In the good old days if you wanted a pint of beer you went to your local boozer and if you needed a hit of caffeine you visited a coffee shop. In recent years this line has become increasingly blurred as leisure companies seek new sources of revenue in an increasingly competitive market.

In an era of falling alcohol consumption and punitive taxes pub operators have had to look for new ways to attract customers. Punch Taverns (PUB), for example, has been trialling Brewed & Baked, a licensed food and coffee-led cafe concept which it likens to a ‘Costa meets Greggs meets a pub’.

Fuller, Smith & Turner (FSTA), which has its own coffee brand called Brewer Street, opened a standalone coffee shop in 2014. JD Wetherspoon (JDW) launched a new breakfast and 99p coffee offering in mid-2015, but its focus on low cost has been criticised for eroding its margins.

Given consumers’ increasing love of coffee it’s no surprise that pubs have moved into this market. Around 1.7 billion cups of coffee are sold each year in the UK from more than 18,000 outlets, a figure which is set to grow to 21,000 by 2020, according to Allegra. The consultancy says the hybridisation of pubs is expected to have driven a 2% growth in UK pub turnover in 2015 - the highest rate since the recession.

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This is clearly a threat to coffee shop chains like Whitbread’s (WTB) Costa, although analysts reckon Costa still has room to grow as its market share is just 6.6%.

Starbucks (SBUX:NDQ) last year started to sell alcohol in the evenings, having debuted its UK ‘grown-up’ cafe experience at Stansted airport. Yo Sushi! has revived its bar proposition with a cocktails-to-food outlet in Chelmsford, having previously had a bar in London in the late 1990s. These are further instances of companies encroaching on the traditional territory of other operators.

Jack Brumby, analyst at Langton Capital, says the evolution in the leisure industry reflects the fierce competition that is present across the UK.

‘Increasing competition leads to necessary innovation, especially from incumbents who have smaller and more agile competitors nipping at their heels. Think JD Wetherspoon’s margin-eroding expansion into the breakfast and coffee market, Pizza Express’ delivery service and Costa’s Fresco concept designed to enhance its food proposition,’ he says.

Brumby says smaller and more responsive businesses can design their offer to respond more quickly to market trends and socio-demographic shifts. Fulham Shore’s (FUL:AIM) Franco Manca has developed a high quality, high value pizza proposition, while Patisserie (CAKE:AIM) is appealing to the ‘Food, Family, Females and Forties-plus’ trends.

Marston’s (MARS) has given up some seating space in its Two for One-branded pubs to have a ‘Pizza Kitchen’, creating a retro-styled pizza parlour. Greene King (GNK) has been enjoying particular success over the past few years in selling takeaway cake.

Pizza party

More surprising is Domino’s Pizza’s (DOM) intention to open a 60-seat restaurant in Kent - a far cry from its successful takeaway model. Brumby says Domino’s has enjoyed great growth in the UK over the past decade but its delivery business will reach maturation ‘sooner rather than later’.

‘Its expansion into restaurants strikes us as a necessity. In an ideal world, Domino’s would continue in the business it understands - opening up delivery stores - but management must appreciate that the UK has a ceiling and so it is investing in restaurants which is risky but achievable as it requires a different skill set,’ Brumby adds.

The leisure industry is changing rapidly and operators can’t afford to stand still. At 19.3p Fulham Shore offers high growth prospects while Fuller, Smith & Turner, trading at £11.90, is a play on Brits’ love of premium food and drinks.