Born in 1971, Costa Coffee has now become Britain’s most loved brand. The British coffeehouse chain is headquartered in Dunstable, England. To know more about Costa Coffee, click here.
Costa Coffee’s unstoppable rise makes it an interesting case to learn how businesses can attain success while operating in a complex and challenging environment.
This article presents the Costa Coffee PESTLE analysis, and highlights key external environmental forces that influence the business success.
1. PESTLE Analysis of Costa Coffee
We first discuss each environmental force, analyze its impact on Costa Coffee, and then evaluate whether that particular force is a threat (T), an opportunity (O), or both (O and T) for the company.
1.1. Political Factors
1.1.1. Taxation policies (T and O)
The UK government imposes high corporate tax. The corporate tax has raised from 19% to 25% in 2023. It could affect the financial performance of coffee brands. However, Costa Coffee takes it as an opportunity to build a responsible brand image.
Last year, Starbucks- a close rival of Costa Coffee was criticized for deceiving and avoiding the tax in UK. As the news broke, the anger against Starbucks compelled the customers to prefer Costa Coffee.
See the difference in customers’ preferences after and before tax row:
Source: The Guardian
It benefited the Costa, as it marked £1 billion sales, and its pre-tax profit rose by 11.4%.
1.1.2. Political uncertainty (T)
Global political uncertainty is growing. It negatively affects the Coffee industry revenue. For instance, the Brexit decision directly affected the UK coffee industry by creating staff shortage and raising production costs. The Brexit fallout has compelled Costa Coffee to raise its prices twice a year.
1.1.3. New trade tariffs (T and O)
In post-Brexit world, the new trade tariffs and restrictions are affecting the UK coffee industry. The new tariffs require additional paper work, which increases the administrative costs for businesses.
However, successful EU-UK co-operative trade agreement benefits the coffee industry, as much feared 9% import duty on instant coffee, and 7.5% on roasted coffee is not imposed. This co-operation agreement makes the business environment somehow conducive for Costa Coffee and other players.
1.1.4. Political lobbying (O)
Costa Coffee invests on the political lobbying to enhance its political influence on the government, and serve its business interests. Political lobbying helps Costa Coffee in gaining the political support for its proposals from relevant councilors.
1.2. Economic Factors
1.2.1. Rising inflation (T)
The prevailing economic uncertainty is hitting the coffee industry hard. The rising prices are compelling the industry players like Costa Coffee to increase their prices.
Following graph shows the inflation rise in UK from 2013 to 2021:
Source: BBC
In 2022, Costa Coffee increased its prices twice (from £2.95 to £3.30) in response to unprecedented inflation pressure- Daily Mail reports.
1.2.2. Minimum wage increase (T)
UK economy has entered in post-pandemic recovery phase. In an effort to support the economic rebound, UK government has raised the minimum wage. Reuters reports that Costa Coffee will increase pay of 16,000 workers from 10 pounds/hour to around 10.70 pounds/hour to meet the revised minimum wage legislation. It can affect the company’s profitability.
1.2.3. Emerging economies (O)
Middle East and Africa are emerging markets with high growth potential. The coffee industry in these regions will account for $22,744.79 million by 2027:
Source: Data Bridge
Costa Coffee may penetrate deeper into Middle Eastern and African region to drive its revenue.
1.2.4. Skilled labor shortage (T)
World Coffee Portal reports that around 40% of the hospitality firms in UK are facing skilled labor shortage in post pandemic and post-Brexit world.
In response to this challenge, Costa Coffee has raised staff pay thrice in a year. But it is affecting the brand’s revenue and profitability- as reported by BBC.
1.2.5. Consumer purchasing power (O)
Despite the rising inflation, a continuous rise in the Britons’ purchasing power could be noticed in this graph:
Source: Financial Times
Rising purchasing power may encourage the customers to spend more, providing an exciting growth opportunity to Costa Coffee.
1.3. Social Factors
1.3.1. Changing lifestyle in developing world (O)
A world-bank report shared that more people in the developing countries are eating out. Costa Coffee can take it as an opportunity, and penetrate deeper into these markets to accelerate the growth.
1.3.2. Growing health consciousness (T and O)
A survey by PwC shared that around 47% of the consumers (aged 18 to 34 years) made their diet healthier in last year, compared to 35% consumers aged 35 to 54 years, and 23% consumers aged 55 above:
Source: PwC
The above research was conducted globally. Following graph presents the findings of a 2020 survey conducted on UK consumers:
Source: Statista
The survey shows the health consciousness trend is getting famous among all age groups in UK. Although, it threatens Costa as its coffee has high sugar content. But, Costa may convert this threat into an opportunity by adding healthy product range in its menu.
