Coffee Shop Hot Shots Business Boomers

Hi. What would you like today?

Nowadays we've all got a favourite coffee.

-One shot.

-Flat white.

-Mocha.

-Americano.

-Cappuccino.

Since the 1990s, when branded coffee bars first hit the UK,

we've embraced their caffeinated delights.

We can't get away from the fact that caffeine is an addictive product.

It's something that we crave on a daily basis.

They have lured us away from our traditional haunts

and changed the way we socialise.

Coffee shops created more places for people to stop, take time to snack

use their laptops and computers.

And the pub wasn't always a fashionable place to be.

Three brands dominate the fight for the coffee pound.

We have to have great product, great stores in great locations

cos if we don't, there'll be someone else that will.

I don't think Starbucks are at all frightened of us.

We are a microscopic blip on their proverbial posterior.

We didn't look at Costa or Starbucks and try to mimic them at all

and, for better or for worse, we kind of march to our own drum.

But not everyone is head over heels about the boom

in big name coffee shops.

The big corporates control everything.

It's almost the Big Brother scenario.

And one company in particular

has got itself into very hot water over tax.

I'm not going to buy Starbucks coffee tomorrow.

I think everybody should go and buy Costa.

This is the inside story of the branded coffee shop world,

where coffee making is an exotic art...

HE SLURPS

..where pricing is an exact science...

If you really want the cheaper deal,

if you know what you are doing, you can pay less.

..and where the coffee shop hot shots are raking in millions

from our love affair with coffee.

At Starbucks in Colinton Road in Edinburgh,

the baristas, Ross, Jason and Louise, have an early start.

Even at this hour, there's a steady stream of bleary-eyed locals.

People tend to order lattes, cappuccinos,

the stronger sort of drinks with more espresso

just to sort of boost their day.

A latte for James.

Starbucks has 750 stores in the UK

and over 20,000 more around the world.

Last year, its international takings hit a mammoth 14.8 billion.

Do you want the Ethiopia espresso in that as well, yeah?

But Starbucks is keen to stress that it cares about the personal touch.

We chose Colinton Road because it's a great opportunity to

work within a really good local community.

They serve so many regular customers that just come in

and that's really great cos they really are a part of that

local community.

Hello. Usual.

Usually, every morning, we can at least tell a good few people

exactly by name. We'll know what they're up to.

We'll know what they've been up to at the weekend. So it's good.

We know our customers really well.

A latte for Kirsty. Cheers.

Starbucks is not the only show in town.

More than 150 coffee shops grace Edinburgh's streets.

But here, as in most places up and down the UK,

Costa Coffee, Caffe Nero and Starbucks are the main attraction.

They each seem to have what it takes to pull us in.

Customers like being in places that serve good coffee, where you can

get your wifi, you can have your meetings

and you can catch up on a bit of work

and in a rather cool and maybe

happy and friendly ambience.

Last year, we handed over £6.2 billion to UK coffee houses -

an increase of 400 million on the previous year.

Retail sales grew by 2.6% last year

but branded coffee sales went up nearly four times as much.

The average coffee shop customer spends over

£450 a year on their habit.

And the annual bill for a really enthusiastic drinker

can be up to £2,000.

On a two-coffee day, that's a fiver easily.

So that's, what, 35 quid a week? That's 140 a month.

Look at me doing the maths.

So we're looking at a grand and a half, two grand a year.

And that's quite a lot of money. I don't regret it for a moment.

With so many big spenders amongst us, there is

plenty of money to be made.

Here's how the margins shake down.

Take a regular Cappuccino. The raw materials -

the milk, water and, of course, the coffee - cost about 15p.

The cup and a napkin cost another 15 pence or so.

Then there's staffing, electricity, the shops themselves

and of course wifi and sofas.

Those fixed costs add about another £1.20.

Plus there's about 45p of VAT.

The average price of a regular Cappuccino is around £2.30.

so the stores are making a comfortable profit

of around 35 pence per cup.

Not surprisingly, competition for the coffee pound is intense.

Especially between Starbucks and Costa.

Costa may not rival Starbucks' status as a vast global enterprise

but this successful British company is top of the pile in the UK.

Costa has been, by far and away,

the most successful in player in the market,

with now 1,700 outlets across the country.

It's growing at about 150-200 stores a year,

which is phenomenal success.

Almost all of the coffee Costa brews comes from its roastery

in Lambeth, South London.

9,000 tonnes of raw coffee beans are processed here every year.

This is the domain of Gennaro Pelliccia,

Costa's chief coffee taster.

Once the coffee comes into the factory,

depending on which origin we need at that moment in time,

it'll come in, it gets split open

and it goes straight up into our holding silo,

where we have all the different origins.

It's Gennaro's job to make sure the different types of raw coffee

beans are blended and roasted to make a standard Costa flavour.

Each individual silo will open up, one after the other,

first Brazilian and then Columbian, then some Vietnamese,

depending on what the composition is today.

That coffee is then sent upstairs to one of the two roasters.

Whilst the coffee is in the roaster, it turns from the green colour

that we've seen to that brown colour.

