In my professional life, I never turn down the opportunity to have a cup of coffee as one never knows where it may lead. This blog is inspired by a cup of coffee at Harris + Hoole.

The UK Branded Coffee Industry.

There are some great coffee retailers in the UK and as a London based real estate guy who travels a lot, I am grateful that the likes of Kaffeine and Speakeasy exist in London and try and frequent when I can.

On my way to the office, I walk past maybe 7 or 8 branded coffee shops and stop on at least one on a daily basis for my morning fix- and it seems I am not alone.

Allegra Strategies produces a report on the UK coffee shop industry and at year-end 2013, the figures are impressive:

By the end of 2013 in the UK, branded coffee shops had:

  • 5,531 outlets
  • £2.6bn turnover
  • 2012-2013 growth of 9.3%
  • 306 new stores in 2013 alone
  • Made £1.7bn cups of coffee

The forecast is for over 7,000 branded coffee shop units by 2018, providing a turnover of £4.1 billion by 2018, with a potential of 9,000 units.

What is more interesting for those social scientists and followers of customer loyalty, is the changing behaviour of the typical coffee drinker.

Coffee drinking behaviours are becoming easy identifiable… and more regular; 20% of coffee shop visitors visit coffee shops every day compared with 11% in 2009, with customers increasing their awareness of tastes and preparation processes involved in their daily cup.

If one were to take this data on a customer lifetime basis, assuming the average customer spends £2.50 per working day, this equates to £650 per annum, or £3,250 over a 5 year term. Moreover, what we identify is that 20% of all customers are regular coffee drinkers and of these customers, they will undoubtedly show loyalty to a particular branded coffee house.

To put this into perspective, the “regular and loyal” element of the market is valued at £520m, rising to £820m by 2018.

This is a growth industry and it is easy to understand why any sensible progressive customer-facing retailer would want to enter this market at this time.

The UK Coffee Players

Enter Britain’s “Favourite Retailer”.

Those of you familiar with my blogs will note my belief that Tesco is in the middle of a severe strategic crisis.

For a long time it’s competitive advantage lay with the ubiquity of the stores, the range of offering in the larger units and an “outside-in” approach to customer loyalty whereby using the Clubcard, Tesco was able to offer targeted deals to specific customers. But the landscape has changed. They operate with high overheads compared to their online rivals, (and their product in the online space is arguably inferior) the big box units neither lead on price nor are segment aligned and the competitive advantage that the Clubcard brought has diminished.

The international expansion has been an inglorious failure, with missteps and retreats in both China and the USA, which has left “Britain’s favourite” retailer looking at a reversion to the UK domestic market and the acquisition of successful brands, such as Giraffe, Euphorium Bakery and Harris + Hoole, the coffee shop, which it is backing on a roll out.

Harris + Hoole

How can Tesco backed Harris + Hoole differentiate in a competitive marketplace?

Those of you who know me, are used to me talking about seeking differentiation in non-differentiated products, such as hotels, gaming and communications.

So this morning when I was in Finchley (as Mrs Lovat wanted to go shopping for something nearby) I took advantage and made my long overdue appointment with Harris + Hoole. It is located on the High Street in a coffee cluster and I came with the kids posing as an “ordinary customer” but in reality, I was about to undertake a serious piece of ethnographic research that the Chicago School of the 1920s would be proud of, plus I wanted a coffee!

2014-02-01 12.12.56

The feel is urban-authentic; the labels are handwritten, the staff are in their own clothes and the cups are unbranded, which knowing the corporate interest, struck me somewhat cynical, however the atmosphere was warm, if not quite comfortable.

The coffee was actually excellent in my unbranded Denby style mug, but I was less than impressed – in fact I left pretty angry and unsatisfied.

Customer Loyalty versus Customer Defection

In the coffee space there are affectively three types of loyalty that exist between customer and operator.

The first is Transactional. This is like the standard loyalty card – if you punch 9 coffees you get a 10th. Coffee operators tend to be located in coffee clusters, so if you go elsewhere, you experience some kind of loyalty cost.

The second is Functional, where we make the decision to go to an outlet based on preference for the good or process. In my case, I am a regular Starbucks customer. This is not for the coffee (which I don’t think is as good as Harris + Hoole- or even Nero) but their processes are excellent and quick, I swipe my iphone and the coffee comes in under 3 minutes. I do get free coffee vouchers, but they go unused as they are an incidental benefit to my decision to go to Starbucks.

The third is defined as Emotional Loyalty, where the customer has loyalty to the brand or product because it makes them feel a particular way, and it is my belief that Harris + Hoole are trying to use this strategy by creating a stripped back retro environment, which is “faux-authentic”, or in the lexicon of the marketing experts – “fake-real”. Engendering this emotional response is particularly difficult to sustain – unless in the aspirational sector, but I did think H+H created a warm environment and positive coffee experience, but so do all the others!

But for me it isn’t enough. Marketing and strategic positioning is only as good as delivery and this has been my problem with Tesco and as it turns out, Harris and Hoole.

Putting the Service-Profit Chain to Work….or Not!

It is nearly 20 years since HBS published Heskett’s article, and still the Service Profit chain is still the most prevalent model in operating strategy and customer loyalty linkage.  No matter how great the strategy is, the relationship and interaction between the front facing employee and the customer is the most important link in the loyalty chain.

The Service Profit Chain (HBS)

In going to a coffee shop, there are only a couple of possible failure points and these are either the core service element or the process element.

If a process fails and the front-line employee is engaged, there is still an opportunity to achieve customer satisfaction and potential retention. But research indicates that if there is a negative experience with the employee–customer interaction, there is a higher level of expected defection.

If a customer is totally satisfied, they will tell their friends and the company grows. If they are totally dissatisfied they will not reward the business with any further custom, or in my case, dedicate the subject of this fortnight’s blog to exploring it!

You see, after I bought some gingerbread men yesterday, the Harris and Hoole people managed not to give me the gingerbread men, which I had paid for, and resold them to someone else – it is a great trick managing to sell the same stock twice, but at least one customer won’t be happy!

The reason why the biscuits were not in my possession – even though I had paid for them is that a helpful member of staff had offered to bring them over to me, but didn’t … and his colleague then sold them on.

This is the type of experience that alienates the customer from the brand, and in the words of Heskett, turns the customer from potential Apostle into a Terrorist.

A Satisfied Customer Is Loyal

I am not naturally hostile to Harris and Hoole and would define myself as a curious, but regular coffee drinker. Actually, I am opposite to hostile and want the company to do well – after all I am a shareholder of Tesco, but please, please, PLEASE, if anyone at Harris + Hoole reads this, take note:

As you expand in a competitive environment without a differentiated product and seeking to command a price premium, you will require thought and definition to your strategic marketing and you must learn from both the successes and the mistakes of Tesco.

All the research into customer behaviour and product testing to create the optimum experience, will be wasted time and irrelevant information if you can’t get the basics right.

Free Advice.

To the Harris +  Hoole strategists, my two nuggets of advice as a student of customer centric marketing:

1. Invest in and train your frontline staff in the correct way. You are still small enough to make customer service your differentiator, rather than the unbranded cups and handwritten descriptions for goods- these are replicable. If someone is nice to us, we remember it.

2. Seek and covet profitable customers. We profitable customers seek functional benefits. We want speed, efficiency and know our processes will be delivered the second we action our order. This is what Starbucks do better than anyone else and why they have the success that they deserve – with arguably an inferior product.

Harris + Hoole your coffee is good, but you have a long way to go.

February 2014


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