1.3.3. Plant based diet (O)
There is constant rise in the demand for plant-based products in UK. A 2020 survey showed that plant based organic food sales were worth $305 million, and this market will grow to $548 million by 2026.
Costa Coffee could consider it an opportunity and add plant based diet in its menu to enter in expanding vegan market.
1.3.4. Growing middle class (T and O)
The proportion of lower middle class will grow more speedily than upper middle class segment across the globe.
Following table shows that in 2020, the upper middle class consumer group was 0.6 billion, which will grow to 1 billion by 2030. While, lower middle consumer group will grow from 2.9 billion (2020) to 3.8 billion (2030):
Source: Wallach et al. (2022)
As Costa charges higher prices and targets upper middle class segment, the growing lower middle class can impose a threat. Costa can turn it into an opportunity by adding more affordable items in its menu.
1.3.5. Growing coffee culture (O)
A report by BBC shared that every day, more than two billion cups of coffee are drunk. The coffee drinking culture is particularly common in countries with high proportion of working class (like China). Soon, it will become world’s most favorite drink.
1.4. Technological Factors
1.4.1. Service robots (O)
Global service robot market is expected to grow from $13.1 billion (2017) to $54.44 billion (2026), as depicted in following graph:
Source: Robotics Tomorrow
Costa is already partnering with Starship to launch delivery robots. Considering the changing service delivery trends and preferences, Costa may continue investing on service robots that could revolve the labor shortage and efficiency related issues besides enhancing customer experience.
1.4.2. Technology transfer (O)
Currently, UK government policies favor the technology transfer process in coffee production and sale. Costa may take it as an opportunity, and partner with farmers that use latest technologies to maximize supply chain efficiency.
1.4.3. Specialty coffee machines (T)
Demand for specialized coffee machines for home use is continuously rising, imposing a threat to the sales of coffee brands including Costa.
1.4.4. Emerging technologies (O)
Proactive companies like Costa are investing heavily on the emerging digital technologies to deliver the superior customer experience.
For instance, Costa invested on HR Tech (Ceridian’s Day force Workforce Management Technology), and saved Costa £625,000.
In 2018, Costa become first mover in introducing contactless cup. Costa partnered with Barclay to integrate contactless technology in their reusable cups so that customers may pay by waving their cups.
Costa may consider investing on technologies like RSI reducing gizmos, back to black, foam on demand technology, and snap chilling technology to improve coffee production and taste.
1.5. Legal Factors
1.5.1. Regulations protecting employees’ rights (T)
The regulations protecting employees’ rights are getting strict. Rising health and safety standards require strict compliance. However, Costa Coffee faces criticism for stressing out its employees. The work conditions at Costa Coffee are poor, and employees ae compelled to work more than 48 hours per week.
This non-compliance increases the risk of lawsuits that could damage the Costa’s reputation as a responsible and caring employer.
1.5.2. GMO regulations (O)
Currently, there is an on-going debate on whether to ban the GMOs as they impose threat to the animal and human health. As Costa Coffee products are GMO free, they can advertise it as a unique selling point to improve their brand image.
1.5.3. Anti-discrimination laws (T)
Stringent anti-discrimination regulations compel the businesses to foster an inclusive work environment. However, Costa coffee is currently facing discrimination lawsuit for failing to provide single-sex bathroom option for women (read full story here). It can hurt the Costa Coffee brand image.
1.6. Environmental Factors
1.6.1. Growing sustainability pressure (T and O)
The environment protection regulations are raising pressure on businesses to integrate sustainability in their business operations.
In response, Costa has partnered with Rainforest Alliance limited to invest back to community. It has also installed recycling points in all 2700+ stores all over the country.
Instead of taking it as threat, such measures enable the Costa to take this pressure as an opportunity to develop responsible brand image.
1.6.2. Raising emission standards (T and O)
Raising emission standards are making business environment increasingly challenging for companies. But Costa coffee is proactively responding to this threat. Its 2030 target is to reduce the emissions per cup by 50%.
1.6.3. Responsible sourcing policies (T)
The stakeholder pressure to adopt the responsible sourcing policies is mounting. However, Costa is unable to implement the responsible sourcing policies. Recently, Costa drew criticism as systemic animal abuse was found to be linked with Costa’s dairy farms.
