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Presentation by JEFFREY YOUNG Allegra Strategies

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1 Presentation by JEFFREY YOUNG Allegra Strategies
10am The UK Sandwich Market Presentation by JEFFREY YOUNG Allegra Strategies

2 Trends in the UK Sandwich Market
Presentation at The Taste Experience British Sandwich Association Jeffrey Young, Managing Director, Allegra Strategies Ltd 1 November 2007 Allegra Strategies Limited No 1 Northumberland Avenue, Trafalgar Square, London WC2N 5BW, UK Tel: +44(0) Fax: 44 (0) 2

3 Background on Allegra Strategies Consumer Food Mega-Trends
Market Landscape Case Study: Branded Coffee Chain Segment Future Sandwich Market Developments Q&A Page 3

4 ABOUT ALLEGRA STRATEGIES
Leading UK research and strategy consulting firm focusing on Coffee and Foodservice, Retail and Consumer Lifestyle Mission to deliver outstanding quality information, assisting clients to better understand their competitive environment and to focus on customers, markets and innovation Publish Project Café series since August 1999, recognised as the definitive report on the UK and European branded coffee and sandwich chain markets Research projects: qualitative and quantitative customer insight programmes, competitive analysis, best practices and commercial due diligence for leading UK and global clients Project Café7 release May European Coffee Shop Market 2007 released October 2007 In addition to bespoke research and strategy consulting to the coffee sector, Allegra also pioneers a series of definitive retail publications including: How Women Shop!™ 2007 Ethical Consumer Trends UK – Clean Energy and Energy Efficiency 2007 Ethical Brands – Implications for the Food sector In 2007, Allegra established an industry Think Tank - The Food Strategy Forum Senior Food & Beverage Executive Top of Mind Survey completed 30 October 2007 Currently working on a new report: ‘Food on the Move’ Page 4 4

5 CLIENTS Allegra Strategies provides research and consulting products and services to a wide variety of leading UK and global corporations. Our recent client list includes: Page 5

6 Background on Allegra Strategies Consumer Food Mega-Trends
Market Landscape Case Study: Branded Coffee Chain Segment Future Sandwich Market Developments Q&A Page 6

7 Allegra’s research and analysis over the past decade identifies 7 Mega-trends driving developments across the global food sector, with important consequences for the UK sandwich market. Healthy Eating Food-on-the-Move Premiumisation / ‘Culture of Food’ Greater Variety and Choice Expansion of Branded Chain Concepts Growing Importance of ‘Experience’ Ethical Consumerism Page 7 7

8 GLOBAL FOOD MEGA-TREND - HEALTHY EATING
Societal concern with obesity in the UK Press and government programmes have stimulated a growing focus on healthy eating Greater awareness of nutrition Proactive efforts by leading supermarkets and foodservice chains Trends towards simpler, more natural, fresh foods and organic produce Dramatic reduction in trans fats Reduced additives and preservatives Page 8 8

9 Allegra’s national food buying behaviour consumer research identified a major trend towards healthy eating. Nearly three-quarters of UK consumers interviewed stated that they are more concerned with healthy eating than they were five years ago. 55% believe that they should be eating healthier still. CONSUMERS’ INCREASED CONCERNS ABOUT HEALTHY EATING [NATIONAL FOOD BUYING RESEARCH] Response to Prompt: I’m more concerned with healthy eating than I was 5 years ago. Percentage Source: Allegra Strategies National Food Buying Behaviour Interviews and Analysis, 2006 Page 9 9

10 GLOBAL FOOD MEGA-TREND – FOOD-ON-THE-MOVE
Also known as Convenience-led consumption, Dash-board Dining or Grab&Go Busier and more mobile lifestyles Consumers are eating more meals out-of-the- home Increasing snacking and grazing ‘Three meals a day’ is now an out-dated stereotype in much of Britain Takeaway food and beverages have risen substantially in the past decade and is now widespread Retailers, foodservice operators and food manufacturers have responded with a wide variety of convenience offers Page 10 10

