Corner Office Conversation with Philippe Schaillee, Global CEO, Costa Coffee

Of course. Really good to meet you. Thank you.

Yeah. So, first of all, what I always like to say is what our ambition is with the Costa Coffee brand. You know, the brand exists since 1971, but we still see it as a startup almost. Our ambition is to be one of the three leading premium coffee brands globally. We are that today, but we want to continue to expand and extend our position. We're today present in over 40 countries and we're continuing to gradually expand. We serve 4 million cups per day on a global basis through more than 4,300 coffee outlets across our markets, over 45,000 professional coffee machines in the away from home segments, and we also have an emerging presence in ready-to-drink coffee which we do with our parent company Coca-Cola. Our global strategy is focused on covering about 60% of the global premium coffee markets. We don't want to be everywhere. We want to be in markets that really matter from Europe, North America including Mexico, Middle East, over China to of course this important market India and a few other markets. What is important to know also is that we built our brand by opening stores with franchise partners like Vivani in India. We build awareness by emerging consumers through this full experience that they live through in the stores and then we expand into away from home and eventually into ready to drink. We're doing well. We're continuing to grow across our markets and we're increasingly seeing that India is playing an important role within that.

Yeah, so it's fascinating and I've had that narrative for probably the past 20 years having spent a lot of time in coffee across multiple companies. There are two drivers of growth of the coffee category globally. There's one which is less relevant for India which is the premiumization of the coffee category through single serve coffee, through specialty coffee stores, consumers have evolved more and more to pay more for a cup of coffee because the quality that they're requesting is getting better and better. But the second driver has been that tea drinking countries across the globe have gradually shifted towards coffee. Why that is? That is because of taste, but it's also because of energy which coffee provides. And so consumers across multiple tea drinking countries are gradually pivoting towards coffee especially as GDP and disposable income is increasing and that's what we see in India too. I mean India has an amazing huge population but within that we see that probably between 40 and 50 million consumers are increasingly gravitating to premium coffees to specialty coffee and that's of course the segments that we're focused on and that we want to play into with Costa coffee.

Yeah, a very significant percentage of them are younger consumers. They step into coffee through cold coffee, through flavored coffee and it's not a surprise of course that we play into that. So if you come into the Costa stores what you will see is an increasing part of our menu offering is cold coffee flavored coffee. You see that we actually give consumers the opportunity on top of our base drinks to actually add incremental flavors because that's in the end what the younger consumer wants. But secondly also you see consumers proudly walk around with a cup of coffee in their hands. So it has badge value and that's definitely for Gen Z consumers important. What we're also doing increasingly to appeal to the younger consumers is make sure that our journey is as digital as possible. We recently deployed our global loyalty club Costa Club which allows consumers just to be into a digital experience which is at the end how they want to purchase and engage with the food and beverage retail brand.

What I'm seeing at the start of this year is an improvement across our markets. So inflationary effects are starting to be reduced. Consumers have had salaries that have been positively affected by inflation. And so we see consumers returning to away from home and certainly to the coffee category positively affecting our sales.

You know I'm originally from a small country Belgium right? India tier one cities are the size of Belgium. So for us it's important to continue to focus on those tier one cities. That's where the consumers are that are most predisposed to make that shift from tea to drinking more coffee and paying the premium price for premium coffee. So today with our partner we believe that that's where we need to focus mostly on driving more penetration and more density within those tier one cities before we start thinking about tier 2 tier three cities.

We have over 200 stores which we're expanding at a rate of 40 to 50 per year. On top of that, we have what we call serving locations which are kind of almost shops in the shops. A lot of them are with PVR Inox, which is a great partner, which also creates a micro experience of what Costa can stand for and works hand in hand with our stores. So we have over 70 locations in cinemas and both of them are expanding at a very attractive rate. We want to continue to have that healthy rate of opening 40 to 50 stores and probably opening 10 to 20 locations in cinemas or other away from home segments where we can replicate that store experience.

The focus remains on both. We've seen that our full store experience is working well with consumers. It is the best way to build the brand. We're also very focused on extending the brand through those shops and shops with great partners like PVR Inox. We see that other cinema chains also want to work with us. Once we've seen that that segment is properly penetrated, then we're going to start thinking about what the next segment is. But today, we like to be really focused on where the brand works well.

We're satisfied with the pricing that we have but we also look at it as a portfolio. So within our portfolio, you can go very premium when you want all the special flavors, you want all the personalization, you want the cold beverage, but we also are very careful about adding to that more accessible products. So that consumers who want an entry-level Costa also have an offering.

We have not reduced prices. I'm sure you're aware of what has happened to the green coffee.

So look, I've touched coffee for probably 20 years of my 30 years in food fast moving consumer goods. I have never seen green coffee at the levels that it is today. Historically it would be a cyclical environment after a couple of years of high prices it would go down and you would always have robusta kind of be much more stable while Arabica would peak. Today we see Arabica and Robusta peak. And it's been much longer than the historical cyclical nature of coffee. So that's of course a bit concerning. Like everybody in the coffee industry, we have reflected that into our prices. We've tried to do that in a sensible way. But of course, you see across the board and across the globe that coffee prices away from home and at home have increased. Within that we try to put through the portfolio play and we try to make sure that consumers have as much as possible opportunities to mitigate that effect of pricing through more accessible coffee propositions or tea propositions but at the same time that they can get their fully loaded Costa coffee experience probably at a more premium price.