2. Summary- PESTLE Analysis of Costa Coffee
| Political • Taxation policies (O) • Political unrest (T) • New trade tariffs (T & O) • Political lobbying (O) | Economic •Rising inflation (T) • Minimum wage increase (T) • Emerging economies (O) • Skilled labor shortage (T) • Rising purchasing power (O) | Social • Changing lifestyle (O) • Health consciousness (T & O) • Plant based diet (O) • Growing middle class (T & O) • Growing coffee culture (O) |
| Technological • Service robots (O) • Technology transfer (O) • Specialty coffee machines (T) • Emerging technologies (O) | Legal • Employees’ rights regulations (T) • GMO regulations (O) • Anti-discrimination law (T) | Environmental • Sustainability pressure (T and O) • Emission standards (T and O) • Responsible sourcing (T) |
3. Recommendations
Costa Coffee should:
• Enter in African and Middle Eastern regions to expand the market reach.
• Add healthy items into the menu to attract health conscious customers.
• Add plant based products into the menu to attract vegans.
• Diversify the menu to target both- upper middle and price sensitive middle class.
• Invest more on service robots and other emerging technologies to enhance customer experience and process efficiency.
• Adopt responsible sourcing policies to avoid any harm to brand reputation.
4. Conclusion
Costa Coffee PESTEL analysis suggests that the company is operating in a challenging business environment. However, Costa is proactively responding to the external threats, and is leveraging the available opportunities to compete in the market.
5. References
Bowers, S. (2013, May 1). Costa breaks through £1bn sales mark as tax anger leaves Starbucks suffering. The Guardian.
Brexit’s impact on the UK coffee industry | CBI. (n.d.).
Redirect Notice. (n.d.-e).
Boyle, D., & MailOnline, B. D. B. F. (2022, June 3). Cost of living Crisis: Outrage as Costa Coffee increases prices by an average of 14p. Mail Online.
Reuters. (2023, March 6). Costa Coffee raises UK staff pay for third time in a year.
Middle East and Africa Espresso Coffee Market Analysis & Size to 2027. (n.d.). Data Bridge Market Research, https://www.databridgemarketresearch.com, All Right Reserved 2023.
Nearly 40% of UK hospitality businesses facing skilled worker shortage. (2022, September 7). World Coffee Portal.
A., & A. (2023a, March 20). Marriott SWOT Analysis 2023 – Strategy Behind Success. Strategy Finders.
Masud, B. F. (2023, March 6). Costa Coffee follows Pret a Manger with third staff pay rise in a year. BBC News.
Romei, V. (2021, November 22). UK consumer spending continues to rise despite surging inflation. Financial Times.
Vakis, R., Genoni, M. E., & Farfan, G. (2023, April 3). More people in the developing world are eating out. Measuring this well could change our understanding of poverty and inequality. World Bank Blogs.
Healthy eating is increasingly on consumer’s agendas, with millennials leading the way – Press room. (n.d.).
Statista. (2022a, February 28). Tendency of adults to seek out healthy food in the UK, in 2020 by age group.
A., & A. (2023a, March 6). Tim Hortons SWOT Analysis – Deeper Insights. Strategy Finders.
Statista. (2022a, February 8). Plant-based food market size in the UK 2019-2026, by category.
A., & A. (2023b, March 7). Beyond Meat SWOT Analysis 2023. Strategy Finders.
Wallach, O. (2022b, April 28). The World’s Growing Middle Class (2020–2030). Elements by Visual Capitalist.
Wallach, O. (2022c, April 28). The World’s Growing Middle Class (2020–2030). Elements by Visual Capitalist.
How the world came to run on coffee. (n.d.).
More Industrial Automation, Robots and Unmanned Vehicles Resources. (n.d.).
A., & A. (2023a, January 13). Walmart SWOT Analysis 2022 | In-depth SWOT Study of Walmart. Strategy Finders.
Nawrat, A. (2022, September 8). The HR tech that saved Costa £625k. UNLEASH.
A., & A. (2023d, March 7). Beyond Meat SWOT Analysis 2023. Strategy Finders.
North, J. (2022, February 6). Edinburgh Costa Coffee accused of “discrimination” for not providing female loo. Scottishdailyexpress.
Climate — Sustainability | Costa Coffee. (n.d.).
Stone, R. (2023, January 9). Cruelty found at dairy farm with links to Costa Coffee. Viva! The Vegan Charity.