Costa Coffee's roastery is a very modern facility

but the history of the company goes back to a time

when decent coffee was pretty hard to track down.

Ah, that's better.

Never felt more like a cup of tea in my life.

Not for nothing do we consider ourselves a nation of tea drinkers.

In the post-war years, Britain's tea consumption was 50 times

that of coffee, and tea houses adorned our metropolitan centres.

There were coffee bars

but they were the preserve of Italian ex-pats.

Well, I was around in the '50s but very, very young.

But I gained from my mother who was operating as a restaurateur in Soho.

There were just pockets, pockets of Italian immigrants

that wanted to bring that culture into the UK.

# Now I like my coffee

# And I like my brew

# But each has its own little job to do. #

These Italian espresso bars in stylish Soho

drew a new audience to coffee.

They became bohemian hang-outs for artists and beatniks.

You prefer a coffee house, do you?

Well, truthfully speaking, I do, yes.

-Are you an abstract artist, may I ask?

-No. Not yet.

I'm glad to hear that. I'm very glad to hear that.

It was about the coffee bar and the music scene around the coffee bar.

So I think it was hip, to take a word from the time,

fashionable and not so much about the quality of the coffee that was there.

And that's why it never expanded

and stood pretty still like that for about 20 years.

Enter two Italian brothers with a hankering for coffee.

Costa was founded in about 1971 by two brothers,

Sergio and Bruno Costa,

who were Italian immigrants who came

over to the UK, couldn't find the taste of home here

so decided that they would set themselves up

as a roasting and wholesale business.

At one point all the hotels in Park Lane were serving Costa Coffee.

It became a very, very popular, very, very successful business.

But the Costa brothers wanted a bigger piece of the coffee action.

They started to open their own cafes.

-Good to see you. Been shopping?

-Coffee.

The middle classes, though, were not interested in Italian style coffee.

The special blend and roast.

-Precisely.

-That gives you that richer, smoother, Nescafe taste.

By now, Brits were infatuated with a totally different type of drink.

In the '80s the UK was the biggest market

for instant coffee in the World.

Make sure you're serving coffee at its best.

Excuse me, I'd like a coffee, please.

-Cappuccino? Espresso?

-Cappuccino.

-Cappuccino.

THUMPING

We had heard of exotic Italian coffees.

But, as the Not the Nine O'clock News team showed in 1982,

we definitely didn't take them seriously.

HE MAKES PERCOLATING SOUNDS

Just bring you back to a story. This is early 1979, 1980.

So we're in Ponti's, we've introduced espresso machines behind the bar.

We're in the middle of Covent Garden, loads of construction work going on.

I'm behind the counter, early morning. A guy's been sent from

the building site to come in to order coffees for the construction site.

He's seen the machine, it's stumped him.

He said, "Can I have five desperados, please?"

So I said, "Certainly, sir,"

and gave him five cappuccinos. He was absolutely delighted

but I had this vision that he'd be going back to the building site

and saying, "I've got the desperados, boys."

Across the pond, things were not much better

but coffee was about to get a massive make over.

MUSIC: "Smells Like Teen Spirit" by Nirvana

Seattle in the 1980s and '90s was the tech capital of the world,

the home of Microsoft, Nintendo, Amazon and Boeing.

And it was the birthplace of the grunge alternative rock scene,

propelling bands like Nirvana onto the international stage.

# Here we are now Entertain us. #

Into this hotbed of counter culture and innovation,

burst the biggest thing to hit coffee since the espresso machine.

It came in the form of Howard Schultz,

the man who would become the godfather of modern coffee shops,

the man who made Starbucks.

This is the in-house design centre, in terms of all the creative ideas,

everything you see in the packaging

that ultimately ends up in the stores.

When Schultz joined Starbucks in 1982,

the company only sold beans, not cups of coffee.

It was a trip he took to Italy that same year

that changed coffee culture for ever.

As he's walking along the streets in Milan,

he's noticing just the culture of these Italian coffee bars

and not so much the coffee as the community that they're creating

and the buzz that, all hours of the day,

you've got people coming in and out of these shops, you know,

standing having their morning or afternoon espresso

and having great, very animated conversation

in, er, the streets of Milan and he falls in love with this idea.

I raced back from Italy

with this wonder in my eye

about recreating the Italian coffee bar in my own image

and bringing it to America.

So convinced was he, that Schultz took over the company

and he opened his first Starbucks cafe in 1987.

In the very beginnings, you know,

at Pike Place in Seattle, where they began,

they were a very home-made, homespun business and that was the appeal.

Tall caramel macchiato. Double.

Schultz shrewdly realised that Americans would not take

to the short, bitter espressos favoured by Italians,

so he invented a new kind of coffee for his coffee houses.

If you think about the battle for the American coffee market,

it was to try to get the younger generation away from soft drinks,

Pepsi and Coke, and introduce them to coffee.

So here we have a drink that's got a caffeine kick, but it's bitter.

Let's put a syrup in, let's make it milkier,

so now we've got the caffeine kick,

we've got the sugar content and that was driven by the Americans.

Almost overnight, frankly, in a city that had never

heard of a cappuccino or a latte, it just goes...it just goes wild.

