05and that remains pretty constant right through the year.
0:28:05 > 0:28:08At Christmas time we have those really indulgent Christmas offerings
0:28:08 > 0:28:09that our customers love.
0:28:09 > 0:28:12But in the Summer time, hopefully we'll get another great summer
0:28:12 > 0:28:16as we did last year, iced drinks become a very important part.
0:28:16 > 0:28:19And our Frappuccino has now become really quite famous
0:28:19 > 0:28:22and something that our customers come in time and time for.
0:28:22 > 0:28:26We lapped up Starbucks' concoctions, so not surprisingly,
0:28:26 > 0:28:30Starbucks-style drinks have also appeared on its competitors' menus.
0:28:32 > 0:28:34If we see that something that's working then, you know,
0:28:34 > 0:28:36our customers'll be asking for it too.
0:28:36 > 0:28:39So clearly we would rather them come to us for that drink
0:28:39 > 0:28:41than anywhere else, so we give customers what they want,
0:28:41 > 0:28:42yeah, absolutely.
0:28:45 > 0:28:49If somebody from 25 years ago walked into a modern cafe
0:28:49 > 0:28:52they'd be completely bewildered by the range of drinks on offer,
0:28:52 > 0:28:55all the different foreign names, all the different sizes,
0:28:55 > 0:28:58all the combinations, the skinny,
0:28:58 > 0:29:01the full fat, the soya, the syrups.
0:29:04 > 0:29:06And once you've managed the difficult job of deciding
0:29:06 > 0:29:10which drink you want, there's one more hurdle to negotiate.
0:29:11 > 0:29:13What size would you like?
0:29:14 > 0:29:19If the drinks are confusing, then the cup sizes are a nightmare.
0:29:20 > 0:29:24So, on the off-chance that you don't know your grandes from your primos,
0:29:24 > 0:29:29I present the idiot's guide to coffee sizing.
0:29:29 > 0:29:32At Caffe Nero there are three no-nonsense sizes - the Small,
0:29:32 > 0:29:34Regular and Grande.
0:29:34 > 0:29:38At Costa you've got the Primo, the Medio and the Massimo.
0:29:38 > 0:29:44And at Starbucks there's the Tall, Grande and Venti.
0:29:44 > 0:29:47And here's one more that you may not have heard of.
0:29:47 > 0:29:49The Starbucks...Short.
0:29:51 > 0:29:54One of the interesting deals available at Starbucks
0:29:54 > 0:29:58is the secret cappuccino, the coffee that dare not speak its name.
0:29:58 > 0:30:02If you go into Starbucks you'll see three sizes of drinks,
0:30:02 > 0:30:05the Tall, the Grande, the Venti.
0:30:05 > 0:30:07You can also get the Short
0:30:07 > 0:30:11and the short is, of course, smaller than the tall,
0:30:11 > 0:30:12and it's cheaper.
0:30:15 > 0:30:19And the reason they don't advertise the existence of this cheaper drink
0:30:19 > 0:30:21is because they don't want to make it too easy to get that bargain.
0:30:21 > 0:30:23If you really want the cheaper deal,
0:30:23 > 0:30:26if you really know what you're doing, you can pay less.
0:30:28 > 0:30:31Starbucks, of course, gives a slightly different reason
0:30:31 > 0:30:33for the absence of the Short on the menu.
0:30:36 > 0:30:39There are literally thousands of combinations of our drinks.
0:30:39 > 0:30:43You can have it Tall, Grande, Skinny, with something,
0:30:43 > 0:30:47without something. We want to make sure that it's your drink.
0:30:47 > 0:30:49You want to have it in the way that you want to have it.
0:30:49 > 0:30:53There's just frankly not enough room to put every combination
0:30:53 > 0:30:54up on a menu board behind.
0:30:55 > 0:31:00So why do the coffee shops have thousands of combinations?
0:31:00 > 0:31:06The answer is that a wide choice of products makes good business sense.
0:31:06 > 0:31:09Wouldn't it be brilliant, from the point of view of the cafe,
0:31:09 > 0:31:14if there was a way to charge more to people who didn't mind paying more
0:31:14 > 0:31:17and to charge less to people who absolutely demanded
0:31:17 > 0:31:19the best possible deal?
0:31:19 > 0:31:21And it turns out there is a way to do this.
0:31:21 > 0:31:25You just offer this menu of choices where any customer who isn't
0:31:25 > 0:31:29price sensitive can order a sprinkling of marshmallows
0:31:29 > 0:31:33and a fancier combination and maybe an extra shot of espresso,
0:31:33 > 0:31:34and extra bit of syrup,
0:31:34 > 0:31:37and these things really don't cost a lot to provide.
