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Store Owned Café Concepts Can Help Improve the Retail Experience

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As retailers seek greater content curation in terms of product mix and store design to improve the customer experience, the option of an in-store café has become another form of value addition for big box chains. This applies to apparel and luxury department stores as well as supermarkets and mass merchandise retailers. A quality cup of coffee or tea, offered on premises or taken to-go while browsing the shelves, can be a brand boosting value addition for shoppers. With fierce competition and multichannel retailing options reducing the necessity of the in-store trip, a café concession can be a valuable retailer tool.

In both North America and Western Europe, café/bar foodservice transactions through retail locations outpaced growth in traditional locations over the last five years. Major retailers have several options in how they approach their in-store café, either operating their own brand concept or adopting a licensing approach with major coffee specialist partners. The success of either model depends on the desire and taste of customers, varying by locality, but well executed store owned café concepts provide far more flexibility and potential return for retailers.

The Licensing Approach

Foodservice can be an important secondary revenue stream for all kinds of retailers. In fact, prior to a recent equine frozen meatball flap, IKEA had been so successful in promoting their branded in-store café and restaurant that the flat pack furniture retailer also became a top 15 foodservice player in Western Europe. While department stores and book shops popularised the in-store coffee shop as a retail foodservice option, it is increasingly common for larger modern grocery retailers to also include a convenient café concession for shoppers.

A popular approach to the in-store café has involved licensing opportunities with major coffee specialist brands, themselves eager to win valuable retail space from which they would otherwise be excluded. The licensing approach allows major retailers to enter the café segment by leveraging the brand equity of major coffee brands that their customers recognise and enjoy. On a smaller scale, supermarkets, hypermarkets and mass merchandisers in the US have explored this approach in building café concepts. US chained coffee specialist leader Starbucks Corp reported 40% of its stores in the Americas and 57% of its stores in the EMEA region were operated under some form of license in 2013. Although this figure includes a large travel segment through franchise agreement, the company opened more licensed stores in the US in (+281) in FY 2013 than company operated locations (+231).

America’s third largest retailer – mass merchandiser Target Corp – as well as several leading grocery chains currently operate Starbucks branded cafés in select locations under license agreements. Having largely defined the modern café design experience, the Starbucks brand helps these retailers to set expectations and entice consumers in a way that may be difficult to achieve under a grocery store, “private label” banner. However, this approach to the supermarket café may be changing.

Some grocery retailers are exploring whether they can do a better job of creating and cultivating their own high value in-store coffee brands without the need for licensing partners.

Tesco & Whole Foods

Harris and Hoole is a chained coffee specialist in the UK, operating coffee shops in wider London that focus on artisanal coffee blends and fair trade practices. The chain plans to add 500 employees and reach 60 stores in 2014. The brand is partially owned and financed (up to 49%) by the UK’s largest grocery chain, Tesco plc. Despite the ownership arrangement, the chain operates independent of the Tesco banner in its high street locations. However, in addition to standalone locations, the company has recently begun to operate concessions inside select Tesco locations in Southeast England. There is little if any consumer facing emphasis on the relationship between Harris and Hoole and its Tesco owners.

This retailer-owned approach to building a largely independent in-store coffee brand closely resembles the success of the US retailer Whole Foods, which purchased Allegro Coffee Company in 1997. Allegro manufactures the retailer’s private label retail coffee products and also operates the in-store café kiosks in Whole Foods outlets under the Allegro name, with a similar focus on artisan coffee quality and sustainable roasting practices. Despite being wholly owned by the Whole Foods company, Allegro operates independently as a roaster and distributor, with a distinct brand attached to its Whole Foods in-store café concessions.

This stealthy approach helps large chains to establish credibility and strength in their concepts. Brand story and message are inextricably linked to the coffee shop. Coffee retailers must convey craft, artisanal quality and sustainability messaging that is difficult to communicate through the banner of a large, corporate supermarket chain. Store-owned cafés – as opposed to licensed concepts – give retailers the freedom to craft and refine this message and consumer experience without the constraints (and financial cost) of a license agreement.

The effectiveness of either approach – licensed or store owned - will depend on the local consumer audience. While Tesco operate Harris and Hoole coffee concepts in some newer supermarkets in and around London, the company has also partnered through licensing agreement with leading coffee specialist chain Costa Coffee (Whitbread plc) in other locations. Retailers must think carefully about the local and regional demands and tastes of the consumer when it comes to their cup of coffee.

Above All: Make Retail Pleasant

Grocery is not the only retailer class exploring their own café concept. In late 2013, trendy US apparel retail specialist chain Urban Outfitters opened its second in-store café in Manhattan. Even home and automotive insurance company State Farm have explored their own café concept locations in some US cities.

In contrast to fullservice restaurants, bars and other options, cafés and coffee shops can prove to be fashionable in-store additions with lower costs associated with their construction and operation. They can establish, compliment or reinforce the brand message of the retailer, differentiating the in-store experience from competitors, the largest and most threatening of which is the non-store option. In developed markets, consumers have the option of forgoing the in-store experience all together. Online ordering and pickup or online home deliveries allow shoppers to minimise or eliminate time spent at the physical store. Café concepts – encouraging shoppers to enjoy, linger (and perhaps purchase) in-store - will continue to be important across retailing. Whether through store-owned brand vehicles or license agreements, store operated cafés and coffee shops should be a part of elevating the in-store experience, helping brick & mortar operators continue to grow.

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