You've got queues out the door

and suddenly people in Seattle are drinking cappuccinos.

That was the start of what was going to be a very big movement.

Pretty soon Starbucks cafes were opening on every street corner.

Schultz wanted his stores to provide

a unique new environment - a "third place".

The third place was that place in people's lives that was

somewhere between work and home,

giving people a place to come together,

giving people a reason to come together,

and facilitating community,

through something as simple as a cup of coffee.

It was such an original idea to incorporate soft furnishings,

things that we take for granted today -

sofas, bookcases -

allowing consumers to feel like they are in their own home.

That was Howard Schultz's moment of genius.

The model of the cafe as the third place

has been adopted by all the successful brands.

If you look carefully,

you will see that all coffee shops are planned out with precision.

In this store, there's about four different zones.

At the front of the store you'll see there is

some seating right by the windows.

The customers can enjoy the view outside but also as important,

other customers can see there are people in there,

"This is a great place to be, there are other customers,

"I'm going to go in and join."

Behind me, over my shoulder, there's perch seating.

This is very reminiscent of the traditional espresso houses in Italy,

where you have your espresso, you stand, you perch,

you drink it and you go.

We have big community tables where customers can come and sit,

either as groups or individually,

working on their laptops, reading, whatever.

Then we have softer seating, it's a little bit more intimate.

Back in 1990s America, the third place became part of the zeitgeist.

American sitcoms like Friends

cast the coffee shop in a central role as a stylish home from home.

95, 96, 97...

See, I told you - less than 100 steps from our place to here.

You've got way too much free time!

When Friends first aired in the UK, lounging on sofas in a cafe

with your nearest and dearest seemed like an exotic new concept.

-Happy birthday, pal.

-We love you, man.

# Stick a pony in me pocket... #

In Britain, we already had a centuries-old venue

for meeting friends and socialising,

a place that formed the essential backdrop of British sitcoms

like Only Fools And Horses.

The local boozer.

All right, Rodney?

-How did you get on at Hampton Court?

-Don't want to talk about it.

-Why, what happened?

-Cassandra gave him the elbow him in the maze.

Oh, that sounds painful.

While Del Boy and Uncle Albert were "sympathising" with Rodney

down the Nag's Head, all was not well in the pub world.

Britain's established brewers had become so successful

that the Government decided it was time

to loosen their monopolistic grip.

Britain's pubs could be in for big changes

after a report today by the Monopolies Commission

criticising the breweries.

The Commission says beer is too expensive

and the breweries own too many pubs.

One brewer, Whitbread,

was forced to dispose of almost a third of its 6,000 pubs.

The top brass decided Whitbread had to diversify

and it identified female spending power as a huge emerging market.

Women have literally come out of the home

and that's meant, of course,

that they have their own income, their own wherewithal,

their own tastes

and they weren't just going to be satisfied with having

a Babycham down the pub now and again with their husbands.

Whitbread wanted to appeal to all these new female spenders

and it found the answer quite by accident.

On a trip to Canada in 1993, I visited what was probably

the first Starbucks outside of the United States,

in downtown Vancouver,

and was interested, but didn't think very much more of it,

but seven or eight months later, going through the same intersection,

I was absolutely amazed to see,

on the opposite corner of the intersection,

another Starbucks, and both Starbucks were trading well.

It was a bit like a light bulb going on.

Whitbread's coffee light bulb had not lit up quickly enough

to satisfy two American expats who found themselves

stranded in London in the '90s, longing for a decent cup of coffee.

The very first morning Ally was in London, she walked me to work,

we walked across Hyde Park and stopped at this little Italian cafe

because she wanted to get a coffee.

Scott and Ally Svenson had come to London from Seattle,

where they had been Starbucks devotees.

I was trying to explain to her that the coffee experience

was going to be different from what she'd just come from.

The coffee offering in Britain in the 1990s was abysmal.

I mean, there was absolutely no reason for anyone to drink it.

It didn't taste very nice,

it didn't smell very nice, it didn't look very nice.

Why would anyone drink that gloopy mess?

Desperate for a proper latte, the Svensons decided that it was

up to them to change the face of British coffee.

They set up their own coffee bar

and they called it the Seattle Coffee Company.

We opened in April. It worked in about five minutes.

We tinkered with that through that very hot summer,

and at the end of that year, we opened two more in December.

At precisely the same time,

Whitbread found the ideal way to enter the coffee market.

We thought briefly about perhaps approaching Starbucks

for the UK franchise, but our main thrust

was to find if there was an acquisition that we could make

of a small company and drive forward from there.

And Costa ticked virtually all of our boxes.

People were just starting to get the idea that it might be part of

their daily routine and what they did.

So it was...you could argue, incredibly prescient

or a little bit lucky as well,

em, but equally it was the start of, you know,

an enormous growth industry in the UK.

In the 1990s coffee gold rush,

Costa Coffee and the Seattle Coffee Company

were joined by Coffee Republic, Caffe Nero

and a host of wannabe coffee brands.

Without a shadow of a doubt, we were in it for the logo

and the paper cups early days.

We didn't really care or know about the coffee,

but we thought it looked great.