0:31:37 > 0:31:40The margins on them are absolutely fantastic.
0:31:43 > 0:31:45So how does it work?
0:31:45 > 0:31:48Well, remember the margin on a regular cappuccino?
0:31:48 > 0:31:51It was a decent 35 pence profit.
0:31:51 > 0:31:54Look what happens if you supersize your order.
0:31:54 > 0:31:59Say to a large cafe latte, with a flavour and an extra topping.
0:31:59 > 0:32:03Now the raw materials cost a bit more at about 30p.
0:32:03 > 0:32:07The packaging and the fixed costs are roughly the same
0:32:07 > 0:32:10and VAT has gone up to about 65 pence.
0:32:10 > 0:32:15So the costs have gone up a bit, but the price tag has soared
0:32:15 > 0:32:20to around £3.30, almost trebling the profit on each cup.
0:32:25 > 0:32:29Given all this coffee-powered cash flying around,
0:32:29 > 0:32:32you could be forgiven for thinking that setting up a coffee shop chain
0:32:32 > 0:32:37would be a licence to print money. But you'd be wrong.
0:32:37 > 0:32:38As the noughties dawned,
0:32:38 > 0:32:42coffee drinking seemed to be deeply entrenched in the British lifestyle.
0:32:44 > 0:32:47I got very excited back in 2003
0:32:47 > 0:32:52when I saw the latte became part of consumer price index.
0:32:52 > 0:32:55For me that was a sign that this market was really here.
0:32:55 > 0:33:00That this branded coffee product was part of British lifestyle.
0:33:04 > 0:33:07Despite this, none of the brands was turning a profit
0:33:07 > 0:33:10because coffee shops only make money
0:33:10 > 0:33:14if they can control the fixed costs, like their rents.
0:33:14 > 0:33:17One company in particular was struggling.
0:33:18 > 0:33:20Coffee Republic had been the brainchild
0:33:20 > 0:33:23of brother and sister team Bobby and Sahar Hashemi.
0:33:25 > 0:33:28They had grown their business quickly since 1995,
0:33:28 > 0:33:31taking on locations with astronomical rents
0:33:31 > 0:33:33where footfall would be high,
0:33:33 > 0:33:37but their brand was not strong enough to pull in the punters.
0:33:38 > 0:33:41They were a brand that was wanting to be a Starbucks,
0:33:41 > 0:33:44but they didn't have the brand pull of Starbucks,
0:33:44 > 0:33:46they didn't have the financial covenants,
0:33:46 > 0:33:48they didn't have the financial clout of Starbucks,
0:33:48 > 0:33:52so they were going head-to-head with Starbucks on the same premises
0:33:52 > 0:33:54and perhaps a bit of hubris,
0:33:54 > 0:33:57paying above and beyond what they should have paid.
0:34:00 > 0:34:03Rents matter because a third of us are more likely to choose
0:34:03 > 0:34:07a coffee bar based on it's convenience than any other factor,
0:34:07 > 0:34:12meaning landlords can charge a fortune for prime sites.
0:34:14 > 0:34:17In the land grab, we ended up acquiring sites
0:34:17 > 0:34:21that, because of the competition or because of the high rents,
0:34:21 > 0:34:23have not been profitable for us.
0:34:25 > 0:34:28Coffee Republic was eventually forced into administration.
0:34:28 > 0:34:32Bobby Hashemi stepped down and today the company is a fraction
0:34:32 > 0:34:34of the size it once was.
0:34:36 > 0:34:40The UK coffee market had boiled down to three big brands -
0:34:40 > 0:34:44Starbucks out in front, with Costa and Nero bringing up the rear.
0:34:44 > 0:34:47But the landscape was about to change.
0:34:49 > 0:34:51In the mid 2000s, Costa was a mediocre brand.
0:34:51 > 0:34:53It was a brand that was a bit lost.
0:34:53 > 0:34:58It was stuck in the middle, really, it was in no-man's land.
0:34:58 > 0:35:02It wasn't... It didn't have the coffee credentials of Caffe Nero,
0:35:02 > 0:35:05it didn't have sexy brand image of Starbucks.
0:35:07 > 0:35:10The arrival of a new management team in 2007
0:35:10 > 0:35:13was actually a pivotal moment in Costa's development.
0:35:13 > 0:35:17It really was the moment that they put the foot on the accelerator.
0:35:18 > 0:35:21One of the new managers who put his pedal to the floor
0:35:21 > 0:35:23was marketing whizz Jim Slater.
0:35:24 > 0:35:30In 2008 he hatched a plan that would hit Starbucks where it would hurt.
