Coffee bars brawl on High Streets

IT IS cappuccinos at dawn between the coffee bar operators on your High Street. Caffe Nero raised its stake in rival Coffee Republic to 10.7%, adding espresso shots to hopes that the industry, after five years of Frasier-and-Friends-fuelled expansion, will finally get what it really needs - consolidation.

There are 17 branded coffee bar chains in Britain, said industry research group Allegra. Nearly all are losing money, despite charging up to £3 for a cup.

Coffee Republic losses trebled last year to £7.5m, Caffe Nero's doubled to £2.8m. Even the mighty Starbucks is losing money here. Whitbread claims its Costa operation - marginally Britain's biggest chain - is profitable but will not disclose figures.

'The only operator which is definitely making money is AMT,' said Allegra. Privately-held AMT operates 37 kiosks, mainly in railway stations.

For the rest, pricey High Street rents and central office overheads wipe out the margins. Last year Nero had £15.6m sales through 61 bars. But operating costs, including rents, wages and raw materials, were £13.2m. The £2.4m surplus, was swamped by £4.5m administrative costs.

Meanwhile industry sales growth is slowing sharply, due to the economic squeeze and brutal competition. The bars are pushing higher-margin food to offset the decline. But branded outlets expanded 50% a year in the late 1990s. They still account for just one quarter of Britain's 7,000 coffee shops. But every High Street now seems to feature a Starbucks, a Coffee Republic, a Costa and a Nero, sometimes all in a line. No wonder they are struggling. A shake-up is under way. McDonald's sold Aroma to Nero earlier this year. Republic bought Goodbean.

Industry analyst David Stoddart at Teather & Greenwood has predicted just two chains will ultimately survive. Starbucks, with £5bn market value and £2.2bn global sales, will surely be one. Costa must be favoured for the second, unless owner Whitbread repeats its Cafe Rouge wrecking performance.

But Nero is not giving in without a fight. Consumers rate it highest, said Allegra. Same-store sales rose 2.5% during the tough first half, while Republic's fell 6.8%. Nero shares, floated at 52p last year, are just 26p. That values each bar at £165,000, or one tenth of a Starbucks.