Insomnia chief losing no sleep over arrival of global goliaths

Insomnia chief executive Bobby Kerr starts every morning with a large Americano loaded with an extra shot of espresso, followed by five more espressos throughout his working day - a far cry from the Maxwell House instant coffee he first tasted as a child.

However, the only jolt he is experiencing now is the fresh competition that global coffee titans Starbucks and Costa Coffee are bringing to the exploding Irish coffee market. The 46-year-old is determined, though, that Insomnia, Ireland's largest independently owned coffee chain, will stay ahead of the game despite the arrival of two of the world's largest coffee companies to his home turf.

Starbucks and British chain Costa entered the Irish market last year, joining domestic incumbents Insomnia, O'Brien's, Cafe Sol, West Coast Coffee and Cafe Society in their bid to capitalise on the increasingly cosmopolitan tastes of the Irish coffee drinker.

While our tea-drinking days are not numbered - Ireland has one of the highest per-capita consumption levels of tea in the world - coffee is seen as trendier by young professionals with high disposable incomes, according to market research firm Euromonitor. Indeed, the amount of coffee consumed in Ireland surged 27 per cent in 2005, compared with a 9 per cent drop in tea consumption.

Insomnia is twice the size of Cafe Sol, and larger than O'Brien's Sandwich Bars, which operates through a franchise, according to Kerr. The chain opened its 25th outlet, in Malahide, earlier this month and plans to add a further five cafes this year and 10 more in 2007.

It also has concessions in 41 Spar stores and three Texaco outlets.

The company aims to defend and build its market share by adding new products, such as breakfast foods and quiche, as well as by revamping outlets, increasing their size and opening more coffee houses in Ireland and abroad. It is also considering buying out a domestic rival.

"We've got to the point where we're opening one outlet a month but it took us 10 years to get this far," Kerr says in an interview.

"I would say there are between 200 to 300 more opportunities in the Irish market.We might even see some indigenous chains acquiring each other - we are looking all the time," says Kerr, a former managing director of Bewley's. "We are serious about growth, so the bigger the better. After all, it takes a long time to grow site by site."

Starting in Britain, Insomnia intends to expand abroad in three to four years as it reaches full capacity in its home market.

Cafe Sol is scheduled to open its first UK outlet next month and plans to start a franchising business in Ireland later this year.

"UK companies are coming to our market so there's nothing to stop us going over there," Kerr says. "However, we own and operate everything, so we would be cautious about the franchising model as we want full control of the business until we reach a particular level."

To aid Insomnia's expansion, the company is moving soon to a new production facility in Rathmines from a current location on St Stephen's Green. It is spending at least €500,000 on buying and refurbishing the Rathmines bakery, which includes a retail outlet that will begin trading under the Insomnia brand in two weeks. The chain will also revamp and extend its older cafes in Blackrock and Ballsbridge.

"We are reinvesting everything we make into the business," Kerr says. "The cost of rent and fit-outs are the biggest challenges. The average site costs €200,000 to refit, excluding the purchase price."

While Insomnia owns coffee houses in Galway, Cork and Drogheda, most of its outlets are in Dublin, where the chain has a "significant" market share. It plans to expand to every major city, including Kerr's home town of Kilkenny.

The expansion will likely start around the capital, in towns such as Bray, Naas and Kildare, Kerr says.

Kerr says the entry of Starbucks and Costa to the local coffee market has had "no affect so far" on his business.

Sales at Insomnia outlets open at least a year climbed 3 per cent between January and August, "which is positive in a competitive market", he says.

The executive expects Insomnia to post operating profit of €1.3 million this year on revenue of €11 million.

When Starbucks enters new markets, it opens new stores at a staggering rate, typically choking competition from independent operators.

The Seattle-based company's first outlet in Ireland was on Dublin's College Green and the chain is expanding to other sites. Kerr, however, is not threatened by Starbucks' voracity for rapid expansion.

"When companies like these come to a new market, it's about sites, which have to be big and high profile," Kerr says. "We had a head start on them because we have the premium sites on Grafton Street, the IFSC, Ballsbridge, Baggot Street, among others. Also, the entry costs are quite high." Insomnia aspires to differentiate itself from new and existing rivals through its marketing and by appealing to ethically-minded consumers.

The anti-globalisation sentiment surrounding Starbucks, meanwhile, may present a problem to the American company in the Irish market, Kerr believes. Starbucks is often seen as an icon of US cultural and economic imperialism, and received special attention from rioters when the World Trade Organization met in Seattle in 1999.

Last week, Insomnia announced that it became the first Irish coffee company to serve just Fairtrade coffee, marking the biggest Fairtrade deal in Ireland.

Purchasing Fairtrade coffee, mostly from Ethiopia, will add up to 8 per cent to Insomnia's costs, though the company said it won't pass the extra expense onto the consumer. Kerr expects the move will boost customer loyalty and, as a result, generate more sales.