0:35:30 > 0:35:32There was a general perception amongst the public
0:35:32 > 0:35:36that all coffee was the same and it clearly isn't.
0:35:38 > 0:35:43So we commissioned a blind taste test and the results were stunning.
0:35:46 > 0:35:49It was a robust and well-certified study,
0:35:49 > 0:35:52and from that we felt confident enough to put adverting out
0:35:52 > 0:35:54that said that seven out of ten coffee lovers prefer Costa.
0:35:55 > 0:35:57When the ad campaign was first launched,
0:35:57 > 0:36:00Howard Schultz seemed undaunted.
0:36:01 > 0:36:05We serve about 2 million customers a week here in the UK.
0:36:05 > 0:36:08We are the leader and we will maintain our leadership position.
0:36:10 > 0:36:15But Costa's adverts had gone for Starbucks' jugular.
0:36:15 > 0:36:17We wanted to be fairly blatant,
0:36:17 > 0:36:22and lines like, "Sorry, Starbucks, the people have voted" were quite
0:36:22 > 0:36:26hard hitting at the time and they proved very effective.
0:36:30 > 0:36:31Starbucks was unnerved,
0:36:31 > 0:36:35and complained to the Advertising Standards Authority.
0:36:36 > 0:36:39We thought they would complain, and that's why
0:36:39 > 0:36:44we had to make absolutely sure that the research was totally robust,
0:36:44 > 0:36:48perfectly legal and would stand to any kind of challenge.
0:36:48 > 0:36:52The ASA upheld Costa's claims despite Starbucks's
0:36:52 > 0:36:56contention that the blind test only used cappuccinos and that the
0:36:56 > 0:37:02test did not prove that Starbucks customers preferred Costa's coffee.
0:37:02 > 0:37:06There were some level of challenge around the accuracy of it,
0:37:06 > 0:37:10but that was all upheld and was found to be true,
0:37:10 > 0:37:14and I guess beyond that, you should probably ask Starbucks.
0:37:16 > 0:37:20They are very entitled to say what they say, and actually,
0:37:20 > 0:37:22that's fine, because we've got to concentrate on what we do.
0:37:22 > 0:37:25We've got to concentrate on our customers
0:37:25 > 0:37:28and making our business the best it can be.
0:37:28 > 0:37:30I don't think Starbucks are at all frightened of us.
0:37:30 > 0:37:35You know, we're a microscopic blip on their proverbial posterior.
0:37:35 > 0:37:36- Hiya.- Yeah.
0:37:38 > 0:37:41- A large latte to go. - Yeah, no worries.
0:37:45 > 0:37:48As Starbucks and Costa Coffee were very publicly slugging it
0:37:48 > 0:37:51out for the number one spot in British coffee, their smaller
0:37:51 > 0:37:56and lower-profile cousin Caffe Nero was quietly building up
0:37:56 > 0:37:58a sizeable empire of its own.
0:38:00 > 0:38:03We didn't look at Costa or Starbucks and try and mimic them
0:38:03 > 0:38:06at all or, or do anything similar, and for better or for worse,
0:38:06 > 0:38:09we kind of marched to our own drum.
0:38:10 > 0:38:13Gerry Ford launched Nero in London,
0:38:13 > 0:38:17but the stores are based on an Italian model.
0:38:18 > 0:38:23Caffe Nero feels more like an authentic experience, you know.
0:38:23 > 0:38:25It feels like more like a specialist,
0:38:25 > 0:38:29and that clearly spills into its food, because it has a more
0:38:29 > 0:38:33specialised offer, it feels more like a quality premium food offer.
0:38:37 > 0:38:40Food is important, because coffee shops only really prosper if
0:38:40 > 0:38:45they can entice us to spend more by offering us mouth-watering goodies.
0:38:45 > 0:38:49In the early days, food was uninspiring in coffee shops.
0:38:49 > 0:38:53It was perhaps a dry, stale muffin or a piece of toast.
0:38:53 > 0:38:57If you were very, lucky you might've got a croissant.
0:38:57 > 0:38:59So it was very simple, very basic.
0:38:59 > 0:39:03Today's coffee shops have really increased their food offer.
0:39:06 > 0:39:09The driving force is the core product of coffee
0:39:09 > 0:39:12and the craftsmanship, and the quality that goes into that.
0:39:12 > 0:39:16But the food, the food sort of complements that.
0:39:16 > 0:39:20We have 30% of our sales in food, which is higher than either
0:39:20 > 0:39:25of the two other major brands and higher than most local independents.
0:39:25 > 0:39:28At Caffe Nero on Peter Street in Manchester,
0:39:28 > 0:39:32the staff know lunchtime is always busy.