I certainly was part of that, I thought I looked so cool.

The coffee competition was about to get a lot more fierce.

By now, Howard Schultz had conquered America and he wanted to go global.

I want to be able to be one of those rare companies that is ubiquitous.

Schultz had 1,600 stores in the US and he had his eye on Britain.

In 1998, he made the Svensons an offer

it would have seemed rude to refuse.

It came down to Howard Schultz and I sitting in a restaurant

in London and having a philosophical conversation

and ultimately reaching across the table and shaking hands.

The Svensons walked away £50 million richer

and Starbucks had arrived in Britain.

It's mid morning at Costa's roastery and a tasting is under way.

Gennaro and his team regularly take batches they are planning to use,

and sample them according to age-old tasting rituals.

THEY SLURP NOISILY

The slurping is not just for fun.

It sprays the coffee all over the tasters' taste buds

so they can profile each individual batch of beans.

'Our job here is to maintain the consistency

'of our in-store Mocha Italia blend.'

We are using coffee from all over the world - Colombian coffee,

Costa Rican coffee, Ecuadorian coffee...

'Some of these origins are harvested,

'obviously, at different times.

'So different times throughout the year,

'the coffee will perform slightly differently.

'The danger is, if we do not constantly check the coffee,'

not just at the end of the season, but throughout the season,

we cannot guarantee the consistency in our stores.

That's why it's so important that we do it all the time.

Costa's flavour clearly plays well with us

because it is Britain's number-one coffee brand.

It's especially popular with women aged 35 to 54.

Last year, the company turned over £648 million in the UK.

I really like Costa Coffee because it's nice and spacious

so I can get the buggy in.

I actually really like their coffee, as well.

It's quite mild and I like to have their decaf coffee

and I like to sit down and read the paper while Laila's asleep

and just have half an hour for myself.

Starbucks is popular for its iced drinks and its American branding,

and it's a favourite of young people.

Its UK cash tills rang up £419 million last year.

I love the staff in here, they're always so friendly and so lovely.

Yeah, the food's really good here as well.

They always make, like, a really good drink for you as well, so.

Nero has a strong Italian image

and it attracts a slightly more male audience.

In 2013 Nero had UK takings of £215 million.

I've just had a routine for years where I've always wanted

to have a coffee, reading my paper first thing in the morning

before I literally hit the road,

and for me personally I like Nero's coffee.

Having a favourite brand of coffee shop

would once have been unimaginable.

But as the coffee shop phenomenon flourished in the '90s,

so did our appreciation of good, strong coffee.

Tasting a stronger flavour is all about, for me, moving up

the ladder of taste, and once you're up that rung on the ladder

it's almost impossible to go back.

I started drinking what I believed at the time was called a Why Bother,

which was a skinny decaffeinated cappuccino, no chocolate.

Erm, so I started ordering that, just to be part of the gang,

to have the cup largely.

Erm, and at some point I must have gone,

"What the hell, I'll have it caffeinated."

And that was how, that was how my sort of addiction, fascination,

obsession love affair began.

It's almost like that legal drug that's hooked everybody.

Once exposed, that's it for life.

And it's not just the coffee that we have become hooked on.

The whole theatre of coffee-making draws us in from the moment

we walk in the door.

The way that we run our service is that every barista

engages with the customer and is an expert coffee maker,

therefore the coffee machine has to be within their reach.

They can't step more than one step over in order to make the coffee.

We don't want to have the coffee machine at the front

to be a barrier to you as the customer.

We don't want to create an emotional block,

we want to create an emotional freedom and engagement and ease.

They want to stand and make the coffee and talk to you

at the same time and then they turn back.

If they happen to ever turn their back, then we do make sure that

people see that we have, "The best espresso this side of Milan."

This kind of rapport with chirpy baristas is a far cry

from the British service culture of yesteryear.

Service is now a competitive advantage

and if you think about how the, you know, the ante is absolutely

being upped and the service standards have improved in the UK.

Coffee shops have definitely been an important part of that.

By the time the new millennium dawned we had been seduced.

We discovered that we could sit for hours

nursing a single cup of coffee.

Coffee shops created more places for people to stop and to take time

to snack and use their ever-growing laptops and computers at the time.

We even learned a whole new language just so we could put in our order.

-One shot.

-Flat white.

-A chai tea latte.

-Soya latte.

-Espresso.

-Mocha.

-Americano.

Cappuccino.

Chai latte.

A one-shot decaf cappuccino.

Starbucks had brought to the UK a cornucopia of drinks

that were already selling well in the US

but were unheard of over here.

Our number one drink is our skinny latte

and that remains pretty constant right through the year.

At Christmas time we have those really indulgent Christmas offerings

that our customers love.

But in the Summer time, hopefully we'll get another great summer

as we did last year, iced drinks become a very important part.

And our Frappuccino has now become really quite famous

and something that our customers come in time and time for.

We lapped up Starbucks' concoctions, so not surprisingly,

Starbucks-style drinks have also appeared on its competitors' menus.

If we see that something that's working then, you know,

our customers'll be asking for it too.

So clearly we would rather them come to us for that drink

than anywhere else, so we give customers what they want,

yeah, absolutely.

