Costa Express: Scott Martin
The king of on-the-go coffee talks us through his rise and rise
From the whirr of new machines in the workshop, to the huge timer looking down on the office floor, the Coffee Nation office is a buzzing hive of activity, as the company metamorphoses into its new guise of Costa Express.
The transformation follows Coffee Nation’s £59.5m acquisition by hospitality giant Whitbread, which owns Costa. The task of replacing all Coffee Nation’s 900 units with Costa Express-branded machines is supposed to take 90 days; according to the huge timer, more than half this time has now elapsed.
One might expect Scott Martin, co-founder of Coffee Nation and now CEO of Costa Express, to be rushed off his feet. But he seems relaxed and, far from being concerned about the dissolution of the brand he has spent 12 years cultivating, Martin is clearly confident that the principles which underpinned Coffee Nation are being retained.
These principles have helped Coffee Nation grow consistently since Martin co-founded the company with Martyn Dawes in 1999, visualising a third way between Friends- style gourmet coffee bars and vending machines spewing out tar-like fluid in white plastic cups. After a tough first couple of years spent wooing dot com-obsessed investors and convincing forecourt operators that a switch to Coffee Nation wouldn’t destroy profit margins, Dawes and Martin started winning over the cynics with their high-grade coffee, backed by a solid relationship with early-stage investor Primary Capital.
The business model evolved slightly. Having initially outsourced everything, the co-founders came to see the benefits of bringing more and more functions in-house – including the telemetry which allows Coffee Nation to monitor each of its machines in real-time. Yet the focus on key product development remained unchanged.
This approach proved well-founded. Soon, Martin says, “I was getting emails from people saying that reps were turning up to meetings with the Coffee Nation cup in their hand, and I was hearing about people going out of their way, diverting onto a particular motorway to go and buy Coffee Nation.”
The iPod of coffee
By its fifth birthday in 2004, Coffee Nation was turning over £20m; yet the company realised that, if it was to maximise growth potential, it had to embark on a major design overhaul. Martin says that there was still a stigma about instant machines, adding: “If people’s perception of coffee from a machine was that it’s vending, and therefore it’s poor quality, then we just had to change the way the machine looks – like Dyson did to vacuums. “We went to one of the best industrial design companies, Seymour Powell, and said “we want the iPod of coffee”. This was back in 2004-2005, when the intuitiveness of [the iPod’s] use, and the simplicity, was what we wanted.”
Every aspect was designed to debunk popular misconceptions, from the illuminated glass shelf to the touch screen, and a range of customer options designed to recreate the barrista experience. The cost of the redesign, around £5m, was absorbed by existing cashflow, coupled with credit from RBS and R&D credits.
With hindsight, Martin wishes he’d sought further investment at this point; “2004 would have been a great time to do another management buyout… the longer you wait with a VC, the less likely they are to want to invest more money into your business, and you know that the exit has to happen.” However, the mid to late-noughties saw further growth, driven by the continued installation of new self-service units. By 2008 Coffee Nation’s machines had been installed in more than 550 outlets.
The first buyout
When Primary eventually exited in April 2008, Martyn Dawes had relinquished his day-to-day involvement. Martin says the parting was not acrimonious, but adds that his co-founder, a natural entrepreneur, “probably wasn’t cut out to be a CEO in a company which was starting to face different demands.”
However, Martin wanted to stay on, and was able to co-ordinate a £24m buy-out led by Marston Capital, with Investec providing mezzanine finance and RBS adding a robust capital expenditure deal. He says it “was the right deal in terms of debt, it didn’t overbear the business, [and provided] the right deal in terms of on-going capital expenditure. We needed to have money, and we needed the cheapest form of money available.”
The fresh funding allowed Coffee Nation to roll out ever-greater numbers of point-of-sale machines, and channel R&D spend into telemetry. Marketing spend remained low; instead of flashing money at big ad campaigns, the company began to open new micro-sites, and explore the potential of social media.
Martin says that sites like Facebook “meant that we could have a one-to-one relationship with the customer. Think of university for example, hugely sceptical of brands and conscious of quality. When we were going to a university, we would create a Facebook site for that machine, and surprise people by giving out messages on it. Things like ‘3 o’ clock in the library, free syrups on the machine.’ The telemetry allowed us to do this.”
