Business Elements to Consider, When Opening a Coffee Shop In Heathrow Airport
1.0: Introduction
Coffee shop trends in the UK have tremendously increased since year 2000 with the increasing perception of the coffee shops as a source of leisure by the customers. Isla Gower (2004)[1] argues that the coffee shops have tremendously increased in the UK since 2003 which is mainly because of the increased demand by the customers as well as the innovative selling methods of the stores through the deployment of cross selling and co-branding strategies. In this report, a critical analysis on setting-up a coffee shop in UK’s busiest airport: Heathrow is presented to the reader. The report commences with the strategic analysis of the market including the SWOT analysis, competitor analysis and the market potential followed by the financial analysis for the feasibility of the establishment of a coffee shop at Heathrow airport. The report further analyses the viability of setting-up the coffee shop at the airport duty free section or at the check-in lobby based upon the costs and sales factors associated
2.0: Strategic Analysis
This section commences with the SWOT analysis for the coffee shop in the Heathrow airport followed by the analysis of the competitive rivalry in the target market. Alongside, the target customers and the feasibility study are also presented to the reader prior to conducting the financial analysis in section 3.
2.1: SWOT Analysis
Strengths:
- Demand: The demand for coffee shops and quality products at competitive prices is enormous in the Heathrow airport as identified by Michael Peacock (2005)[2]. This is mainly because of the increasing number of passengers to the airport, which has not only increased the customer base but also accelerated the construction of Terminal 5 at the Heathrow airport.
- Customer base: The customer base which is the main element whilst determining the target market as argued by Gerry Johnson and Kevan Scholes (2003)[3] is enormous in the Heathrow airport terminals. This is not only from the side of the passengers who arrive or depart from the airport but also because of the increase in the visitors who accompany the passengers as argued by David Jinks (2004)[4]
- Location: The location factor as argued by Laurence Mathew (2005)[5] is a critical element for strategic positioning of an organization in the target market. The fact that the Heathrow airport is of international importance and a shop located there can attract customers from both the national and international market makes the location factor as a key strength for setting-up a coffee shop in the airport.
Weaknesses:
- Volatile customer base: The major weakness is the volatile nature of the customer base in the airport. The fact that even though the customer potential in the Heathrow airport is vast, but ever changing due to the nature of the business in the airport makes the customer potential as a critical weakness as much as it is argued as a strength. Since this is an apparent factor for any shop in the airport, the weakness is oblivious in nature.
- Seasonal business: Another important factor that needs to be considered is that the airport caters high level of customers during the periods of holiday making whilst supports only the business travellers at other times. This makes it clear that the business for the coffee shop is seasonal in nature.
Opportunities:
- Differentiation by Pricing: the demand for quality products at competitive pricing is an increasing demand at the Heathrow airport especially from the customers visiting from the far east of the world as argued by Laurence Mathew (2005). This demand can1 be harnessed by the coffee shop through providing value-added services and quality products at competitive prices. The financial analysis in the next section will provide a deeper insight on the pricing of the products.
- Diverse Target market: The diversity in the market which is merely due to the diversity in the passengers to the airport provides an effective method of attracting a niche market or more than one segment of the market with customised products whilst providing a base line of product range to meet the overall demand of the customers.
- Promotion through embracing culture: The fact that the airport caters visitors from difference culture makes it clear that the coffee shop can attract customers through embracing its promotions reflecting upon specific culture. This even though might appear niche marketing, is actually a successful method of reaching the wider market where the visitors would appreciate the innovation in the promotion as argued by Laurence Mathew (2005).
Threats:
- Terrorism: The major threat is the element of disaster that can be caused by terrorist attacks. The fact that the Heathrow airport is a pivotal location for terrorist attack is the major threat faced by any shop in the Heathrow airport.
