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Costa Coffee shutters SG ops: Why high rental alone should not be blamed

Costa Coffee has revealed that it will be closing all of its eight stores in Singapore by the end of September. The last two remaining stores located in Holland Village and VivoCity will shut operations in the coming weeks. A spokesperson from Costa has confirmed the coffee chain is pulling out of Singapore operations, but said the move would not affect its operations in other Southeast Asia markets as it has plans to grow the brand in other regions.

“Our key focus is growing our franchise business and we look forward to growing our presence and bringing irresistible and handcrafted coffee to the SEA Region,” the spokesperson said.

In a TODAY article, Costa’s employees who were informed of the news earlier this year said that high rents were part of the reasons for the closure. However, Costa Coffee did not wish to comment on Marketing’s queries on the reasons for its closure.

The complaint of high rental costs is a common occurrence amongst retailers in Singapore. However,  speaking to  Marketing, Andrew Crombie, managing director of Crombie Design added that as consumers get more sophisticated, they tend to move to a tailored and bespoke experiences from coffee places. Moreover, there is a growing trend among younger segments to seek for authentic experiences.

Crombie explained that diving into the product source, the production techniques and the nuances of consumption are somethings that artisans can deliver “credibly” but coffee chains might struggle with. As such, the evolution of coffee culture might be causing the shift in the market, compared to the rents.

Rent is no doubt a factor, but it seems to be an easy excuse.

Simon Bell, managing director, Fitch Design similarly added that there is “revolution” among consumer categories against bigger corporate brands. This is evident in other beverage brands as well as fast-food outlets. Although demand has not always necessarily decreased, consumers have switched to “relevant and cooler” offers for their coffee purchases. Many retail brands, noting this trend, are also adopting to the shift in the pace of the consumer by continuously adapting. He added:

Despite the closure, Costa Coffee will be back with a fresher, better and hopefully a more interesting offer.

Graham Hitchmough, chief operating officer at Bonsey Design echoed that the rise of rents and indie coffee houses pose as a challenge for most coffee chains, not only for Costa Coffee. However, this does not bring the international café chains to end as multi-national brands do continue progressing. Hitchmough added that independent cafés thrive on cheaper locations, artisanal quality with ethical sourcing as well as a loyal clientele. But, multi-national coffee brands are more towards a  “zero-sum” game. This means that with the operational costs and need for scale, only a few major chains will be able to dominate, with market exits and consolidation inevitable.

As such Hitchmough believes Costa Coffee was unable to achieve “requisite” scale in Singapore, as it did not manage to establish a differentiated brand presence compared to the existing international franchises and local players. He added that the success of Starbucks and other major coffee brands in Singapore are based on “marrying the consistency and convenience of a multi-market player with local adaptation, product innovation, some artisanal elements and a level of corporate social responsibility”.

“They have been smart in trying to assimilate some of the more popular aspects of the independent purveyors and are now reasonably happy to coexist with them,” he added. While rental prices and competition are key factors in Costa Coffee packing up its Singapore stores, Hitchmough said that it’s not hard not to see Costa Coffee’s withdrawal from Singapore in context with its recent acquisition by The Coca Cola Company.

“As barriers to entry for new international chains are now higher than ever,  it will be interesting to see how Costa approaches the Singapore market in the future with the full might of The Coca Cola Company behind it,” he added.

Read also:
Coca-Cola to boost coffee segment with US$5.1bn Costa Coffee acquisition

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