It may sometimes seem the UK is awash with coffee shops, but analysts believe there is plenty of room for more, which is good news for Costa Coffee owner Whitbread.
In a buy note on Whitbread, Barclays reported the latest findings from data company Allegra Strategies on the coffee market, following a meeting with the firm. Allegra believes there could easily be 9,500 coffee shops by 2021 compared to 5,781 now. If this seems high, Barclays points out there are currently around 49,500 pubs in the UK, despite the continuing spate of closures across the country. Barclays said:
Yesterday we hosted our annual meeting with Allegra Strategies – leading providers of data on the branded UK coffee market. We remain positive about the outlook for Costa’s growth in the UK. The brand yet again gained market share and rose in terms of consumers’ preference in 2014.
Allegra sees scope for 64% growth in the number of UK coffee shops over the next 7 years and sees a significant opportunity for the Costa Express vending business especially in light of the very favourable competitive backdrop. Competition in coffee shops remains tough with evidence for example that Starbucks is finally growing again, but we believe the market characteristics remain favourable for Costa to continue to succeed both in the pace of store/machine rollout and in like for like growth where we continue to expect more than 5% like for like sales growth per annum.
Barclays said Whitbread remained a top pick:
We continue to view the stock as cheap with a 1.5 times price earnings to growth ratio (21.5 times 2015 estimated PE).
We believe consensus expectations for the fourth quarter 2014 and the 2015 full year remain low.
Costa continues to gain significant share: Costa yet again outperformed, gaining a further 0.9% market share in 2014 (versus Starbucks -0.6%). Costa has now gained around 22% share over the past 7 years (versus Starbucks -c14%). Costa also increased further in terms of brand preference (50% of consumers versus 48% last year).
[There is a] pricing opportunity. Costa coffee prices now stand at a around 5% discount to Starbucks and a 10% discount to Caffe Nero since the group chose not to increase prices last year. We believe the scope for Costa to drive even stronger like for like sales growth in 2015 through price increases is significant and also believe the business would benefit in a stronger consumer environment.
In a downbeat market - the FTSE 100 is currently down 32.07 points at 6778.53 - Whitbread shares have edged up 5p to £50.05.