If somebody from 25 years ago walked into a modern cafe

they'd be completely bewildered by the range of drinks on offer,

all the different foreign names, all the different sizes,

all the combinations, the skinny,

the full fat, the soya, the syrups.

And once you've managed the difficult job of deciding

which drink you want, there's one more hurdle to negotiate.

What size would you like?

If the drinks are confusing, then the cup sizes are a nightmare.

So, on the off-chance that you don't know your grandes from your primos,

I present the idiot's guide to coffee sizing.

At Caffe Nero there are three no-nonsense sizes - the Small,

Regular and Grande.

At Costa you've got the Primo, the Medio and the Massimo.

And at Starbucks there's the Tall, Grande and Venti.

And here's one more that you may not have heard of.

The Starbucks...Short.

One of the interesting deals available at Starbucks

is the secret cappuccino, the coffee that dare not speak its name.

If you go into Starbucks you'll see three sizes of drinks,

the Tall, the Grande, the Venti.

You can also get the Short

and the short is, of course, smaller than the tall,

and it's cheaper.

And the reason they don't advertise the existence of this cheaper drink

is because they don't want to make it too easy to get that bargain.

If you really want the cheaper deal,

if you really know what you're doing, you can pay less.

Starbucks, of course, gives a slightly different reason

for the absence of the Short on the menu.

There are literally thousands of combinations of our drinks.

You can have it Tall, Grande, Skinny, with something,

without something. We want to make sure that it's your drink.

You want to have it in the way that you want to have it.

There's just frankly not enough room to put every combination

up on a menu board behind.

So why do the coffee shops have thousands of combinations?

The answer is that a wide choice of products makes good business sense.

Wouldn't it be brilliant, from the point of view of the cafe,

if there was a way to charge more to people who didn't mind paying more

and to charge less to people who absolutely demanded

the best possible deal?

And it turns out there is a way to do this.

You just offer this menu of choices where any customer who isn't

price sensitive can order a sprinkling of marshmallows

and a fancier combination and maybe an extra shot of espresso,

and extra bit of syrup,

and these things really don't cost a lot to provide.

The margins on them are absolutely fantastic.

So how does it work?

Well, remember the margin on a regular cappuccino?

It was a decent 35 pence profit.

Look what happens if you supersize your order.

Say to a large cafe latte, with a flavour and an extra topping.

Now the raw materials cost a bit more at about 30p.

The packaging and the fixed costs are roughly the same

and VAT has gone up to about 65 pence.

So the costs have gone up a bit, but the price tag has soared

to around £3.30, almost trebling the profit on each cup.

Given all this coffee-powered cash flying around,

you could be forgiven for thinking that setting up a coffee shop chain

would be a licence to print money. But you'd be wrong.

As the noughties dawned,

coffee drinking seemed to be deeply entrenched in the British lifestyle.

I got very excited back in 2003

when I saw the latte became part of consumer price index.

For me that was a sign that this market was really here.

That this branded coffee product was part of British lifestyle.

Despite this, none of the brands was turning a profit

because coffee shops only make money

if they can control the fixed costs, like their rents.

One company in particular was struggling.

Coffee Republic had been the brainchild

of brother and sister team Bobby and Sahar Hashemi.

They had grown their business quickly since 1995,

taking on locations with astronomical rents

where footfall would be high,

but their brand was not strong enough to pull in the punters.

They were a brand that was wanting to be a Starbucks,

but they didn't have the brand pull of Starbucks,

they didn't have the financial covenants,

they didn't have the financial clout of Starbucks,

so they were going head-to-head with Starbucks on the same premises

and perhaps a bit of hubris,

paying above and beyond what they should have paid.

Rents matter because a third of us are more likely to choose

a coffee bar based on it's convenience than any other factor,

meaning landlords can charge a fortune for prime sites.

In the land grab, we ended up acquiring sites

that, because of the competition or because of the high rents,

have not been profitable for us.

Coffee Republic was eventually forced into administration.

Bobby Hashemi stepped down and today the company is a fraction

of the size it once was.

The UK coffee market had boiled down to three big brands -

Starbucks out in front, with Costa and Nero bringing up the rear.

But the landscape was about to change.

In the mid 2000s, Costa was a mediocre brand.

It was a brand that was a bit lost.

It was stuck in the middle, really, it was in no-man's land.

It wasn't... It didn't have the coffee credentials of Caffe Nero,

it didn't have sexy brand image of Starbucks.

The arrival of a new management team in 2007

was actually a pivotal moment in Costa's development.

It really was the moment that they put the foot on the accelerator.

One of the new managers who put his pedal to the floor

was marketing whizz Jim Slater.

In 2008 he hatched a plan that would hit Starbucks where it would hurt.

There was a general perception amongst the public

that all coffee was the same and it clearly isn't.

So we commissioned a blind taste test and the results were stunning.

It was a robust and well-certified study,

and from that we felt confident enough to put adverting out

that said that seven out of ten coffee lovers prefer Costa.

When the ad campaign was first launched,

Howard Schultz seemed undaunted.

We serve about 2 million customers a week here in the UK.