0:39:35 > 0:39:38As it comes up to lunchtime, we tend to get ready for the rush make sure
0:39:38 > 0:39:43everything's full, stocked, make sure all the tables are clear,
0:39:43 > 0:39:45there's places for the customers to sit.
0:39:54 > 0:39:58Back at HQ in London, Caffe Nero's Italian food consultant
0:39:58 > 0:40:03Ursula Ferrigno is holding a tasting session to give staff a real
0:40:03 > 0:40:04flavour of Italy.
0:40:05 > 0:40:10Ursula is employed by Caffe Nero to try to put that sought-after
0:40:10 > 0:40:12Italian stamp on its food.
0:40:12 > 0:40:15The customer is becoming more and more discerning.
0:40:15 > 0:40:19I feel it's important that they come into a Caffe Nero and think,
0:40:19 > 0:40:23"I am getting exceptional food and its just like in Italy."
0:40:28 > 0:40:32I like to come in with a very ambitious range of food.
0:40:32 > 0:40:35Some of my ideas need to be tweaked,
0:40:35 > 0:40:39but they're all authentic, exploring new foods new ideas.
0:40:40 > 0:40:44Once Ursula's ambitions have been sufficiently tweaked,
0:40:44 > 0:40:48the challenge is to make sure they will work in the stores.
0:40:48 > 0:40:50We do a lot of testing and trialling.
0:40:50 > 0:40:54It's important we've applied sufficient rigour to the process.
0:40:54 > 0:40:57So we test it both within our food team,
0:40:57 > 0:41:02within the wider Caffe Nero team, and with customers.
0:41:03 > 0:41:06If we have confidence in the product, we'll just say,
0:41:06 > 0:41:09"This is great, we love it, we think our customers will love it",
0:41:09 > 0:41:10and we just put it out there.
0:41:13 > 0:41:17Purists, though, might not regard every item as being in line
0:41:17 > 0:41:21with Ursula's quest for the authentic Italian experience.
0:41:26 > 0:41:27PRODUCER: Tell me about muffins.
0:41:27 > 0:41:28SHE LAUGHS
0:41:29 > 0:41:31Erm...
0:41:34 > 0:41:36We had a big debate about it.
0:41:36 > 0:41:39Do we serve that which is slightly an American type of product?
0:41:39 > 0:41:41We don't have a lot of those, but if we're going to do some of them,
0:41:41 > 0:41:44we want to do them better than anybody else.
0:41:48 > 0:41:51By the late noughties, the British coffee shops were all serving us
0:41:51 > 0:41:55decent food, decent coffee, and most of them were making decent money.
0:41:55 > 0:41:59But then the economy hit a bump in the road.
0:42:02 > 0:42:06Across the country, shops began closing down.
0:42:06 > 0:42:08Household budgets were squeezed.
0:42:08 > 0:42:09Belts were tightened.
0:42:11 > 0:42:15But UK consumers were not about to give up on their daily
0:42:15 > 0:42:17dose of coffee.
0:42:19 > 0:42:24On the one hand, it's quite a luxury to spend £2.50 on a cup of coffee
0:42:24 > 0:42:27when you could make an instant cup of coffee at home.
0:42:27 > 0:42:29You don't need to spend that money.
0:42:29 > 0:42:33On the other hand, it's an affordable luxury.
0:42:34 > 0:42:37I'm not remotely surprised that people kept drinking coffee
0:42:37 > 0:42:40through the recession, and I certainly did,
0:42:40 > 0:42:44and it did seem like an even more precious pleasure at that point.
0:42:46 > 0:42:50In fact, the recession was a boon to coffee shops.
0:42:50 > 0:42:54Property prices and rents plummeted, allowing the brands to snap
0:42:54 > 0:42:56up new locations at bargain prices.
0:42:58 > 0:43:01Costa put on an impressive growth spurt,
0:43:01 > 0:43:06adding hundreds of sites in 2009 and 2010.
0:43:08 > 0:43:10By the end of the decade,
0:43:10 > 0:43:14Costa had achieved what might once have seemed impossible.
0:43:14 > 0:43:18For the first time in the UK, it had more stores, more customers
0:43:18 > 0:43:22and higher takings than its giant rival, Starbucks.
0:43:26 > 0:43:32Although, Costa don't like to overplay the achievement.
0:43:32 > 0:43:35Yes, internally it was very, and obviously we were happy
0:43:35 > 0:43:38to have done it, but ultimately, you still have to stay focused
0:43:38 > 0:43:40on getting it right for the customer, and I think
0:43:40 > 0:43:44that's the driver. It wasn't about overtaking our competition.
