Costa’s £10m tongue

Costa Coffee, the Marketing Week Engage Awards Brand of the Year 2011, gives Ruth Mortimer exclusive behind-the-scenes access to how research fuels its rapidly expanding global operation.

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Costa Coffee’s chief coffee taster Gennaro Pelliccia has an unusual claim to fame – his tongue was insured for a whopping £10m in 2009. The chain has put its money where Pelliccia’s mouth is after enormous growth over the last few years, including a 22.8% rise in sales worldwide over the last six months to £351.3m.

Indeed, Costa is now the UK’s largest coffee chain and the third biggest food and drink chain overall, with store numbers in Britain outstripping even McDonald’s.

While tongue insurance makes for good PR, it also serves a business purpose. The brand’s overall marketing director Jim Slater claims the secret ingredient that sets his company apart from its rivals is its commitment to insight-led operations, development and marketing (see Insight@Costa, below). Pelliccia’s tongue is crucial because Costa’s research reveals that consumers really care about the coffee’s taste.

Costa in numbers

22.8%
Rise in total sales to £351.3m in the six months to August 2011

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145
The number of new stores opened by Costa in the first half of 2011

300
Costa’s predicted number of worldwide stores opening in 2011/12

70%
The percentage of shop managers who have risen from store employees

£10m
The amount for which Costa’s chief coffee taster Gennaro Pelliccia has his tongue insured

Pelliccia and his tasting team are based at a roastery in London, but insight feeds into every aspect of Costa’s brand around the globe. With nearly 1,300 outlets in the UK and almost 700 overseas locations, customer research is used to guide everything from store design to new product development. How the brand looks and feels in China or India is different to how it does in Eastern Europe or Saudi Arabia (see International@Costa, below).

“We’ve combined our instinct with insight. I can’t even count the amount of times in the last three years that we have changed the business for the better based on insight,” Slater admits. The Marketing Week Engage Awards judges agreed in May this year, awarding Costa the Brand of the Year trophy for how it has transformed its business through customer insight.

Playing the loyalty card

Indeed, it was customer insight that led the brand to set up its Costa Coffee Club last year – a scheme that now has more than 6 million loyalty cards in circulation in just 18 months. Head of insight Caroline Harris says the loyalty scheme was set up after research showed that 10% of coffee customers overall made up 50% of Costa’s visits.

This, she claims, is not only an issue for Costa but is true of the whole coffee shop market. “We were surprised by the promiscuity,” she admits. “The 10% that were our best customers might also be Starbucks customers.”

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Costa’s research also told Harris that convenience of location was so important to coffee drinkers that the company needed an incentive for people to seek out Costa above and beyond its competitors. A new loyalty scheme was seen as the answer.

Although the company had previously used prepay cards that customers could load cash on and spend in store, consumer insight indicated that UK shoppers prefer points collection schemes, such as Nectar and Boots Advantage Card.

After testing the scheme in various formats in Scotland, the new Coffee Club card was launched nationwide in the UK last spring. Back in April, when just 1.2m cards were active, Costa’s parent company Whitbread claimed they were being used in 41% of all transactions, with cardholder spend 6% higher than for non-cardholders.

Slater will not give away details on how the 6 million cards are performing, but claims: “When someone becomes a card holder, their frequency of visits and spend-per-transaction increases. The Costa Club was a risk for us that has paid off handsomely.”

The loyalty scheme is also set to be rolled out to international markets. Costa is in talks with its franchise partner in the United Arab Emirates about how it can develop a similar loyalty scheme to the UK version, while in China a different style of loyalty scheme is being examined.

Head of international marketing Mita Padhi explains: “What is really important to Chinese customers is status, so perhaps we would use a ’tiered’ system, rather than a points system. So if you have a certain amount of activity, then you are a ’red member’, then more activity could make you a ’gold member’ with VIP rewards.

“We are going to test that proposition. So far, our research tells us the tiered system is much more compelling for the Chinese customer as they like that instant reward and the status that makes them feel good about themselves. Loyalty works in every market in some form.”

International@Costa

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Mita Padhi, international marketing director

Marketing Week (MW): Are your international customers similar to your client base in the UK?

Mita Padhi (MP): Costa has 700 outlets outside the UK, in China, the Middle East, Russia and Eastern Europe. Through several rounds of insight and segmentation, we have discovered that the customer in the UK is very different from our consumers in other parts of the world.