We are the leader and we will maintain our leadership position.

But Costa's adverts had gone for Starbucks' jugular.

We wanted to be fairly blatant,

and lines like, "Sorry, Starbucks, the people have voted" were quite

hard hitting at the time and they proved very effective.

Starbucks was unnerved,

and complained to the Advertising Standards Authority.

We thought they would complain, and that's why

we had to make absolutely sure that the research was totally robust,

perfectly legal and would stand to any kind of challenge.

The ASA upheld Costa's claims despite Starbucks's

contention that the blind test only used cappuccinos and that the

test did not prove that Starbucks customers preferred Costa's coffee.

There were some level of challenge around the accuracy of it,

but that was all upheld and was found to be true,

and I guess beyond that, you should probably ask Starbucks.

They are very entitled to say what they say, and actually,

that's fine, because we've got to concentrate on what we do.

We've got to concentrate on our customers

and making our business the best it can be.

I don't think Starbucks are at all frightened of us.

You know, we're a microscopic blip on their proverbial posterior.

-Hiya.

-Yeah.

-A large latte to go.

-Yeah, no worries.

As Starbucks and Costa Coffee were very publicly slugging it

out for the number one spot in British coffee, their smaller

and lower-profile cousin Caffe Nero was quietly building up

a sizeable empire of its own.

We didn't look at Costa or Starbucks and try and mimic them

at all or, or do anything similar, and for better or for worse,

we kind of marched to our own drum.

Gerry Ford launched Nero in London,

but the stores are based on an Italian model.

Caffe Nero feels more like an authentic experience, you know.

It feels like more like a specialist,

and that clearly spills into its food, because it has a more

specialised offer, it feels more like a quality premium food offer.

Food is important, because coffee shops only really prosper if

they can entice us to spend more by offering us mouth-watering goodies.

In the early days, food was uninspiring in coffee shops.

It was perhaps a dry, stale muffin or a piece of toast.

If you were very, lucky you might've got a croissant.

So it was very simple, very basic.

Today's coffee shops have really increased their food offer.

The driving force is the core product of coffee

and the craftsmanship, and the quality that goes into that.

But the food, the food sort of complements that.

We have 30% of our sales in food, which is higher than either

of the two other major brands and higher than most local independents.

At Caffe Nero on Peter Street in Manchester,

the staff know lunchtime is always busy.

As it comes up to lunchtime, we tend to get ready for the rush make sure

everything's full, stocked, make sure all the tables are clear,

there's places for the customers to sit.

Back at HQ in London, Caffe Nero's Italian food consultant

Ursula Ferrigno is holding a tasting session to give staff a real

flavour of Italy.

Ursula is employed by Caffe Nero to try to put that sought-after

Italian stamp on its food.

The customer is becoming more and more discerning.

I feel it's important that they come into a Caffe Nero and think,

"I am getting exceptional food and its just like in Italy."

I like to come in with a very ambitious range of food.

Some of my ideas need to be tweaked,

but they're all authentic, exploring new foods new ideas.

Once Ursula's ambitions have been sufficiently tweaked,

the challenge is to make sure they will work in the stores.

We do a lot of testing and trialling.

It's important we've applied sufficient rigour to the process.

So we test it both within our food team,

within the wider Caffe Nero team, and with customers.

If we have confidence in the product, we'll just say,

"This is great, we love it, we think our customers will love it",

and we just put it out there.

Purists, though, might not regard every item as being in line

with Ursula's quest for the authentic Italian experience.

PRODUCER: Tell me about muffins.

SHE LAUGHS

Erm...

We had a big debate about it.

Do we serve that which is slightly an American type of product?

We don't have a lot of those, but if we're going to do some of them,

we want to do them better than anybody else.

By the late noughties, the British coffee shops were all serving us

decent food, decent coffee, and most of them were making decent money.

But then the economy hit a bump in the road.

Across the country, shops began closing down.

Household budgets were squeezed.

Belts were tightened.

But UK consumers were not about to give up on their daily

dose of coffee.

On the one hand, it's quite a luxury to spend £2.50 on a cup of coffee

when you could make an instant cup of coffee at home.

You don't need to spend that money.

On the other hand, it's an affordable luxury.

I'm not remotely surprised that people kept drinking coffee

through the recession, and I certainly did,

and it did seem like an even more precious pleasure at that point.

In fact, the recession was a boon to coffee shops.

Property prices and rents plummeted, allowing the brands to snap

up new locations at bargain prices.

Costa put on an impressive growth spurt,

adding hundreds of sites in 2009 and 2010.

By the end of the decade,

Costa had achieved what might once have seemed impossible.

For the first time in the UK, it had more stores, more customers

and higher takings than its giant rival, Starbucks.

Although, Costa don't like to overplay the achievement.

Yes, internally it was very, and obviously we were happy

to have done it, but ultimately, you still have to stay focused

on getting it right for the customer, and I think

that's the driver. It wasn't about overtaking our competition.

Whether the race was important or not, Costa's expansion

into the regions was proving to be a winning strategy.

But opening stores in small towns is not always popular,

as Costa discovered when it set it sights on a small shop

in the Devon town of Totnes.