0:43:47 > 0:43:51Whether the race was important or not, Costa's expansion
0:43:51 > 0:43:54into the regions was proving to be a winning strategy.
0:44:04 > 0:44:07But opening stores in small towns is not always popular,
0:44:07 > 0:44:12as Costa discovered when it set it sights on a small shop
0:44:12 > 0:44:14in the Devon town of Totnes.
0:44:15 > 0:44:19We'd found what we thought was a great location for us,
0:44:19 > 0:44:23and we set about our usual plans around opening, and then understood
0:44:23 > 0:44:28that there was some strong local feeling about us coming.
0:44:28 > 0:44:30In this seemingly peaceful market town,
0:44:30 > 0:44:34Costa's plans had stirred up a hornet's nest.
0:44:35 > 0:44:39One of the local businessmen who declared war on Costa
0:44:39 > 0:44:42was independent cafe owner Martin Turner.
0:44:43 > 0:44:47We're a town of only about 8 or 9,000 people, and we have
0:44:47 > 0:44:51three or four independent butchers, there's a similar amount
0:44:51 > 0:44:57of veg shops, there's many cafes here, but we feel
0:44:57 > 0:44:59that the cafes here are of a good quality.
0:45:00 > 0:45:03You can come here and see
0:45:03 > 0:45:07many different things, rather than it just being a stereotypical town.
0:45:10 > 0:45:14It's a view shared by many, that our towns are beginning
0:45:14 > 0:45:16to look alarmingly alike.
0:45:16 > 0:45:18You could be in a British high street and you look
0:45:18 > 0:45:22and it would be replicated 100 times over throughout the UK.
0:45:22 > 0:45:26Individual chains, local businesses, they bring individuality,
0:45:26 > 0:45:28they bring a little bit of uniqueness to it.
0:45:28 > 0:45:31I personally would like to, If I went into one town,
0:45:31 > 0:45:33I could find the local good coffee shop there,
0:45:33 > 0:45:35and the same when I moved on the next town.
0:45:35 > 0:45:37I don't want to go and see the same brand there
0:45:37 > 0:45:39and the same brand there.
0:45:39 > 0:45:43As feelings ran high in Totnes, Costa executives
0:45:43 > 0:45:45embarked on a fact-finding mission.
0:45:48 > 0:45:50We went down and we talked to the MP and the Mayor
0:45:50 > 0:45:54and the leader of the group that didn't want us to open.
0:45:54 > 0:45:56When they said that they were coming down en masse,
0:45:56 > 0:46:01and they wanted to meet myself and a few other people,
0:46:01 > 0:46:06it was, "OK, this is our time almost. This is the time to be able
0:46:06 > 0:46:11"to actually have our say and have an honest conversation with them."
0:46:13 > 0:46:16The protestors declared that Costa would damage
0:46:16 > 0:46:20the essence of Totnes if they insisted on opening there.
0:46:21 > 0:46:25We're a local company. We employ local, we shop local,
0:46:25 > 0:46:29the money stays local, and that was the really, really important thing.
0:46:29 > 0:46:34When big corporates come in, the money just goes out of the town.
0:46:34 > 0:46:36The big corporates control everything.
0:46:36 > 0:46:39It's almost the Big Brother scenario.
0:46:39 > 0:46:44Faced with such vigorous opposition, Costa threw in the towel.
0:46:45 > 0:46:48We listened, and ultimately we decided that the best thing
0:46:48 > 0:46:52was to not open, because there was a real groundswell of opinion
0:46:52 > 0:46:56that said that they would rather stay with their independent coffee
0:46:56 > 0:47:00shops in that town, of which there were many, rather than have a Costa.
0:47:00 > 0:47:05A few Totnes residents had fought the corporate machine of Costa
0:47:05 > 0:47:07and they had won.
0:47:07 > 0:47:09When we actually heard that they weren't coming in,
0:47:09 > 0:47:11it was a massive surprise.
0:47:11 > 0:47:13It was the first time they'd ever done that,
0:47:13 > 0:47:15so for us, it was a massive coup.
0:47:15 > 0:47:18It's not all good news for Totnes, though.
0:47:18 > 0:47:20Apart from the odd pop-up shop,
0:47:20 > 0:47:24the proposed Costa site has lain empty for nearly two years.
0:47:26 > 0:47:29And whilst some people oppose coffee shops, others see
0:47:29 > 0:47:33it as a downright advantage when the brands come to town.
