Coffee shop competition heats up

The proliferation of coffee shops all over Dublin city centre may suggest that it's the business to be in - but cafe owners say that escalating overheads and increasingly aggressive competition mean that it is now more than ever the survival of the fittest.

"People think we make a big mark-up on coffee," says Brian Goff, a director of Insomnia Coffee Company, off Aungier Street, Dublin 2, "but, with labour costs and other overheads, it is a lot less than people imagine".

Go into any city centre coffee house and order a basic "no frills" cup of coffee and you won't get much change, if any, from £1. If you want a cappuccino, espresso or a flavoured gourmet coffee, you can expect to pay from £1.20 to £2.50.

"The mark-up on each cup of coffee is very difficult to assess," says Mr Goff, "but I reckon if we make 10p in the £1 profit on each cup, we are doing very well."

Mr Goff says Insomnia Coffee Company manages to keep overhead costs down because they are in what is called, "a high pedestrian secondary location. You have to look at location very carefully; somewhere like Grafton Street, where the rents are very high is much more difficult to sustain".

The average cost of a new letting in a prime location on the southside of the city centre is about £30 to £35 per sq ft per annum, compared with £20 a sq ft on the northside. A site in a shopping centre can be as high as £85 per sq ft. Prospective tenants can also expect to pay key money to the landlord, which in a premium spot can be up to four times the rent.

Gerard O'Toole of Sherry FitzGerald's retail property division believes that the coffee shop business in Ireland is set to become more aggressively competitive.

"I can only see it going one way. It will become like the UK has in the last three to four years, where the big companies like Coffee Republic are coming in and trading very aggressively, side by side and across the road from other cafes."

Sobering news for existing coffee shops in town who are already struggling to keep afloat. Pat Delaney, director of the Small Firms Association, says they can lose out when customers come in and buy just one cup of coffee.

"Very often the coffee is at a reduced price, it is the chocolate cake or the sandwich you buy that's important. If you just buy a coffee and leave they have lost out. Each shop has a set number of people it can accommodate and an average spend per person; it has to be about £4 per person for a coffee shop to be on survival level." History has proven that market entry is easy, he says, but survival is very difficult.

"The demands are very severe. The coffee shops are the end of the chain where people go to sit down for 15 to 20 minutes. They have to provide a pleasant environment, have good staff and a good product and they have to be price competitive."

Supply costs have soared in recent times. Linda Madigan, owner of Cafe Ole in Liffey Street, says the price of coffee continues to escalate.

"When I started off five-and-a-half years ago, I made a 60 per cent mark-up on coffee but now it is far far less; there have been three increases in coffee prices in the last 18 months."

The art of making a good cup of coffee can be time consuming. "In the time it takes to make a mocha or a cappuccino properly, you can make a sandwich," says Ms Madigan. "People have become quite discerning, so you won't get away with serving a bad cappuccino."