We'd found what we thought was a great location for us,

and we set about our usual plans around opening, and then understood

that there was some strong local feeling about us coming.

In this seemingly peaceful market town,

Costa's plans had stirred up a hornet's nest.

One of the local businessmen who declared war on Costa

was independent cafe owner Martin Turner.

We're a town of only about 8 or 9,000 people, and we have

three or four independent butchers, there's a similar amount

of veg shops, there's many cafes here, but we feel

that the cafes here are of a good quality.

You can come here and see

many different things, rather than it just being a stereotypical town.

It's a view shared by many, that our towns are beginning

to look alarmingly alike.

You could be in a British high street and you look

and it would be replicated 100 times over throughout the UK.

Individual chains, local businesses, they bring individuality,

they bring a little bit of uniqueness to it.

I personally would like to, If I went into one town,

I could find the local good coffee shop there,

and the same when I moved on the next town.

I don't want to go and see the same brand there

and the same brand there.

As feelings ran high in Totnes, Costa executives

embarked on a fact-finding mission.

We went down and we talked to the MP and the Mayor

and the leader of the group that didn't want us to open.

When they said that they were coming down en masse,

and they wanted to meet myself and a few other people,

it was, "OK, this is our time almost. This is the time to be able

"to actually have our say and have an honest conversation with them."

The protestors declared that Costa would damage

the essence of Totnes if they insisted on opening there.

We're a local company. We employ local, we shop local,

the money stays local, and that was the really, really important thing.

When big corporates come in, the money just goes out of the town.

The big corporates control everything.

It's almost the Big Brother scenario.

Faced with such vigorous opposition, Costa threw in the towel.

We listened, and ultimately we decided that the best thing

was to not open, because there was a real groundswell of opinion

that said that they would rather stay with their independent coffee

shops in that town, of which there were many, rather than have a Costa.

A few Totnes residents had fought the corporate machine of Costa

and they had won.

When we actually heard that they weren't coming in,

it was a massive surprise.

It was the first time they'd ever done that,

so for us, it was a massive coup.

It's not all good news for Totnes, though.

Apart from the odd pop-up shop,

the proposed Costa site has lain empty for nearly two years.

And whilst some people oppose coffee shops, others see

it as a downright advantage when the brands come to town.

What's interesting now as far as estate agents are concerned,

then they like to sell the idea of, "There's going to be

"a Starbucks here" or, "There's going to be a Costa here",

or indeed, actually, above all, "There's going to be a Waitrose

"in the local community." This is a strong selling proposition

as far as places and property, towns and city centres are concerned.

But what about those small local independents

in Totnes and across the country?

Are they being squeezed out by the bullying power of the brands?

A brand, when it comes to a town or a high street,

can impact an independent.

Having said that, I think it's going to hurt the independents

which maybe have less of a quality offering to offer and it

won't impact independents who have quite a strong quality offering.

There is a lot of space for all of us.

From Costa and also the independent artisans.

As a whole, there are more independent artisan coffee

shops in the UK than there are branded stores.

So there is a lot of space.

Well, the big brands would say that, wouldn't they?

But the numbers don't lie.

In fact out of 16,500 coffee shops in the UK, only 5,500 of them

belong to big brands - the rest are independents.

Often independents do well precisely because they ARE small

and they do NOT have the spotlight of negative media coverage

that exposes the dealings of bigger companies.

If a company, a brand is doing well, if it's producing what people

want, it's going to get bigger and no-one would complain about that.

If it becomes complacent, lazy, not doing the right thing as

far as their social responsibilities are concerned, people will stop

voting for that brand and they'll lose their place pretty quickly.

In recent years, the brands have been challenged over

the issue of fair prices for farmers.

As a result of consumer pressure, the branded coffee shops now

buy their coffee almost exclusively from sustainable sources,

paying up to 12% above the average world price for their raw coffee.

Part of the reason they do this, is because if one of them

didn't, it would be easy for us to switch to a brand that did.

One company has been affected by the power of consumer pressure

more than any other.

Starbucks has faced the animosity of anti-globalisation rioters.

It has been accused of mistreating its staff.

It's even been put through the wringer for using too much water.

Starbucks was in the news again in late 2012

when tax avoidance allegations hit the headlines.

Starbucks has been criticised over reports that it hasn't paid

any corporation tax in the UK for the last three years.

Margaret Hodge, Chair of the Public Accounts Committee, added

fuel to the fire on the BBC's Newsnight.

It's not paying fair tax.

I am not going to buy Starbucks coffee tomorrow.

I think everybody should go and buy Costa.

Some consumers did exactly what Margaret Hodge suggested

and boycotted Starbucks.

You walked past Starbucks at that point when the tax story hit

and they were empty largely.

And it felt right.

While I understand that as any corporation is inclined to

get away with paying as little tax as they possibly can,

they should, we should.

We we're all part of this, we need to pay tax, whoever we are.

Starbucks was forced to react.

The company had not been paying corporation tax,

because it had been taking advantage of legal tax deductions.

So technically, it wasn't making a profit in the UK.

Belatedly, Starbucks has decided to waive some of those tax deductions.