11 Nearly two-thirds of UK consumers eat out-of-the-home at least once per week or approximately two meals per week on average. This trend has grown substantially over the past decade with the introduction of more convenience offers and more mobile consumption habits. EATING OUT-OF-THE-HOME [NATIONAL FOOD BUYING RESEARCH] How many times per week on average would you eat meals out-of-home? Percentage 7 times or more per week 5 to less than 7 times per week 3 to less than 5 times per week 2 to 3 times per week Once per week 2 to 3 times per month Once a month Once every two months Once or less every quarter Very seldom/ don't normally eat out Source: Allegra Strategies National Food Buying Behaviour Interviews and Analysis, 2006 Page 11 11

12 A quarter of UK consumers under 35 stated that they eat many meals ‘on-the-move’, an important current and future market for sandwich players. Allegra’s national food sample reveals that younger consumers are more likely to eat unstructured meals. EATING ON-THE-MOVE [NATIONAL FOOD BUYING RESEARCH] Response to Prompt: I eat many of my meals on-the-move. Percentage Source: Allegra Strategies National Food Buying Behaviour Interviews and Analysis, 2006 Page 12 12

13 GLOBAL FOOD MEGA-TREND - PREMIUMISATION / ‘CULTURE OF FOOD’
Historically high relative wealth has increased discretionary income Growing demand for higher quality products and luxury treats, provides food players with opportunities to increase revenue A few examples: Growing popularity of deli concepts Rise of farmers markets Premium supermarket own-label Shift from instant to roast & ground coffee Premium niche brands, e.g. Kettle Crisps Rise of celebrity chefs and TV programmes e.g. Master Chef, Hell’s Kitchen, Jamie Oliver Page 13 13

14 GLOBAL FOOD MEGA-TREND - GREATER VARIETY AND CHOICE
Increased travel and exposure to different cultures is driving more open-mindedness Increased acceptance and enjoyment of a wider variety of food types and multi-cultural cuisines More demanding consumers expect a higher degree of choice and quality Wide variety of product formats and channels to market Variety in tastes is particularly evident from the diversity of supermarket shelves and restaurant menus of today 24-hour access to food purchases is potentially a contributor to obesity                         Page 14 14

15 GLOBAL FOOD MEGA-TREND – EXPANSION OF BRANDED CONCEPTS
A global trend to consolidation in retail and foodservice Branded chain foodservice concepts, e.g. Costa, Starbucks, Pret, Carluccio’s, Subway, La Tasca, Pizza Express have proliferated at the expense of independent operators Significant growth in the quality mid-market Consumers shunning ‘greasy spoon’ outlets Despite a stated ‘emotional’ link to independent operators, UK consumers are gravitating to brands that they trust, associate with and aspire to Brands create a sense of ‘fashion’ and excitement Financial strength and operational excellence of branded operators provide distinct advantage                                   Page 15 15

16 Growing brand awareness is evident as consumers increasingly use foodservice chain concepts. Vibrant brands that connect to a broad but well-defined target audience are those that gain most customer recognition. AVERAGE NUMBER OF MAJOR BRANDS RECOGNISED UK BRANDED COFFEE SHOP VISITORS, [COFFEE SHOP INTERVIEWS] Response to Question: Which of the following coffee/sandwich shops brand do you know? Number of Brands Source: Allegra Strategies Coffee Shop Interviews & Analysis, April 2007 Page 16 16

17 GLOBAL FOOD MEGA-TREND – IMPORTANCE OF CUSTOMER ‘EXPERIENCE’
High quality, themed store environments have become important tools to unlocking consumer spend Rise of ‘3rd space’ as a social venue – importance of a ‘my time’ space is not to be underestimated Sense of ‘urban casualness’ is encapsulated in the successful Starbucks, including the use of sofas, hand-written menu boards and themed graphics New McDonald’s stores now feature vibrant, café-like environments Supermarkets such as M&S and Waitrose are food-shopping Tastings, customer education and events Page 17 17

18 GLOBAL FOOD MEGA-TREND – ETHICAL CONSUMERISM
Ethical dimensions are increasing in consumer purchase decisions. Key areas include: Environmental impact / Food miles Fairtrade Local sourcing Organics Social responsibility Impetus has been driven by corporate activities and widespread media coverage Growing concern with climate change but also an important focus on food provenance, localness and reduced packaging Ethical positioning is a business imperative Page 18 18