In the UK, the average consumer age is 44. But in the international business, it’s just 28. That difference means that you need to have a stronger digital marketing presence in many other countries because these young people are social media advocates.

MW: Which global markets are most and least like the UK?

MP: The most similar market to the UK is the United Arab Emirates. It’s a very mature coffee drinking market and there is a lot of competition from Western brands. It’s not just Starbucks, there is Caffè Nero and Coffee Bean & Tea Leaf, which is huge in the US.

People in the UAE drink coffee as frequently as Brits, their spend is also the same and their habits are similar.

The markets least like the UK are probably China and India. The majority of both populations is under 25 and aspiring to be part of Western culture. They are looking for a place to hang out. It’s a tight-knit community, where people live at home for longer, so they need a place to go with their friends. A coffee shop becomes that place to socialise. Takeaway sales account for probably less than 10% of the business.

MW: How do you market the brand in China if it is so different from the UK?

MP: If you go to any Chinese shopping mall, there are Gucci and Prada stores. I’m not saying we are like Prada as a brand, but we sit next to its stores in some malls. So we have to be accessible but also premium. One of the phrases we used in our marketing last year was “everyday affordable luxury”.

This affects store design – it has to speak to that younger demographic using the outlets to socialise. It needs to be a bit more funky, cool and vibrant in its colour palette with soft seating. We can’t put UK store designs in, say, Shanghai because that’s not what people are looking for.

We also have to have a whole digital strategy there – not just Facebook, but how you talk to people on their mobiles. Blogging is huge in China, so we need to make sure we have the right messages and sentiment. That is a priority given the young target audience.

MW: What is the market like in India?

MP: Our consumer insight tells us that savoury snacking is vital for the Indian market, whereas in the UK, it’s more about cakes and pastries.

In India, the food is the difference between a store making money or not. It is such an important driver for customers there; it can play an equal role with the coffee.

MW: How do you adapt Costa’s food offering in other international markets?

MP: We offer people a premium Western coffee shop food selection. We have category A products, which appear everywhere. So every market will have, say, a blueberry muffin, a chocolate muffin, a croissant and a panini. These are the products that establish your core range.

Then we have category B products that are regional such as haloumi panini. In China, people like the fact that we serve Western food, but some customers prefer familiar flavours, so we might innovate by producing a Szechuan chicken panini.

Category C products, meanwhile, are bespoke for each individual market, such as Chinese mooncakes – these little cakes are given as gifts and we sell 175,000 a year.

MW: Which are your biggest competitors on a global scale?

MP: Our number one competitor is Starbucks. In China, it was there 10 years before us but it isn’t in India yet. There is a regional player in India called Café Coffee Day, which is expanding into Europe, that has become synonymous for many Indians with a café experience.

The quick-service restaurant brands come into it too, such as KFC and Subway. McDonald’s McCafé brand is also growing rapidly in Europe.

New product development

Aside from loyalty schemes, Costa is also hoping to attract more visitors to its stores with the launch of several new products, including a new drink called Costa Light and brews that people can share. Costa Light is made from a single shot of espresso frothed with skimmed milk. With fewer than 80 calories, it is aimed at people who are watching their weight or want to avoid drinking too much caffeine.

“This was developed from the results of a project looking at how we could be innovative with coffee, along with research looking at where our gaps were,” Slater explains. “During our focus groups, the ’calorie bank’ came out, where people trade off something perceived as good for something perceived as bad.”

The company is using the tagline ’Costa Light. All the love, none of the handles’ to market the new drink. It has also launched the Costa Light Comedy Challenge competition to find new stand-up talent. The latter initiative follows a survey the brand ran showing that Brits are shy about telling jokes.

Costa credits the Flat White with pushing up sales 7% at its branches in its first three months on sale

Costa head of UK marketing Kevin Hydes says the Costa Light campaign focuses on mass awareness, rather than targeting any specific group. “We are not marketing this as a product for women. It is as accessible for men, who are just as conscious about calories these days,” he says.

Slater adds that because the brand’s baristas make Costa Light by hand using Italian espresso machines, it is not an innovation that can be copied by rivals with push-button coffee systems.

Costa Light follows on the heels of the brand’s main product innovation last year, the Flat White – a milky coffee style popular in Australia and New Zealand.

Costa credits the Flat White with pushing up sales 7% at its branches in its first three months on sale. Neil Campbell, international operations excellence director for Costa, who previously handled operations in the company’s UK stores, says this type of new product development also helps improve staff morale.