The Whitbread deal
Between April 2008 and March 2011, Coffee Nation almost doubled its footprint to 900 sites, and used its social marketing reach to expand into new territory, such as hospitals, universities and offices. It was inevitable that a corporate giant would come in to snap the company up; but, in fact, it was Coffee Nation which went to Whitbread, not the other way round. Martin takes up the story:
“We approached them, originally… we simply wrote to them and said ‘we’ve got this system, we’ve rolled out this machine, is there any merit in talking about whether there’s a brand alliance?’ That’s how the initial conversation started, and it just progressed from there.”
Martin insists there was no clear intention to sell, and the prospect of a deal “did come out of the blue.” However he soon warmed to Whitbread. The “entrepreneurialism behind Costa” was particularly appealing, and they wanted him to stay with Coffee Nation – a desire he shared.
The deal with Whitbread was conducted in complete secrecy. Martin says: “We signed the deal on the Monday night (March 1), and I emailed the employees that evening to say that ‘there’s a meeting at 11 o clock tomorrow morning – would you like to come?’ Of course everyone came. I think most thought that we’d gone bust, because we’d been so secretive.”
Reaction was typical; Martin says that, after “initial euphoria,” the office began humming with “corridor conversations about what’s going to happen with the brand.”
To assuage employees’ fears, Martin chose to lead by example, or, in his words, “act through behaviour. For example, I turned on the timer in the office on the day after the acquisition, to say we’ve got 90 days to get this ready, guys”.
Synergy and integration
Since the timer was turned on in March, Coffee Nation has recruited around 20 staff, created six international promotions, launched a B2B marketing campaign and begun to roll out the new machines – branded Costa Express but based entirely on Coffee Nation technology. Yet the machines’ recipe configuration will be completely new, taking into account the Costa heritage.
Cynics initially wondered whether the new brand would be able to square Costa’s long-standing marketing mantra, that not everyone can make a good cup of coffee, with Coffee Nation’s gourmet-for-all technology. However Martin believes that, far from being contradictory, Coffee Nation’s technology and Costa’s gourmet image are in fact complementary. In fact, he says that since the Whitbread deal, “sales have gone up, and the acceptance levels are extraordinarily high. We don’t appear to have lost any Coffee Nation customers, but we appear to have gained some Costa customers.”
The brand synergy will, he hopes, enable Costa Express to enter “airports – a key target market for us – and railway stations, where either you want to sit and relax in a Costa or you’re in a hurry, and you want a Costa. That’s where Costa Express will come in.”
Martin himself is very happy in his new role. Although he originally left corporate life in his twenties “because I hated it,” he says that being a corporate CEO and reporting to a Costa board “doesn’t feel any different”; in fact he welcomes aspects of the Whitbread operation, such as its specialist procurement function. “I’ve also found going out and selling Costa Express is extremely powerful – our system and their brand is a very powerful combination.”
Looking to the future, Martin is already excited about “Generation 2, which will be, I imagine, sometime in the next 18 months. That will be about making truly a new way of buying coffee in an unmanned environment, repeating [the sweeping changes] Coffee Nation made in 2007.”
He says he’d like the machines “to be as small, identifiable, intuitive as possible. Ideally I’d like it to recognise you, so if you’re a Costa consumer, I’d like it to recognise who you are, either through your card or through something else, I’d like it to know what you drink, and I’d like it to be able to reward you through the [Costa] club.”
Martin also wants to explore overseas territories such as Dubai and India, where Costa already enjoys a foothold; the product range may be augmented, with iced drinks and smoothies under consideration.
Unsurprisingly, Martin has no plans for a personal exit just yet. “I’ve always been quite clear with them that if it’s stimulating, then that’s what I want. Coffee Nation has always been fun, and the thing that stimulates me is that we’re taking this into thousands of locations.”
With a target of 3,000 locations in five years, the ever-busy Martin has plenty to occupy him. Happily ensconced in his High Wycombe office, with his shop floor beneath him and his core staff all around, one senses he wouldn’t have it any other way.