0:47:35 > 0:47:39What's interesting now as far as estate agents are concerned,
0:47:39 > 0:47:42then they like to sell the idea of, "There's going to be
0:47:42 > 0:47:44"a Starbucks here" or, "There's going to be a Costa here",
0:47:44 > 0:47:47or indeed, actually, above all, "There's going to be a Waitrose
0:47:47 > 0:47:50"in the local community." This is a strong selling proposition
0:47:50 > 0:47:56as far as places and property, towns and city centres are concerned.
0:48:01 > 0:48:04But what about those small local independents
0:48:04 > 0:48:06in Totnes and across the country?
0:48:06 > 0:48:10Are they being squeezed out by the bullying power of the brands?
0:48:11 > 0:48:14A brand, when it comes to a town or a high street,
0:48:14 > 0:48:17can impact an independent.
0:48:17 > 0:48:21Having said that, I think it's going to hurt the independents
0:48:21 > 0:48:26which maybe have less of a quality offering to offer and it
0:48:26 > 0:48:31won't impact independents who have quite a strong quality offering.
0:48:35 > 0:48:39There is a lot of space for all of us.
0:48:41 > 0:48:45From Costa and also the independent artisans.
0:48:45 > 0:48:50As a whole, there are more independent artisan coffee
0:48:50 > 0:48:52shops in the UK than there are branded stores.
0:48:52 > 0:48:55So there is a lot of space.
0:48:55 > 0:48:58Well, the big brands would say that, wouldn't they?
0:48:58 > 0:49:00But the numbers don't lie.
0:49:00 > 0:49:06In fact out of 16,500 coffee shops in the UK, only 5,500 of them
0:49:06 > 0:49:11belong to big brands - the rest are independents.
0:49:11 > 0:49:15Often independents do well precisely because they ARE small
0:49:15 > 0:49:19and they do NOT have the spotlight of negative media coverage
0:49:19 > 0:49:22that exposes the dealings of bigger companies.
0:49:24 > 0:49:27If a company, a brand is doing well, if it's producing what people
0:49:27 > 0:49:31want, it's going to get bigger and no-one would complain about that.
0:49:31 > 0:49:36If it becomes complacent, lazy, not doing the right thing as
0:49:36 > 0:49:40far as their social responsibilities are concerned, people will stop
0:49:40 > 0:49:46voting for that brand and they'll lose their place pretty quickly.
0:49:46 > 0:49:49In recent years, the brands have been challenged over
0:49:49 > 0:49:52the issue of fair prices for farmers.
0:49:52 > 0:49:55As a result of consumer pressure, the branded coffee shops now
0:49:55 > 0:49:59buy their coffee almost exclusively from sustainable sources,
0:49:59 > 0:50:03paying up to 12% above the average world price for their raw coffee.
0:50:03 > 0:50:07Part of the reason they do this, is because if one of them
0:50:07 > 0:50:10didn't, it would be easy for us to switch to a brand that did.
0:50:15 > 0:50:18One company has been affected by the power of consumer pressure
0:50:18 > 0:50:20more than any other.
0:50:20 > 0:50:24Starbucks has faced the animosity of anti-globalisation rioters.
0:50:24 > 0:50:27It has been accused of mistreating its staff.
0:50:27 > 0:50:34It's even been put through the wringer for using too much water.
0:50:34 > 0:50:36Starbucks was in the news again in late 2012
0:50:36 > 0:50:40when tax avoidance allegations hit the headlines.
0:50:40 > 0:50:43Starbucks has been criticised over reports that it hasn't paid
0:50:43 > 0:50:47any corporation tax in the UK for the last three years.
0:50:47 > 0:50:50Margaret Hodge, Chair of the Public Accounts Committee, added
0:50:50 > 0:50:53fuel to the fire on the BBC's Newsnight.
0:50:53 > 0:50:56It's not paying fair tax.
0:50:56 > 0:50:58I am not going to buy Starbucks coffee tomorrow.
0:50:58 > 0:51:01I think everybody should go and buy Costa.
0:51:01 > 0:51:05Some consumers did exactly what Margaret Hodge suggested
0:51:05 > 0:51:08and boycotted Starbucks.
0:51:08 > 0:51:10You walked past Starbucks at that point when the tax story hit
0:51:10 > 0:51:12and they were empty largely.
0:51:12 > 0:51:14And it felt right.
0:51:14 > 0:51:17While I understand that as any corporation is inclined to
0:51:17 > 0:51:21get away with paying as little tax as they possibly can,
0:51:21 > 0:51:24they should, we should.
0:51:24 > 0:51:28We we're all part of this, we need to pay tax, whoever we are.
0:51:28 > 0:51:31Starbucks was forced to react.
0:51:31 > 0:51:34The company had not been paying corporation tax,
0:51:34 > 0:51:37because it had been taking advantage of legal tax deductions.