“Whether it’s Flat White or Costa Light, our teams want to know what we are doing to keep them number one. They know their part in how they treat the customer, but they also want to know our ideas.”

Marketing campaigns

The ideas that Slater and his team base marketing campaigns on for new products are, like everything else, the result of consumer insight. Costa’s most-famous ad campaign to date is one claiming that seven out of 10 people prefer the taste of its cappuccino in blind taste tests to Starbucks or Caffè Nero.

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The campaign arose from insight showing that consumers didn’t realise there was any difference in taste between the three main coffee brands in the UK, says Harris. “Because that isn’t true, we had to educate people about our product.”

Although Starbucks has challenged Costa’s comparison ads, the Advertising Standards Agency has refused to uphold its complaints. Slater comments: “We decided to be pretty aggressive and agitate the market. I think we can now paint a more emotional picture for the brand over time.”

Since the ’seven out of 10’ campaign, Costa has gone on to run its first TV ad featuring monkeys trying to make the perfect cup of coffee. The company also emails targeted promotions to Costa Coffee Club members.

“I’m always looking for how we will make more cash on an ongoing basis,” says Slater. However, head of insight Caroline Harris is my voice of reason because research shows us that customers don’t want contact more than twice a month.”

Learning when marketing isn’t appropriate is as important as when to put yourself in front of customers, claims Slater.

Insight@Costa

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Caroline Harris, head of insight

“Everything we do is underpinned by customer insight. It informs our strategy and validates our instinct. From continuous studies in the UK and seven key international markets, we can understand the consumer hierarchy of needs, how we perform against those and where our competitors sit.

Four years ago, the insight team was just me. But we made the decision to bring everything we know about the customer together in one place and now a global insight manager, who is responsible for international projects, a location and planning manager, who does all the science behind where our stores go, and a customer service manager all report to me.

We use segmentation models to understand our customers. We can drill right down to individual stores and understand, for example, what proportion of our visitors are what we would call ’relax’ visitors or ’recharge’ visitors. Underneath these two headings, we then have eight individual segment profiles, such as ’commuter’. However, these are not mutually exclusive – someone can be a commuter during the week, but a more relaxed customer at the weekend.

This data lets us understand segments where we overindex and underindex. We can also overlay our Coffee Club data and EPOS till data to understand if a store’s customer base is ’relax’ or ’recharge’. Then we can make sure the service and design match the needs of those customers.

A good example is our store in Farringdon, London. It is by the train station and its design used to be one till, one coffee machine and lots of comfy chairs. But we realised it was a ’recharge’ store, so we put in two tills, two coffee machines and took out the chairs. It’s all about making the right store for the right people in the right location.”

Motivation and training

But marketing is not just an external process. Operations director Campbell says that communicating brand messages to Costa’s 18,000 staff in the UK can be a complex process. The company must package an intricate marketing message for its consumers so it can be understood and communicated by every barista, even if they only work a couple of shifts a week.

Most motivating for staff, claims Campbell, are the rapid promotions on offer for young baristas that are keen to rise up in the business. People are able to achieve store management positions in around 18 months to two years.

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“These are the most important people in the business,” says Slater. “They meet the customers. We want to breed a self-starting, passionate culture. We see it time and again when people come into the business and move up.”

The opportunities for staff to move around the business are even more rewarding now the firm is growing internationally. Campbell explains that some Polish employees of Costa are now asking to go and run stores in Poland, where the company has bought local firm Coffee Heaven.

The career opportunities are also on offer for senior employees. Slater, who is currently undertaking the Advanced Management Programme at Harvard Business School, notes: “It’s important for me to be taken seriously at the boardroom table and understand what’s going through the mind of the finance director or operations director, so I can contribute fully.”

Despite hoping to learn new skills in the US, Slater already talks about his marketing role as a general management function. He sets out “three levers” that he sees himself as pulling – the customer (informed by insight); the people (all staff); and shareholder value (making money for the business).

Ultimately, says Slater, the belief that everyone needs to run the business together is what has been driving Costa’s success. He says: “There are places where tension exists with marketing and other departments. In some companies, everything is siloed and you hear about people having fights with the sales guys. We’ve worked really hard to smash that away and blur the lines so everyone has the same agenda.”

Innnovation@Costa

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Kevin Hydes, head of UK marketing

Marketing Week (MW): Why are you moving into the self-service coffee machine market with Costa Express?