- New entrants and costs: The threat of new entrants in the market is a critical element. This is also an increasingly concerning factor with the rapid deployment of the construction project for Terminal 5 at the Heathrow airport which not only increases the opportunities from development but also the threat of new entrants and stiff competition in the target market.
From the analysis above it is clear that even though there are potential threats and certain weaknesses in starting a coffee shop at the airport, the strengths and opportunities are out performing the weaknesses and threats thus justifying the investment for a new coffee shop in the Heathrow airport.
2.2: Competitive Rivalry
The competition for the new coffee shop at the Heathrow airport is mainly from the Starbucks and Costa coffee chains situated across the airport terminals. This makes it clear that starting a coffee shop at Heathrow airport should be at all terminals in the same time in order to effectively compete with the existing competitors. The innovative product range and the quality of service offered by the Starbucks chain which operates across the UK has increased its position in the target market as a brand which is a strong competitor to a new coffee shop in the Heathrow airport.
The competitive rivalry can be effectively overcome through the deployment of cross-selling, pricing and co-branding strategies as argued by Graham Francis and Ian Humphreys (2005)[6]. This approach to the sales will not only increase the stability of the coffee shop in the Heathrow airport but also leverage competitive advantage in the target market identified.
2.3: Target Customers and Feasibility Study
Since the target customer base in the Heathrow is highly volatile in nature, the coffee shop is aiming to target the customers in the economy segment of the target market who are not only immense in number but also steadily increasing with the competitive pricing strategies of the airline operators.
The feasibility for the sales in the coffee shop is mainly accomplished through the analysis of the number of customers visiting the coffee shops in the Heathrow airport. The study was carried out as a two-day activity targeting the coffee shops in the check-in lobby of terminal 3 of Heathrow airport. The results are tabulated below
Table 1: Classification of customers and coffee sales
| Customer classification | Number of customers |
| Customers buying coffee alone (only once) | 500 |
| Customers buying coffee with food (sandwich or hot food) | 625 |
| Customers buying coffee more than once or for a family | 300 |
The above three segments of the customers clearly justify that the average spending by an individual at a coffee shop in about £ 4.07. The calculation for this value is presented in Section 3.1 where the financial analysis is presented to the reader. This makes it clear that the coffee shop has a strong customer potential when deployed across the four terminals in the Heathrow airport.
3.0: Financial Analysis
3.1: Average Spending
From the information presented in table 1 and the retail average price for coffee and sandwich at Heathrow airport the average spending is calculated below
Average cost of Coffee = £ 2.65 (medium size Americano comparing Costa Coffee, Starbucks and other individual shops)
Average cost of food = £3.25 (hot or cold)
Table 2 provides the results for the sales using the aforementioned values
Table 2: Average spending per individual calculation
| Customer classification | Sales (£) |
| Customers buying coffee alone (only once) | 500 x £2.65 = £1325 |
| Customers buying coffee with food (sandwich or hot food) | 625 x £(2.65+3.25)= £3687.5 |
| Customers buying coffee more than once or for a family | 300 x £2.65 = £795 |
Total Spending = £1325 + £ 3687.5 + £ 795 = £5807.5
Average Spending by per customer = £ 5807.5 / (500 + 625 + 300) = £4.07
3.2: Cost Analysis
The costs associated with the setting up of the coffee shop at the Heathrow airport is mainly the rent for the shop floor space. The high rent rates per square foot of commercial space at the Heathrow airport is the critical element that needs analysis before conducting cash flow.
Since the coffee shop is aimed to be a take away with the ability to cater a small location to allow customers to enjoy their food makes the shop floor necessary much larger as well as secure. The average rent per square foot of space at Heathrow airport Heathrow airport is deemed to be £165 per calendar month (pcm)[7].
The estimated shop space required is 750 sq ft, which includes the shop, storage and some space to accommodate dinning area for the customers.
Hence the rent per calendar month = 750 x £165 = £ 1,23,750
Cost through acquiring raw materials and infrastructure set up is estimated to £75,000 for the year, which includes the purchase of the furniture and the initial set-up of the shop.
