Caffè Nero Group PLC

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Caffè Nero Group PLC

3 Neal Street, 2nd Floor
London, England WC2H 9PU
United Kingdom
Telephone: (44) 20 7520 5150
Fax: (44) 20 7240 5332
Web site: http://www.caffenero.com

Public Company
Incorporated: 1997
Employees: 1,100
Sales: £39.39 million (2003)
Stock Exchanges: London
Ticker Symbol: CFN
NAIC: 722110 Full-Service Restaurants

Caffè Nero Group PLC ranks as one of the three largest operators of espresso shops in the United Kingdom, trailing Starbucks Corporation and Costa Coffee. Caffè Nero operates more than 150 shops in more than 50 cities and towns in the United Kingdom, with sites stretching from Brighton, England, to Glasgow, Scotland. Although the company strives to convey a single, branded identity to the chain, it also endeavors to tailor each store to the peculiarities of its location. Caffè Nero intends to greatly increase its store count by opening units in both large metropolitan markets and in smaller regional markets. The company also intends to expand into mainland Europe.

Origins

The first Caffè Nero opened in 1990, debuting in the South Kensington section of London. The coffee shop drew its inspiration from a small espresso bar in Milan, a city where thousands of shops catered to millions of people accustomed to having their coffee while standing. In London, where the first Caffè Nero offered no seating for its patrons, the custom of drinking coffee while standing was foreign. Moreover, Londoners, as a whole, did not demonstrate a particular taste for the espressos, lattés, and mochas that were ingrained in the daily lives of those in Milan and throughout Italy. The first Caffè Nero, not surprisingly, drew its clientele largely from London's Italian community, who enjoyed their traditional coffee drinks and samplings of their native cuisine, prepared in a kitchen located downstairs from the espresso bar.

The debut of the first Caffè Nero occurred well before the sight of Italian-style espresso shops would become commonplace in London. Despite the lack of general appeal for its format, Caffè Nero thrived on Old Brompton Road in South Kensington, its success sufficient to justify the establishment of other, similarly designed espresso bars. Within the next six years, four more Caffè Neros were opened in London, with each opening signaling an increasing acceptance and demand for espresso and all its derivative variations.

By the beginning of the late 1990s, espresso shops had begun to become big business in London. Large chains, in an attempt to emulate or to capitalize upon the success of the globally minded Starbucks Corporation, began to appear and expand in earnest. For one group of businesspeople, Caffè Nero offered a way into London's promising specialty coffee retailing market.

The group of managers who saw Caffè Nero as the foundation for a much larger chain was headed by Gerry Ford. Ford, who earned his B.A. from Stanford University and his Ph.D. from Oxford University, possessed a wealth of business experience, starting his career at Hewlett-Packard. After leaving Hewlett-Packard, Ford spent three years developing a number of small businesses at APAX Partners, an international venture capital firm. Next, Ford served as the chief executive for several companies involved in the food and consumer goods industry. In 1991, he helped start Paladin Associates Ltd., a venture capital group that invested in and managed food, consumer brands, and media businesses. It was through Paladin that Ford and his consortium of investors purchased the five Caffè Neros in operation in 1997. With financial backing from BancBoston, the private equity investment arm of FleetBoston, Caffè Nero Group PLC was formed as the corporate entity Ford would use to expand the small yet established chain. The new management team thoroughly revamped the design of the Caffè Nero units, but kept the name, the coffee, and the espresso shops' signature toasted Italian sandwiches. Once the concept was honed to his liking, Ford pressed forward and began opening additional units.

Caffè Nero nearly tripled in size during its first two years under the control of Ford and his team. Using the capital supplied by BancBoston, which owned a 14 percent stake in Caffè Nero Group, Ford began building a chain of shops, but he was careful to avoid giving his customers the sense of being in a chain. Each company shop operated under the Caffè Nero name and offered the same coffee and same limited food menu, but the stores were designed individually, with each shop endeavoring to incorporate the style of its particular neighborhood. Caffè Neros located in commercial sections of the city were outfitted with stools and tiled floors to reflect customers' preference for a short stay. Company coffee shops in residential areas featured furnishings that were more conducive for a longer stay, with sofas and armchairs replacing stools. Although Ford and his team acknowledged the need to create a single, branded identity, they also eschewed absolute uniformity of the chain's units.

2001 Initial Public Offering Fuels Expansion

By the end of the 1990s, the retail coffee market in London was expanding rapidly. Caffè Nero responded by accelerating its rate of expansion, as the company attempted to keep pace with a handful of other coffee retailers who were saturating London with new espresso shops. By May 1999, the end of Caffè Nero's financial year, there were 13 shops in operation. By this point, Ford was ready to enter markets outside of London for the first time. A Caffè Nero opened in Manchester in October 1999—the company's first step toward expansion throughout the United Kingdom. By mid-2000, the chain had expanded to 30 shops, representing a fraction of what Ford envisioned for the company. He intended to establish 250 stores by 2004, a goal whose fulfillment would require a substantial flow of capital. To help improve its ability to expand, the company completed an initial public offering (IPO) of stock in March 2001, when it had 53 sites in operation, raising £9 million from its debut on the London Stock Exchange.

