Cooks Coffee Company [LON:COOK], a New Zealand-based company, recently completed its dual listing on the Aquis Exchange in the UK (it is also listed in New Zealand). Cooks Coffee holds two well-established brands in the UK: Esquires Coffee and Triple Two, covering different demographics. Cooks claims to be the fourth largest coffee-focused café chain in the UK, having 85 shops in total in the UK and Ireland.
The Food & Beverage sector has experienced a bounce back from the Covid outbreak and lockdowns, particularly after government restrictions on trading were lifted in mid-July 2021. The Armchair Trader recently had a meeting with the CEO of Cooks Coffee Company, Keith Jackson, talking about the outlook for 2023, growth opportunities and what is special about the company.
The Coffee chain market
The coffee chain industry in the UK has seen significant growth in recent years, with the market expected to reach a value of £5.8 billion by 2026. The industry has benefited from increasing consumer demand for convenience, as well as the growing popularity of specialty coffee and the influence of international coffee chains. However, the industry has also faced challenges such as intense competition and the impact of the Covid-19 pandemic, which has led to temporary store closures and a shift towards delivery and takeaway options.
In terms of market share, major international chains such as Starbucks and Costa Coffee dominate the market, although there has also been an increase in the number of independent and specialty coffee shops. As of January 2022, the branded UK coffee shop market has 9,540 outlets, and the 70 stores Cooks coffee have is less than 1 % of the UK market, giving them sufficient room to grow. The target number of outlets by FY25 is over 200, at a CAGR of 24%.
The whole industry is also expected to continue to grow, with a focus on sustainability and ethical sourcing, as well as the introduction of new technologies such as mobile ordering, click and collect and loyalty reward programs.
Cooks Coffee’s specialty
Cooks Coffee’s ethos is built around a group of ethical coffee chains with a community spirit. All of their supply is ethical, organic and purchased direct from farmers, with renewable packaging materials. Cooks Coffee’s stores are focused on being part of the local community, with local franchisees and locally themed décor, to make different offerings, meeting the local needs.
Esquires Coffee runs mostly in suburban areas, which have a greater demand for cafés due to the norm of working from home. Positioned as a premium mainstream coffee shop, Esquires Coffee has a strong reputation for its organic coffee and contemporary food offering. According to Cooks Coffee CEO Jackson, Esquires have a more food-focused strategy, as food makes up about 45% of the total revenue. Esquires Coffee is more focused on the family, and the decoration is more like an old-school café.
Triple Two, on the other hand, runs more in the city, having a modernised decoration and slightly different menu to attract the younger generation. Triple Two have acholic cocktails in the offering, making the café more popular at night, for customers that are not fans of noisy pubs. Triple Two is a fast-growing brand, that almost doubled its footprint in the last year.
The key sources of revenue for Cooks are recurring operational revenues and capital revenues. Recurring operational revenues include royalties, marketing fees by the franchisees and supplier incentives. Capital revenues include the sale of café franchises, the sale of regions in the UK, property search & project management fees (Triple Two only), design fees, and construction & fit-out fees (Triple Two only). The recurring revenue is estimated to be 67.8% of the total revenue, expected to grow to 77.2% in FY 25.
In our discussion with Jackson, he explained that the growth of Cooks Coffee would be focused on the organic development of and acquisitions of more businesses that are already operating in the sector and that have a synergy with Cooks Coffee.
Organic development can be driven by the greater availability the property market offers, as the industry emerges from the pandemic. Jackson also said the screening for acquisition is an ongoing process, showing the determination Cooks Coffee has in growing its presence.
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Cooks Coffee has also made sure they are innovating. Having a different seasonal offering, with additional special offerings in the holidays, they can provide customers with a more diverse selection.
With a fast growing number of outlets, Cooks Coffee can help franchisees to connect directly to suppliers and sign contracts at a ‘bulk buying’ price. This helps to absorb inflation-related high costs, making the price more affordable to customers.
Cooks Coffee has a focus on technology development, specifically the app for Esquires and Triple Two. Its app helps customers to order online and receive personalised offers as well as loyalty rewards, helping the customer have a more seamless experience. Cooks Coffee’s brands have also teamed up with Uber Eats, Just Eat and Deliveroo, to help the customer enjoy their organic coffee at home.
Financial outlook for Cooks Coffee
From Cooks Coffee’s financial results for the 12 months ending March 2022, the company reported a net profit before tax of NZ$0.34 million (£0.18m), compared to a loss of NZ$2.62 million (£1.37m) in the prior period. Management attributes this improvement to the recovery of cafe sales in the UK, after government restrictions were lifted, the full-year contribution of the Triple Two acquisition, and the benefits of prior restructuring and cost-reduction efforts.
Store sales in the UK for the fiscal year were 123% of the pre-Covid FY2019 year, while store sales in Ireland were 75% of FY2019 figures. However, store sales in Ireland for Q4 (January-March) were 97% of the FY2019 equivalent, indicating a potential recovery above pre-Covid levels as long as restrictions remain lifted.
The acquisition of Triple Two Coffee in June 2020 has added scale to the core UK market and placed Cooks as the fourth largest coffee-focused cafe chain in the UK according to Allegra Research. Total group revenue from continuing activities increased 283.2% to NZ$6.7 million. The company has restructured its balance sheet and reduced debt by NZ$3.3 million as of March 31, 2022. Total equity in the company improved to a positive NZ$3.1 million from negative equity of NZ$1.7 million the previous year.
Given the current market situation, this stock might deserve investors’ attention for its fast growth.
You can get access to AQSE listed shares via most UK stockbrokers.