The above statements have proved that the costs for the shop floor rent is very high and hence the pricing of the products cannot be reduced below a threshold level which will prove loss to the shop.
The estimated monthly cost for the coffee shop is thus set at £1,50,000 in order to accommodate any fluctuation in the market.
With the average selling price set at £4.00, which is lesser than the average price calculated above, the break even for the coffee shop without making loss, is calculated below
Fixed costs = £ 1,50,000 (rent, labour and facilities)
Average Selling price = £ 4.00
Assumption:
Variable cost per unit (ingredients) = £1.65 per unit
Break even point in number of units = 150000/(4-1.65)
= 63829.7 = 63830 units approx
The average customer density per day at the Heathrow airport is approximately 630137 (Company profile, 2005).
The overall customer potential for coffee shops in the airport is thus far higher than the break even point for the company which makes it clear that the company can achieve its target of 63830 units per month to break even.
3.3: Cash Flow Analysis
The assumptions for the cash flow analysis are listed below
- The average selling price per unit = £ 4.00
- The fixed cost per month is £115,000
- The variable cost per unit = £1.65
- Estimated sales per month is 70000 units
- A loan of £2,00,000 is applied from commercial bank at 15% Apr rate amount to monthly repayment of £2500 pcm
The cash flow for a calendar month is thus presented in Table 3.
| Credit (£) | Debit (£) | |
| Net Cash in Flow from operating activities | 28000 | |
| Fixed costs (rent, electricity, facilities etc) | 150000 | |
| Interest Paid to Bank | 2500 | |
| Variable costs | 247500 | |
| Corporation tax (15%) | 30375 | |
| Net cash out flow | 207625 | |
| Net increase in cash | 72375 |
The above cash flow analysis has not taken into account the long-term liabilities since the cash flow is estimated to identify the monthly income through starting the coffee shop afresh in Heathrow airport.
4.0: Conclusion
From the strategic and cash flow analysis it is clear that the new coffee shop venture at Heathrow airport is indeed a lucrative option. The financial analysis has proved that the capacity of the airport (in terms of customers) outruns the breakeven point for the shop thus making it clear that the investment in the new shop will be profitable.
5.0: References
Books
Gerry Johnson and Kevan Scholes (2003), Exploring Corporate Strategy: Text and Cases, UK: Prentice Hall
Journals and reports
David Jinks (2004), BAA: Private Sector Public Duty. Logistics & Transport Focus, Jul/Aug2004
Graham Francis and Ian Humphreys (2005), Airport Regulation: Reflecting on the Lessons from BAA plc. Public Money & Management, Vol. 21 Issue 1
Isla Gower (2004), UK leisure Industry – Market Overview, UK: Key note Plc
Laurence Mathew (2005), Airports of the Future: A Manager’s View of an Innovation Exercise. International Journal of Innovation Management
Michael Peacock (2005), Heathrow Group. Logistics & Transport Focus, Nov2005
Footnotes:
[1] Isla Gower (2004), UK leisure Industry – Market Overview, UK: Key note Plc
[2]Michael Peacock (2005), Heathrow Group. Logistics & Transport Focus, Nov2005
[3] Gerry Johnson and Kevan Scholes (2003), Exploring Corporate Strategy: Text and Cases, UK: Prentice Hall
[4] David Jinks (2004), BAA: Private Sector Public Duty. Logistics & Transport Focus, Jul/Aug2004
[5] Laurence Mathew (2005), Airports of the Future: A Manager’s View of an Innovation Exercise. International Journal of Innovation Management
[6]Graham Francis and Ian Humphreys (2005), Airport Regulation: Reflecting on the Lessons from BAA plc. Public Money & Management, Vol. 21 Issue 1
[7] Company Profile (2005), British Airport Authority, UK: Data Monitor