That means it will pay £20 million in tax over the next two years.

'We decided our customers didn't need to wait for us to become profitable'

for us to make a contribution to the Exchequer in the UK.

That's a decision we made. We did it because we listened to our customers,

and I think we have a history, we have a 42-year history

of doing the right thing, and I think we did the right thing.

We're paying corporation tax today and we feel very good about it.

By the time it was able to feel very good about its tax obligations,

Starbucks customers had already flocked back.

Costa had seen a spike in sales immediately after the news

story broke, but the effect was short-lived.

As far as Starbucks was concerned, actually it was a relatively

small crisis.

They had their bottoms smacked, but fundamentally,

if you've got a strong brand

and a great offer that people want,

people will come back and they'll come back quickly

and the reality is people like going into Starbucks.

At Costa on Peter Street in Manchester,

there's a brisk evening trade.

Beth has worked for Costa for five years.

She's an old hand on the late shift.

Evenings are just as busy as mornings.

We usually have a lot of shoppers leaving the shops, coming here,

chilling with all the big bags and stuff like that.

People work quite late these days, and I think that after a nice

hard day at work they do end up wanting a coffee.

In the evening, customers prefer milder drinks.

Usually a lot of hot chocolates, I think,

and a lot of milky coffees, cos they don't want something

too strong in the evening, cos they don't want to be up all night.

This branch of Costa, with its late closing time,

is proving to be a hit with locals,

but there is plenty of competition on this street for the coffee pound.

The success of the coffee brands has been observed

and admired by the broader food service outlets.

Brands like Pret, like McDonalds have actually seen the opportunity

and said "I want a piece of that."

As other food outlets have improved the coffee they offer,

it's meant that we now have more

and more choice about where to get a decent cup of coffee.

That's made life much more competitive for coffee shops.

It's a Darwinian world out there -

you need to keep on improving your offer, improving your brands.

If you do what customers want, if you go where they're going, you succeed.

If you don't, if you're stuck in history,

it doesn't work and you are way off.

That Darwinian world has forced Starbucks to face up

to its image as a corporate leviathan.

They are now trying to make their stores seem less corporate

and more...local.

Years ago, every Starbucks virtually looked the same.

And we were getting loads of customers feedback saying,

"We love your product, we love your partners - our baristas -

"but frankly, the stores are a bit outdated and a bit old-fashioned."

So we really we listened to that.

And over the course of the last couple of years we've refurbished

almost half the estate so that we can make sure every store is

unique, and places where customers can say "This is my third place,

"this is where I want to go, that's my Starbucks store."

While Starbucks is trying to make its cafes seem small

and lovable, Costa is still expanding and it's found a way

to reach even more customers, using the Costa Express vending machine.

Inside every single Costa Express machine,

we use the same coffee as we use in our coffee shops.

So I'm just ordering up my coffee here. I'll go for a plain cappuccino.

Jim Slater and his team are about to launch a brand-new

Costa Express model, which takes vended coffee to a whole new level.

You can just hear the gentle buzz of a coffee shop

in the background, just to bring the sense of sound into play.

You can also smell the smell of artisanal bakery products.

There's a little pain au chocolat you can smell wafting from the machine.

Here again just evoking a coffee shop and bringing those senses to life.

You can have the exact same ingredients -

freshly ground mocha Italian coffee extracted as an espresso.

Using fresh milk to make the same cappuccino, cafe latte,

Americano that you have in the Costa store made by a barista.

Here's the finished coffee.

A beautiful cappuccino.

Mmm. Lovely.

-Hiya, can I get a flat white, please?

-Yes, of course, sir.

But if the coffee really is that good from Costa's vending machines,

why do we need coffee shops and specially trained baristas at all?

When you come to a coffee shop, you are not just buying the coffee.

That'll be the key driver, but once you have wrapped the service

and the environment around it as well that is what really makes the difference.

And that seems to be the key for the coffee shops.

It's not simply about the coffee.

Just as Howard Schultz dreamed 25 years ago, coffee shops are as much

about having somewhere to hang out

as they are about decent cappuccinos.

That's something the coffee shop brands are set to

profit from as they roll out towards new frontiers around the world.

We're in the UK, we're in Ireland, we're in Poland,

we're in Cyprus, we're in Turkey and we're in the UAE.

We've got more than 300 stores in China now,

more than 100 across the UAE, over 100 in Poland,

so we're spreading out across the across the world.

Starbucks meanwhile is operating in 64 countries worldwide

and it is planning to continue to grow here in the UK.

There's a huge demand for er, better coffee and experiences here,

er, maybe more so than anywhere else in the world

so we'll continue to invest here and that means er,

growing our store base of course, but only in those places where,

er, we think there's a real need and we'll be welcomed.

For many of us, the spread of all coffee shops IS welcomed,

because we are now officially a nation of coffee lovers.

'I cannot bear being somewhere

'and not knowing where the next good latte's coming from.'

It's such a delight to get off a train or get out of a car and

see a Starbucks, or see a Nero, see a very good independent coffee shop.

It's like a little beacon of civilisation - you know

things are basically going to be OK when you see that.

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