Chris Rogers, the managing director of Costa, said that the chain had taken the decision after it "recognized the strength of feeling in Totnes against national brands".
He said that the chain, which had worldwide sales of £819 million in its last financial year, respected the residents' demands.
Campaigners welcomed the news. They had argued that Totnes already has 42 independently-run outlets that serve coffee and did not need another one run by a large multi-national firm.
In a statement, No to Costa said: "This is a major milestone for local communities and is a day when the value of localism comes into its own."
The group criticised the local council, South Hams District Council, for agreeing to let Costa open in the first place.
Dr Sarah Wollaston, the local MP, said that she was "delighted" that Costa recognized the vibrancy of Totnes and decided not to open there.
"I welcome that decision and want to thank Costa for being prepared to listen to those concerns," said Dr Wollaston.
Paul Wesley, the owner of Harlequin Books in the town and a member of the Totnes Chamber of Commerce, said that the main attraction of Totnes is its large number of independent shops.
He said that the town has a history of liberalness due to the close proximity of Dartington Hall, which was home to a progressive school and an arts college for much of last century. The south Devon enclave, which has a population of just 8,000, is well known for its "alternative" image and has a resident community of writers, therapists, musicians and herbalists.
"Totnes is a bit bolshy isn't it? Because of Dartington Hall in the past the town has attracted fairly liberal people. It is occasionally a little bit arty-farty and a little bit navel-gazing. But that has nurtured a lot of people who are independent," said Mr Wesley.
Mary Portas, the high street expert and Telegraph columnist, praised Costa for listening to the people but criticised South Hams Council, who gave the shop planning permission, for failing to do so.
Ms Portas told Twitter: "Applaud Costa Coffee for listening to Totnes before opening. Shame South Hams Council didn't b4 granting permission."
PR executives described Costa's move as a good one. Gordon Beattie, founder of PR consultancy Beattie Communications, said that in listening to the local residents, Costa has made a "smart move".
"Only arrogant brands would dismiss public opinion. We live in an age where people power is coming to the fore and a lot of people will take heart from this decision," he said.
Totnes is not the only Devon town to hold its own against a large corporation. Around five years ago the nearby town of Torrington saw off Tesco after a campaign by local residents.
Other parts of the UK have protested against Costa opening in their area.
Dozens of residents of the town of Southwold in Suffolk wrote to their local council earlier this year objecting to Costa's plan to open in the town.
However in August the shop's application was approved.
Following the decision Michael Palin, the TV present and Monty Python member, said that it was important to protect Southwold's "harmony" to prevent it becoming like other seaside towns.
While Totnes will be basking in the glory of sending a multi-million pound corporation packing, it could soon have another battle on their hands.
According to reports on Totnes FM, restaurant chain Pizza Express has expressed an interest in opening in the shop that Costa was due to occupy.
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