0:51:37 > 0:51:41So technically, it wasn't making a profit in the UK.
0:51:41 > 0:51:46Belatedly, Starbucks has decided to waive some of those tax deductions.
0:51:46 > 0:51:51That means it will pay £20 million in tax over the next two years.
0:51:51 > 0:51:55'We decided our customers didn't need to wait for us to become profitable'
0:51:55 > 0:51:58for us to make a contribution to the Exchequer in the UK.
0:51:58 > 0:52:03That's a decision we made. We did it because we listened to our customers,
0:52:03 > 0:52:06and I think we have a history, we have a 42-year history
0:52:06 > 0:52:09of doing the right thing, and I think we did the right thing.
0:52:09 > 0:52:14We're paying corporation tax today and we feel very good about it.
0:52:14 > 0:52:18By the time it was able to feel very good about its tax obligations,
0:52:18 > 0:52:21Starbucks customers had already flocked back.
0:52:21 > 0:52:25Costa had seen a spike in sales immediately after the news
0:52:25 > 0:52:29story broke, but the effect was short-lived.
0:52:29 > 0:52:32As far as Starbucks was concerned, actually it was a relatively
0:52:32 > 0:52:33small crisis.
0:52:33 > 0:52:37They had their bottoms smacked, but fundamentally,
0:52:37 > 0:52:39if you've got a strong brand
0:52:39 > 0:52:41and a great offer that people want,
0:52:41 > 0:52:43people will come back and they'll come back quickly
0:52:43 > 0:52:46and the reality is people like going into Starbucks.
0:52:50 > 0:52:52At Costa on Peter Street in Manchester,
0:52:52 > 0:52:54there's a brisk evening trade.
0:52:56 > 0:52:58Beth has worked for Costa for five years.
0:52:58 > 0:53:02She's an old hand on the late shift.
0:53:02 > 0:53:05Evenings are just as busy as mornings.
0:53:05 > 0:53:08We usually have a lot of shoppers leaving the shops, coming here,
0:53:08 > 0:53:10chilling with all the big bags and stuff like that.
0:53:10 > 0:53:15People work quite late these days, and I think that after a nice
0:53:15 > 0:53:18hard day at work they do end up wanting a coffee.
0:53:18 > 0:53:22In the evening, customers prefer milder drinks.
0:53:22 > 0:53:25Usually a lot of hot chocolates, I think,
0:53:25 > 0:53:28and a lot of milky coffees, cos they don't want something
0:53:28 > 0:53:31too strong in the evening, cos they don't want to be up all night.
0:53:31 > 0:53:34This branch of Costa, with its late closing time,
0:53:34 > 0:53:36is proving to be a hit with locals,
0:53:36 > 0:53:42but there is plenty of competition on this street for the coffee pound.
0:53:42 > 0:53:45The success of the coffee brands has been observed
0:53:45 > 0:53:48and admired by the broader food service outlets.
0:53:48 > 0:53:53Brands like Pret, like McDonalds have actually seen the opportunity
0:53:53 > 0:53:55and said "I want a piece of that."
0:53:55 > 0:53:59As other food outlets have improved the coffee they offer,
0:53:59 > 0:54:01it's meant that we now have more
0:54:01 > 0:54:05and more choice about where to get a decent cup of coffee.
0:54:05 > 0:54:09That's made life much more competitive for coffee shops.
0:54:09 > 0:54:11It's a Darwinian world out there -
0:54:11 > 0:54:15you need to keep on improving your offer, improving your brands.
0:54:15 > 0:54:18If you do what customers want, if you go where they're going, you succeed.
0:54:18 > 0:54:21If you don't, if you're stuck in history,
0:54:21 > 0:54:23it doesn't work and you are way off.
0:54:25 > 0:54:29That Darwinian world has forced Starbucks to face up
0:54:29 > 0:54:32to its image as a corporate leviathan.
0:54:32 > 0:54:35They are now trying to make their stores seem less corporate
0:54:35 > 0:54:37and more...local.
0:54:37 > 0:54:40Years ago, every Starbucks virtually looked the same.
0:54:40 > 0:54:43And we were getting loads of customers feedback saying,
0:54:43 > 0:54:46"We love your product, we love your partners - our baristas -
0:54:46 > 0:54:50"but frankly, the stores are a bit outdated and a bit old-fashioned."
0:54:50 > 0:54:52So we really we listened to that.
0:54:52 > 0:54:56And over the course of the last couple of years we've refurbished
0:54:56 > 0:54:59almost half the estate so that we can make sure every store is
0:54:59 > 0:55:03unique, and places where customers can say "This is my third place,
0:55:03 > 0:55:07"this is where I want to go, that's my Starbucks store."