Caffè Nero's IPO reflected the ambitious expectations of Ford and his executives. The company was planning a major assault on London's specialty coffee retailing market, with longer-range plans calling for similarly aggressive expansion throughout the United Kingdom and across the English Channel. At the time of the IPO, Ford proposed opening 45 shops by the end of 2001. Future expansion also called for a foray into mainland Europe within 12 months of the IPO's completion. Caffè Nero was not alone in articulating bold expansion plans. The company ranked as the fourth largest operator in the U.K. coffee market, trailing Starbucks, Costa Coffee, and Coffee Republic. Together, the four companies represented the industry elite, with each in a race to capture greater market share than its rivals.

With the capital realized from the IPO, Caffè Nero began expanding with fervor. By May 2001, the company had 75 stores in operation, having opened nearly two dozen new shops in the two months following its IPO. In 2002, Caffè Nero's expansion strategy took on a new dimension, as the company completed its first move on the acquisition front. In March 2002, Caffè Nero acquired Aroma Limited, a chain of coffee shops owned by McDonald's Corporation, "cherry picking 29 of the best sites from Aroma's list of stores," according to Ford in the company's 2002 annual report. Caffè Nero paid £2.3 million for the Aroma shops, giving it a total of 108 shops, or enough to make it the largest independent coffee bar operator in the United Kingdom and the third largest of all types of operators in the United Kingdom. Geographically, the company's presence stretched from Brighton, England, to Glasgow, Scotland.

As Caffè Nero entered its fifth year under Ford's management, the company began to display noticeable financial strength. Although the company had yet to reach a point where its own profits could support its expansion, the growth in revenues was impressive. By the end of its financial year in May 2002, a 70 percent increase in sales was recorded, as Caffè Nero's annual revenue volume swelled from £15.6 million in 2001 to £26.6 million—a figure that largely excluded the influence of the Aroma acquisition. By this point, Caffè Nero and its three rivals controlled approximately 63 percent of the U.K. market. Costa Coffee led the pack with 300 shops, followed closely by Starbucks, which owned 294 sites. Caffè Nero trailed with 108 shops, having passed Coffee Republic and its 85 locations with the acquisition of Aroma. In terms of consumers' preference, however, Caffè Nero outstripped all of its competitors, having been selected as the best coffee house in the United Kingdom in 2002 by coffee research firm Allegra Strategies—the second consecutive year Caffè Nero received the accolade. Ford, encouraged by the success of the company, revealed plans for further expansion in an April 18, 2002 interview with Leisure & Hospitality Business. "We will look to Europe once we reach around 140 sites and we're self-financing," he said. "That should be in about half a year."

Company Perspectives:

The Caffè Nero Philosophy is really very simple. Coffee, Atmosphere, Food and Service are the key elements of our business and we put time and energy in to striving for excellence in these four areas. We want all of our customers to enjoy a great cup of coffee and a good Italian snack in an authentic European coffee house atmosphere delivered in a friendly matter.

Ford's advance into mainland Europe did not occur according to his plans, but the company achieved notable progress, nonetheless. The company's pace of expansion was slower than originally planned because of strategic alternatives it was exploring. In August 2002, after securing another £7 million to finance its expansion, the company increased its investment in rival Coffee Republic, whose efforts to compete in the race with Starbucks, Costa Coffee, and Caffè Nero, had begun to result in a number of money-losing shops. Ford increased his company's stake in Coffee Republic from 4 percent to 10 percent in a single transaction in August 2002, sparking speculation that Caffè Nero was attempting a takeover of its competitor. In late 2002, the company decided not to pursue its acquisition of Coffee Republic in the short-term, which allowed it to resume its normal pace of expansion, but the decision did not remove the possibility of a merger between Caffè Nero and Coffee Republic at a later date.

Expansion in the 21st Century

During its 2003 financial year, Caffè Nero applied itself to its ongoing expansion campaign. The company opened 18 new stores and sold five undesirable units acquired in the Aroma transaction, giving it a total of 121 shops by May 2003. The growth achieved during the year typified the company's approach to expansion, reflecting a strategy it intended to embrace as it mapped its future course. The strategy involved expanding either by grouping its stores in clusters in metropolitan markets or by targeting smaller regional towns. In 2003, for instance, the company opened four Caffè Neros in Manchester, giving it a total of nine in the city. Other cities, such as Birmingham, with seven stores, and Leeds, with four stores, were beginning to become the object of Caffè Nero's cluster strategy, but the company was moving into much smaller markets as well. By mid-2003, residents in smaller markets such as Worthing, Maidstone, Durham, and Rickmansworth had become patrons of Caffè Nero.

As Caffè Nero plotted its future expansion, there were encouraging signs that success lay ahead. The retail coffee sector in the United Kingdom continued to show capacity for further growth by all participants in the industry segment. Further, according to Caffè Nero's own estimations, the retail property market offered a wealth of opportunities for those looking to establish additional stores. The company was also strongly positioned financially to continue its march throughout the United Kingdom. Caffè Nero hoped to generate enough profits to finance its expansion by the end of 2004, and thereby eliminate the need for external financing. Once the company achieved financial self-sufficiency, it intended to open between 35 and 40 new Caffè Nero units each year.

Key Dates:

1990:: The first Caffè Nero opens in London.
1997:: Paladin Associates Ltd., led by Gerry Ford, acquires five Caffè Nero shops in London.
1999:: A Caffè Nero opens in Manchester, the first unit outside London.
2001:: Caffè Nero debuts on the London Stock Exchange.
2002:: Caffè Nero acquires Aroma Ltd.