London cafés brewing little profit

High rent is one of the major problems facing major coffee chains in London

LONDON, England (CNN) -- The lines are long, and the most basic cup of coffee costs $3.

Coffee shops are the new retail phenomenon in Britain, with many chains expanding rapidly.

But despite the high demand and the high prices, few of the chains across London are making any money.

Critics ask: Is this a dot-com in a cup?

"The business is somewhat more difficult and complex than many of the operators had originally thought would be the case," says Jeffrey Young of Allegra Securities.

CNN NewsPass VIDEO High prices but still no profits for many UK coffee chains. CNN's Mallika Kapur reports (March 25) Play video

"They came into the market thinking there would be caffeinated profits and easy money. But at the end of the day there are enormous complexities and hard work that needs to be done to actually turn these stores into profits."

What they have achieved so far hasn't impressed investors. The biggest chain, Starbucks, is struggling in Britain. Analysts say it lost around $7.5 million last year.

Another visible brand, Costa Coffee, is in the black, but barely -- while two listed companies, Coffee Republic and Caffé Nero, are loss making.

Coffee Republic's operating loss in the last six months came in at $850,000, while Caffé Nero reported a six-month loss of $1.09 million. Their share prices are at record lows.

Four chains control about two-thirds of the name-brand coffee-shop market, according to one insider

One of the major problems facing these coffee shops is high rent. Prime locations in the heart of London don't come cheap: Rents could be as high as $400,000 a year for a single coffee shop.

But that's not stopping coffee chains from brimming over. They're expanding at a rate of 20 percent a year, hoping to corner the market before turning a profit.

"There are parts where there really are a lot of coffee stores, and there's no doubt that in some of those markets it's approaching saturation," says Costa Coffee CEO Mike Tye.

"In Greater London, there are about 70 coffee stores per million population. But if you compare that to outside London, there's only about 15 -- so you can tell the difference."

Industry insiders say this will inevitably lead to major consolidation.

"Right now four players control about 64 percent of the branded market," says Caffé Nero CEO Gerry Ford.

"That's already pretty honed down and pretty consolidated, and I think probably in the end there will be about three players doing that."

But it's a risky game coffee chains are playing. Even McDonald's found it hard to make money at it -- it recently sold its Aroma coffee shops to Caffé Nero.