0:55:07 > 0:55:11While Starbucks is trying to make its cafes seem small
0:55:11 > 0:55:14and lovable, Costa is still expanding and it's found a way
0:55:14 > 0:55:21to reach even more customers, using the Costa Express vending machine.
0:55:21 > 0:55:25Inside every single Costa Express machine,
0:55:25 > 0:55:30we use the same coffee as we use in our coffee shops.
0:55:30 > 0:55:33So I'm just ordering up my coffee here. I'll go for a plain cappuccino.
0:55:33 > 0:55:37Jim Slater and his team are about to launch a brand-new
0:55:37 > 0:55:44Costa Express model, which takes vended coffee to a whole new level.
0:55:44 > 0:55:46You can just hear the gentle buzz of a coffee shop
0:55:46 > 0:55:49in the background, just to bring the sense of sound into play.
0:55:49 > 0:55:53You can also smell the smell of artisanal bakery products.
0:55:53 > 0:55:57There's a little pain au chocolat you can smell wafting from the machine.
0:55:57 > 0:56:01Here again just evoking a coffee shop and bringing those senses to life.
0:56:01 > 0:56:05You can have the exact same ingredients -
0:56:05 > 0:56:12freshly ground mocha Italian coffee extracted as an espresso.
0:56:12 > 0:56:16Using fresh milk to make the same cappuccino, cafe latte,
0:56:16 > 0:56:21Americano that you have in the Costa store made by a barista.
0:56:24 > 0:56:25Here's the finished coffee.
0:56:25 > 0:56:27A beautiful cappuccino.
0:56:29 > 0:56:30Mmm. Lovely.
0:56:31 > 0:56:34- Hiya, can I get a flat white, please?- Yes, of course, sir.
0:56:34 > 0:56:38But if the coffee really is that good from Costa's vending machines,
0:56:38 > 0:56:42why do we need coffee shops and specially trained baristas at all?
0:56:42 > 0:56:45When you come to a coffee shop, you are not just buying the coffee.
0:56:45 > 0:56:48That'll be the key driver, but once you have wrapped the service
0:56:48 > 0:56:53and the environment around it as well that is what really makes the difference.
0:56:54 > 0:56:57And that seems to be the key for the coffee shops.
0:56:57 > 0:57:00It's not simply about the coffee.
0:57:00 > 0:57:04Just as Howard Schultz dreamed 25 years ago, coffee shops are as much
0:57:04 > 0:57:07about having somewhere to hang out
0:57:07 > 0:57:09as they are about decent cappuccinos.
0:57:09 > 0:57:13That's something the coffee shop brands are set to
0:57:13 > 0:57:18profit from as they roll out towards new frontiers around the world.
0:57:18 > 0:57:21We're in the UK, we're in Ireland, we're in Poland,
0:57:21 > 0:57:25we're in Cyprus, we're in Turkey and we're in the UAE.
0:57:25 > 0:57:27We've got more than 300 stores in China now,
0:57:27 > 0:57:32more than 100 across the UAE, over 100 in Poland,
0:57:32 > 0:57:35so we're spreading out across the across the world.
0:57:35 > 0:57:40Starbucks meanwhile is operating in 64 countries worldwide
0:57:40 > 0:57:44and it is planning to continue to grow here in the UK.
0:57:44 > 0:57:49There's a huge demand for er, better coffee and experiences here,
0:57:49 > 0:57:51er, maybe more so than anywhere else in the world
0:57:51 > 0:57:54so we'll continue to invest here and that means er,
0:57:54 > 0:57:58growing our store base of course, but only in those places where,
0:57:58 > 0:58:02er, we think there's a real need and we'll be welcomed.
0:58:02 > 0:58:06For many of us, the spread of all coffee shops IS welcomed,
0:58:06 > 0:58:10because we are now officially a nation of coffee lovers.
0:58:11 > 0:58:14'I cannot bear being somewhere
0:58:14 > 0:58:17'and not knowing where the next good latte's coming from.'
0:58:17 > 0:58:20It's such a delight to get off a train or get out of a car and
0:58:20 > 0:58:24see a Starbucks, or see a Nero, see a very good independent coffee shop.
0:58:24 > 0:58:27It's like a little beacon of civilisation - you know
0:58:27 > 0:58:29things are basically going to be OK when you see that.
0:58:35 > 0:58:38The Open University delves further into how these businesses
0:58:38 > 0:58:40continue to boom. Go to:
0:58:43 > 0:58:45Follow the links to The Open University,
0:58:45 > 0:58:48where you can also take part in our online survey.