19 While, 9% of visitors expressed strong opinions in favour of Fairtrade coffee, a high 57% of visitors remain passively indifferent to ethical coffee purchases. IMPORTANCE OF FAIRTRADE [COFFEE SHOP INTERVIEWS] Response to Prompt: It is important to me to order Fairtrade coffee whenever I can.* Percentage of Respondents Note*: Scale 1 to 5; where 1 = Agree Strongly; 2 = Agree; 3 = Neither; 4 = Disagree; 5 = Disagree Strongly Source: Allegra Strategies Coffee Shop Interviews & Analysis, April 2007 Page 19

20 Background on Allegra Strategies Consumer Food Mega-Trends
Market Landscape Case Study: Branded Coffee Chain Segment Future Sandwich Market Developments Q&A Page 20

21 With its highly concentrated population of 60 million and increasingly brand-led, food-conscious consumers, the UK provides a fertile market for quality sandwich providers. The UK is a hybrid between the US and Europe, combining a strong chain presence and convenience-driven behaviour, with the food and café culture of Europe Growing consumer ‘food culture’ has emerged over the past 5 years, e.g the success of Waitrose, M&S food, Taste the Difference, Finest and branded food chains such as Pret, EAT and Carluccio’s Café culture has risen exponentially over the past decade, with 47% of consumers visiting a coffee venue at least once per month. 67% of adult consumers eat out-of-the-home at least once per week UK out-of home Food & Beverage market is estimated at £37 billion Estimated 228 million daily meal occasions in the UK UK day-time convenience F&B market is estimated at £14bn and £3.3bn in London Sandwich market estimated at £3.5 - £3.7 billion Significant growth of the branded coffee/sandwich chain market, currently at £1.3bn. Forecast to reach a market size in excess of 6,500 units with total sales of £2.5bn within a decade Pret leads the branded food-focused coffee segment in sales and outlets, followed by EAT M&S, Sainsbury’s Local, Tesco Express, Boots and Greggs provide strong competition within the lunch time/sandwich market, as does fast-growing chain Subway, with 986 stores currently Page 21 21

22 The UK out-of-home food and beverage market is estimated at £37 billion and is expected to grow at 1.6% per annum to Allegra estimates that the daytime on-the-move market at approximately £14 billion. ESTIMATED ANNUAL TURNOVER – UK OUT-OF-HOME FOOD & BEVERAGE MARKET £ Billions Compound Annual Growth Rate F 1.6% Source: ONS, Defra, Allegra Strategies Analysis, 2007 Page 22 22

23 Restaurants and cafés account for a growing 50% share.
The UK comprises approximately 130,000 Vat registered foodservice businesses with the total number of outlets estimated around 170,000. Restaurants and cafés account for a growing 50% share. Compound Annual Growth Rate 1996 – 2007E TOTAL NUMBER OF UK FOODSERVICE ENTERPRISES, 1996 – 2007E No. of Businesses 130,825 Total Market % Canteens & Catering % Hotels % Bars & Pubs 1.4% Restaurants & Cafes % 128,315 124,080 121,030 114,795 117,385 111,920 106,440 107,460 109,270 105,345 105,315 Note: Figures are for VAT registered businesses ONLY and numbers are start of year figures Source: ONS Business Activity, Allegra Analysis, 2007 Page 23 23

24 McDonald’s remains the largest foodservice chain in terms of number of outlets. However, this gap is narrowing with Subway soon to reach 1,000 UK outlets. SELECTED UK SANDWICH/FOOD-TO-GO OPERATORS STORE NUMBERS, MAY 2007 Number of Outlets Mc Donald's Greggs Subway Tesco Express Boots Sand. Costa Coffee Starbucks Sains-bury's Local Caffè Nero Caffè Ritazza Bakers Oven Pret A Manger BB’s Coffee & Muffins O'Brien's M&S Simply Food EAT Coffee Republic Bagel Factory Benugo Source: Allegra Strategies Analysis, 2007 Page 24 24

25 A variety of players are present in the market, each targeting a specific niche. Allegra expects the main value growth for sandwich players to occur in the upper right-hand quartile. UK SANDWICH/FOOD-TO-GO OPERATOR POSITIONING MAP - + ILLUSTRATIVE Price Quality Food Credentials BB’s Coffee & Muffins Sainsbury’s Local Starbucks Caffè Ritazza Costa M&S Simply Food Caffè Nero EAT Subway Greggs Bakers Oven McDonald’s Tesco Express Benugo’s Benjy’s (Defunct) Boots Pret Waitrose Sandwiches Source: Allegra Strategies Analysis 2007 Page 25 25