Kevin Hydes (KH): The premium self-service coffee market is pretty young. There are about 2000 self-service units out there at the moment. We spotted an opportunity because we can’t reach consumers in some of the locations where they want coffee, so this allows us access to places we couldn’t get to before.

We bought Coffee Nation, which had about 45% of the self-service market share. We think the market in total can reach about 14,000 locations over the next seven or eight years.

MW: Costa prides itself on its hand-prepared coffees in store. Doesn’t this concept clash?

KH: We want to reach people where we can’t have a full store experience. We see potential in hospitals, stations, universities and so on. Chief taster Gennaro Pelliccia has worked on the product a lot, so we can make sure it lives up to the taste we expect.

MW: As well as launching Costa Express, you are using greeters at some of your stores. Why?

KH: We are testing this host role at some of our stores to support the customer journey. Queues come with negative connotations, so we need to make things as easy as possible. The greeter can direct people in the store, or take food from people in a queue and get it grilled, speeding up that process.

Ultimately, the host acts as the voice of our brand, so it’s important to give people a good experience. Sometimes people will want to chat about their weekend, while others just want to get a coffee as quickly as they can. The host has to pick up on that.

We have been testing this since the start of the year in 15 locations, mostly in London during busy periods. We have tried it outside London on peak shifts to aid the process, but on a quiet Wednesday afternoon, it isn’t necessary. That might feel a bit awkward.

MW: You have also launched Drive Thru stores in the UK. Will we see more of these?

KH: Convenience plays a big part in coffee choice. Drive-thru coffee is massive in the States. In the UK, we are familiar with roadside coffee from service stations, so it felt natural to look in that area to build our business.

We built full stores with drive-thru elements attached, while we try to see what the appetite is for this. We’re planning to open six this year and we’ve got three open already.

Our mix of sales ranges between 25% and 40% coming through the drive-thru element. These outlets can break even just through their store sales, so the drive-thru sales are on top. It’s a very low risk strategy.

Implementation@Costa

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Neil Campbell, international operations excellence director

“You can have the best marketing ideas in the world, but if the guys in your stores don’t buy into it, it just won’t work. We discuss what we will do with the marketing department and how our store teams will take it. Most of the marketing gets to store level, which means the in-store guys know about campaigns and what they are expected to do.

Our teams enjoy taking part in some product initiatives, like the Flat White, because they see it as a credit to them and their ability to make good coffee. It’s seen as recognising that they are the only baristas that could deliver this consistently around the UK. Any business that has both full and part-time members understands the importance of delivering consistent experiences.

We have a recognition culture for store teams. About 70% of our store managers have come up through the ranks. We focus on consistency and good performance. We talk to teams about the speed of service for the guy that’s in a rush. Or chatting to that friendly lady who wants to talk to us.

We don’t have email access in our stores, so we need to talk to people a lot. We bring the teams together at a conference and then the messages cascade out from there. But that means making sure we get every message right from the start so we can be very clear about what we ask them to do.”

Creative viewpoint

Seb Joseph

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Insight does not just feed Costa’s commercial strategy, it also drives the creative strategy. Karmarama chief executive Ben Bilboul, who has worked with Costa since 2006, says that along with insight, the brand’s advertising is built around innovation and challenging category expectations.

The agency was tasked with helping the chain win the high street coffee wars by building preference in a market that was traditionally convenience driven. Bilboul explains: “Our focus was how we build preference for Costa Coffee.

“Although we used customer insight to evolve the campaign, we also needed to do something creatively that would challenge people’s preconceptions about coffee.”

The resulting “seven out of 10” campaign was heavily investigated by the Advertising Standards Agency following complaints from Starbucks, but these were dismissed. “Once we realised we were going to base the concept around coffee credentials, there was no point in watering that message down,” says Bilboul. “That’s why we went for protest-style print ads and a provocative but fun TV spot.”

The TV ad featuring monkeys drew criticism from some animal charities. Bilboul maintains the brand’s creative strategy needs to keep its challenging nature, especially as Costa is the first in its market to advertise on TV. Using TV allowed the agency to dramatise the campaign’s concept in a way that print ads couldn’t, he says.

He notes: “The best challenger brands are thought-leaders – they set the agenda. By focusing its advertising strategy around building preference, Costa has done that.”

To read about how Marketing Week Engage Awards 2011 Agency of the Year Karmarama developed the creative behind Costa Coffee’s latest Costa Light campaign and more, visit the Pitch blog.

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