Yeah, it's interesting. We haven't seen any downtrading. So, when we look into our portfolio, like I said, we offer the choice, but consumers are not necessarily downtrading. Certainly Gen Z consumers, they're gravitating more and more to cold, very personalized, very customized and that comes at a premium price, but that's where they're going.

Yeah. So, of course, that's in full collaboration partnership with our great strategic partner that we have in this market, Devani. So we're believing that our current growth rate is appropriate. 40 to 50 stores is right. If we see more opportunity then we can accelerate but we're more focused on quality openings than on quantity in openings. I think many players in food and beverage retail across markets but also in India have seen that if you go too fast you don't make sure that store by store it is operating perfectly. So I think that's the right growth rate. Like we said we complement that with further expanding our presence and openings in the cinema segments and that's for now appropriate.

Yeah. So two points to that. The first thing is we invite competition. When you think about it the penetration of premium coffee in India is still very low but it's growing fast. The more that we're surrounded by competitors who are offering quality premium coffee, the more consumers will be appealed to step into the premium coffee category. The faster will be growing. Then within that, of course, we need to make sure that we maintain our leadership position. This ambition that we have to be one of the top three premium coffee players globally of course also applies to India. And I think that's always derived from four key elements why we believe that Costa stands out in the premium coffee category. The first one is the Mocha Italia signature taste. It was developed by the Costa brothers who started the brand in 1971 and it's a historical fact that they did more than 100 efforts to actually get that taste exactly right. And we believe that that signature taste is a premium offering, a premium accessible coffee that nobody else in the category can offer. That's also what our consumers are playing back. So that's number one. The second thing is the consistency of our quality across coffee, the other beverages that we provide and food. The third one is the extra care of our baristas. And then finally the belief that we need to offer a unique balance between our global proposition and the adjustment to local rituals and local cultural elements. You see that in how we adjust to local customs, local events, how we work with local influencers, how we bring local drinks that apply to the local taste buds from a beverage perspective and from a food perspective.

I wish I get that question a lot. I wish I would have a crystal ball. Look, there is clearly what's happening with coffee is a combination of on the one hand a series of harvests that have been worse than expected, potentially impacted by climate change or climate evolution. But of course, also it's impacted and amplified by traders and speculators who have tried to amplify that effect. Our belief is that there is going to be a moment where that's going to be reduced. We already see Robusta coffee starting to stabilize and starting to go down as harvests are coming in better than the year before. So, as harvest also in on Arabica, especially in Brazil, is improving, we're going to start seeing more of a normalization of coffee prices and the reduction of coffee prices from all-time highs. I'm not anticipating that it will ever go back to historical lows. I think that's something from the past and that's fine. But my hope is not a strategy but my hope is that in the second half of next year we will start seeing a reduction of coffee prices.

Yeah, the answer is clearly no. This partnership is one of our strongest partnerships across the globe. We see Devani as a role model from a franchise partner perspective. They're clearly separating the different businesses. When you look at the Devani part of the family's business, it is 100% focused on food and beverage retail. It is managed by food and beverage retail experts who are managing other brands on top of Costa. What that brings is scale. What that brings is expertise. What that brings is market penetration and we are benefiting from that. So we're very pleased with the partnership and this partnership stays. And India is the only such market where both the players are you know running your company is owned by Coke and you know a rival is operating the business. So within the Costa stores is Pepsi served? It's Coca-Cola. Coca-Cola within all the Costa coffee stores. Yes.

Yes. On a global, first of all, from an India perspective, I don't see the impact. We're mostly locally sourced. That impact should be minimal to none. On a global basis, very limited. I think the biggest question is to what extent are tariffs going to impact green coffee prices. But at this point we don't see that play a big role. Our presence specifically in the US is quite limited. We're more focused on other markets. So from that perspective we also would not be impacted by tariffs on goods that are imported into the US.

Well, first of all, for us, I mean, we've been here now think about 20 years we've had to learn how to grow into India but now with the last couple of years it's really been an accelerator it's gone from what we call a seeding market to really a scaling market in our top 20 global markets from a Costa perspective. So yes India and I only see that rising into our top markets position. So obviously for us it is a critical growth accelerator and we want to continue to double down and invest into this market.

Well we look when we look at the coffee category in general we see it as a category that is growing between four and 6% globally while India will probably be in the low double digits and we want to do better.

What I tell them is quality growth. So it's not growth at all costs. It's making sure that the business that we're building is a foundation for being a top 10 market for us in the long term. So we're focused on quality growth.

Of course. Of course, at home, away from home. I probably have about between 8 and 10 Costa coffees a day.

Well, I mean, yes. As a CEO of the company, you have to be heavy user, but that comes effortless because I love coffee. I've always loved coffee. And luckily, when I joined Costa, I appreciate the taste profile immediately. So I'm having Mocha Italia single or double espressos continuously during the day up until 3:00 or 4 when I shift to tea.

Yeah, it's not a market share game. In a market like India where it's all about growth, we're not focused on gaining market share in the segment that is still relatively small. We're focused on convincing consumers to move from tea to premium coffee in the number of drinking occasions that they have. They're not going to stop drinking tea, but that they start drinking premium coffee more frequently away from home. And then within that we're one of those top three premium coffee brands that they become loyal with.

Thank you very much.