26 1 2 3 4 5 KEY CHALLENGE Rising food/ingredient costs
Recent Allegra industry research identified Rising food costs as the single biggest challenge for UK food & beverage players and is currently a major concern for sandwich manufacturers and sandwich retailers. Given intensifying competition and the need to differentiate means that Innovation/New Product Development is the second most important challenge currently. TOP 5 CHALLENGES MENTIONED BY UK FOOD & BEVERAGE EXECUTIVES, OCT. 2007 RANKING KEY CHALLENGE 1 Rising food/ingredient costs 2 Innovation & new product development 3 Sustainability/Environment 4 Intense competition 5 Attracting & retaining staff - Source: Allegra Strategies Analysis Food Strategies Forum Top of Mind Survey, Preliminary Data, October 2007 Page 26 26

27 Background on Allegra Strategies Consumer Food Mega-Trends
Market Landscape Case Study: Branded Coffee Chain Segment Future Sandwich Market Developments Q&A Page 27

28 MARKET OVERVIEW Branded coffee shop market now totals 3,000 units, set to nearly double over the next decade Regional growth will account for the lion’s share of growth in outlets at circa 10% per annum London is still growing, forecast at 6-7% per annum for the next 3-4 years Branded segment turnover is valued at £1.3 billion in 2007 and to exceed £2.5 billion by 2017 Top 3 coffee-focused players: Starbucks, Costa Coffee and Caffè Nero accounted for 1,400 units and each adding outlets per year Branded food-focused players Pret A Manger and EAT have accelerated growth plans UK café culture is here to stay. The popularity of coffee bars continues to grow as a significant proportion of UK consumers make coffee shops part of their daily lives Coffee shops have become important venues not only to drink coffee and other beverages, but also to eat, relax, socialise and conduct business meetings Major branded chains Starbucks, Costa Coffee, Caffè Nero, Pret A Manger and M&S Cafés have set strong benchmarks on product variety, coffee quality and store environments Consumers now expect these features across a growing set of UK foodservice, leisure and shopping venues An increasingly important channel for sandwich manufacturers Page 28

29 The UK branded coffee market has quadrupled since 1999 to reach an estimated 3,000 outlets a and accounting for 30% of the defined coffee shop market in Allegra predicts the branded market to grow by more than 8% to 2010 and ultimately to double within 10 years. Compound Annual Growth Rate Dec Dec 2010F TOTAL NUMBER OF UK COFFEE SHOP OUTLETS, BY TYPE, DEC DEC 2010F No. of Outlets 10,795 Total Market 4.2% Non-specialists 5.5% -Hotels -Supermarkets -Department/Book stores -Service Stations Independent Operators 0.9% Branded Chains 8.6% Coffee Focused Food-Focused 10,443 10,077 9,651 9,171 9,285 8,746 8,322 7,674 7,305 6,843 6,160 5,400 5,093 4,756 *Note: Non-specialist segment excludes branded chains who have partnered with non-specialist players Source: Allegra Strategies Industry Interviews and Analysis, 2007 Page 29

30 Coffee-focused segment, e. g
Coffee-focused segment, e.g. Starbucks, Costa Coffee and Caffè Nero is set to grow at 9% to 2010 vs. 8% for the food-focused segment, e.g. Pret and Eat. TOTAL NUMBER OF UK BRANDED COFFEE SHOP OUTLETS, BY SEGMENT, DEC – DEC. 2010F No. of Outlets Total Branded Chain Market 8.6% Food-Focused 7.6% Coffee-Focused 8.9% Compound Annual Growth Rate Dec Dec 2010F 3,985 3,752 3,502 3,205 2,869 2,624 2,424 2,190 2,030 1,784 1,382 Source: Allegra Strategies Industry Interviews and Analysis, 2007 Page 30

31 COFFEE SHOP CONSUMER RESEARCH OVERVIEW
24% of the UK adult population or approximately 11 million consumers visit coffee shop at least once per week. 47% of UK adults – 20 million individuals – visit at least once per month 76% tend to visit their favourite coffee shop vs. 74% in 2005, strengthening brand loyalty Location is the main factor influencing a consumer’s choice of a given coffee shop/sandwich shop, at 63% in 2007 vs. 67% in 2005 Atmosphere has grown in importance as a key influencing factor for UK coffee shop visitors Sandwiches are purchased on a regular basis by 50% of coffee shop visitors Take-away is more important than in the past months according to 38% of visitors Brand awareness of coffee and sandwich bar brands is high and growing Allegra’s national telephone sample indicated brand awareness of 10.9 brands on average across the UK, revealing how far branded chains have penetrated the UK consumer mindset Only 12% of adults UK rank an independent coffee shop as their favourite Pret A Manger leads in the food-focused segment with leadership in food quality and service Caffè Nero ranks highest among high street chains on overall key success factors Page 31

32 According to Allegra’s national telephone sample, 24% of the UK adult population, approximately 11 million individuals, visit coffee shops at least once per week. 47% of the adult population, more than 20 million consumers, visit coffee shops at least once per month. FREQUENCY OF VISITS [CONSUMER TELEPHONE INTERVIEWS] Response to Question: In general, how often do you visit coffee shops? Percentage of Respondents Source: Allegra Strategies Household Telephone Interviews and Analysis, April 2007 Page 32 Source: Allegra Strategies Household Telephone Interviews & Analysis, April 2007

33 Only 16.5% of customers never buy food in coffee shops.
25% of coffee shop visitors frequently purchase food items within coffee bars. A further 47% of customers occasionally make food purchases in coffee shops. Only 16.5% of customers never buy food in coffee shops. FREQUENCY OF FOOD PURCHASED IN COFFEE SHOPS [COFFEE SHOP INTERVIEWS] Response to Question: Do you normally purchase food with your drink in coffee shops? Percentage of Respondents Source: Allegra Strategies Coffee Shop Interviews & Analysis, April 2007 Page 33

34 Background on Allegra Strategies Consumer Food Mega-Trends
Market Landscape Case Study: Branded Coffee Chain Segment Future Sandwich Market Developments Q&A Page 34

35 Allegra’s national research highlights themes of healthy eating, local origin of products and exploring new tastes to be important on-going and future trends. Despite trends to premiumisation, value-for-money will continue to be important. UK CONSUMERS’ EXPECTED FUTURE CONCERNS AND INTERESTS [NATIONAL FOOD BUYING RESEARCH] In the years to come, what will you be generally more focused on? Percentage Note: Multiple responses; answers were prompted and randomised when asked Source: Allegra Strategies National Food Buying Behaviour Interviews and Analysis, 2006 Page 35 35

36 Allegra’s Food Strategy Forum has examined the corporate competencies required to lead in the rapidly evolving Food & Beverage sector. EMERGING FRONTIER OF CRITICAL CORPORATE COMPETENCIES ILLUSTRATIVE High Importance Price Competitiveness COMPETITIVE FRONTIER Service Excellence Cost-efficiency Brand Authenticity Production Volumes Pre-defined Production Runs Flexible Operations Capacity to Innovate Multi-reach Talent Management Product Freshness Customised Choice Ethical Values Traditional Working Practices Premium Provenance Collaborative Mindset Customer Experience Declining Importance Rising Importance Low Importance Page 36 36

37 FUTURE CONSUMER BEHAVIOUR
Eating out more More informed More aware of ‘food culture’ More demanding in terms of quality and service Busier and more mobile More informal More adventurous Variety-driven Complex set of value expectations Page 37 37

38 FUTURE PRODUCT DEVELOPMENTS
Healthier Tasty and flavoursome Fresh and Natural Wider variety and more exotic fillings (incl. Ethnic) Artisanal breads Local provenance Premium Convenience Organics Smaller portions Priced to reflect segmentation Page 38 38

39 FUTURE ROUTES TO MARKET
More diverse: Foodservice Traditional Retail and Convenience formats Widening set of non-food players Independent sandwich bars Workplace More sophisticated, more segmented Great emphasis on branded chain concepts Increased competition Sandwiches increasingly competing against other products for shelf space In the short-term, more cost-driven due to food price rises Page 39 39

40 FUTURE WINNING BRAND CREDENTIALS
Innovative packaging Authentic Ethical Informative Honest Convenient Communicate a compelling story Deliver consumer 'Experience' Page 40 40

41 Background on Allegra Strategies Consumer Food Mega-Trends
Market Landscape Case Study: Branded Coffee Chain Segment Future Sandwich Market Developments Q&A Page 41


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