Coffee - Cornell

Report
Coffee shop
INDUStry
Isaure Dacre-Wright
Richard Horgan
Amy Mitchell
Tanali Hamlet
Why coffee shop
industry?
• Based on an everyday consumer product: coffee
• Typical in the American culture
• Increase in recent years
• Attract an increasing number of consumers
Why coffee shop
industry?
• Sell a good and a service at the same time
• Based on a relatively cheap raw materials
• Pricing strategy to maximize profit
overview
1. Industry Structure
2. Pricing Strategies
• Raw Data
• Results and Analysis
3. Analysis and Recommendations
Industry structure
Coffee shop Industry
Products
• Drip-coffee products
• Espresso products
• Iced-drink products
• Complimentary items
Product Breakdown by
revenue
Technology in the
Coffee shop Industry
• Technology is used to reduce labor and costs, reduce
waste, and increase sales
• Social Media and Smart Phone integration
• Redesigned kitchen layouts and ordering systems
• LED displays
• Communication devices
Technology in the
coffee shop industry
Demand
Determinants
• Sensitive to factors that impact growth in household
disposable income
• Baby boomers greatly impact revenue growth
Age
18-25
25-30
35-50
50-65
65+
% Food Budget Spent Dining Out Dollar Value
$
46.4%
2,351
$
44.8%
2,668
$
42.3%
3,165
$
42.8%
2,911
$
37.0%
1,926
Spending by Income
Levels
Income/year
% of Market
Below $50,000
23.1%
$
1,626
$50,000-$75,000
12.9%
$
2,711
$75,000+
64.0%
$
4,490
Total $27.8 Bln
Dollar Value
Macroeconomic
Factors
Logistics
• Business locations distributed according to the population
size
• Brick and mortar locations
• Drive-thrus
Firms in the Industry
• 38,868 businesses in the industry
• HHI: (36.62)+(24.52)+(2.12)+(1.62) = 1945.78 relatively
concentrated
FIRMS IN THE INDUSTRY
Barriers to Entry
• Barriers to entry are low
• Medium level of fragmentation
• Entry into the market through signing a franchise
agreement
• Competition among franchisees for prime real estate
Business Differentiation
• Complex Products
• Price differentiation
• Target market differentiation
• Service differentiation
The Supply Chain
KEY ECONOMIC DRIVERS
Consumer Spending
Healthy Eating Index
Consumer Sentiment Index
Per Capita Coffee Consumption
SUPPLY INDUSTRIES
Beef & Pork Wholesaling
Coffee Production
Dairy Wholesaling
Egg & Poultry Wholesaling
Fish & Seafood Wholesaling
Frozen Food Wholesaling
Fruit & Vegetable Wholesaling
RELATED INDUSTRIES
Specialty Food Stores
Chain Restaurants
Single Location Full-Service Restaurants
Caterers
Street Vendors
Bars & Nightclubs
Fast Food Restaurants
Coffee
& Snack
Shops in
the US
DEMAND INDUSTRIES
Consumers
RELATED INTERNATIONAL
INDUSTRIES
Global Fast Food Restaurants
Full-Service Restaurants in China
Fast-Food Restaurants in China
Fast Food Services in Australia
Cafes and Coffee Shops in Australia
Source: IBISWorld Industry Report 72221b
Industry structure
Life Cycle Stage
MATURE
Regulation Level
MEDIUM
Revenue Volatility
MEDIUM
Technology Change
MEDIUM
Capital Intensity
MEDIUM
Barriers to Entry
LOW
Industry Globalization
LOW
Industry Assistance
Concentration Level
NONE
MEDIUM
Competition level
HIGH
INDUSTRY LIFE CYCLE
• Mature, some argue that it could be on the end of the
Growth phase
• High “price based” competition
• Mergers and acquisitions over the past few years have
changed the outlook of the industry
• Carlyle Group/Bain Capital’s acquired Dunkin’ Brands
• Joh. A. Benckiser acquired Peet’s Coffee & Tea
Major Players
Dunkin’ brands
GROUP, inc. (1946)
• 16,800 locations in 58 countries
• Subsidiaries: Dunkin’ Donuts & Baskin-Robbins
• Dunkin’ Donuts (1950)
• 10,083 stores
• Sells over 1 billion cups of coffee annually
• Baskin-Robbins (1946)
• 6,000 outlets in 35 countries
• Services 3.7 million people weekly
5-Year Financial
performance
Starbucks
corporation (1971)
• Added 1,063 stores between 2012 and 2011
• Recently acquired Evolution Fresh (2011) and Teavana
(2012)
• Main Products
•
•
•
•
Coffee/Coffee Accessories
Pastries
Extended Breakfast Items
Sandwiches
5-YEAR FINANCIAL
PERFORMANCE
KRISPY KREME
DOUGHNUTS, INC. (1937)
• Responsible for 2.1% of the market share
• Presence:
• 92 Company Stores
• 142 Domestic Franchise Stores
• 460 International Franchise Stores (in 20 countries)
Einstein noah
restaurant group, inc.
• Responsible for 1.6% of the
market share
• Subsidiaries: Noah’s New
York Bagels, Einstein Bros.,
and Manhattan Bagel
Pricing Strategies &
raw data
Raw Data
• Conducted two surveys asking age range, reasons for
visiting, and products purchased
• Surveys differed in the size options
• Used to test our reference pricing hypothesis
• Collected prices from 6 different coffee shops in the Ithaca
market
• N=62
Pricing strategies
• Nonlinear Pricing
• Second Degree Price Discrimination
• Complementary Pricing
• Price Bundling
• Reference Pricing
• Flexible Pricing
• Customer Loyalty Discounts
• Charm Pricing
• The Perception Gap
• Quality and Quantity Pricing
• Competition Pricing
Nonlinear pricing
• Characterized by marginal prices that vary with coffee size and
quality
• Appear in markets where marginal or average costs change with
product size
• Most common nonlinear prices are quantity discounts
• Nonlinear pricing is also used with second degree price
discrimination when consumers hold private information about
their tastes
Nonlinear pricing
(cont.)
• Use nonlinear pricing as a screening mechanism to induce
different types of consumers to buy different products
• Generally coupled with product design decisions that
determine how much of a product the consumer will receive
• Screening incentives cause firms to make the small version of
their product “too small”
• Allows them to collect more profit from consumers who
purchase the larger version
Second degree price
discrimination
• There are different groups and classes of consumers
• The seller is aware of this but cannot distinguish
• Set high, mid, and low prices and the different classes self
select
• Use consumer preferences to distinguish classes of
consumer
Second degree price
discrimination
a.
#
Age
Response
Percentage%
1
18-25
20
65%
2
25-40
7
23%
3
40-65
4
12%
31
100%
Total
b.
#
Age
Response
Percentage%
1
18-25
27
87%
2
25-40
3
10%
3
40-65
1
3%
31
100%
Total
Second degree price
discrimination
• Most of the coffee buyers in the Ithaca market were between the
ages of 18 and 25
• Most likely undergrad and grad students who may not have as
much income as a professor or working adult
• Sellers are aware of this and as such assess their coffee prices
• Prices would be relatively lower than the prices in the market in
NYC
Complementary
Pricing
• Common items are priced low (coffee)
• Prices of other items are higher (sandwich or baked good)
• Attract customers to store with low priced coffee
• Customers unintentionally buy the more expensive item
Price Bundling
• Bundle together a cup of coffee and a sandwich
• Large cappuccino-$3
• Sandwich-$5
• Cappuccino and sandwich-$7
Price bundling
(cont.)
• Sellers must consider willingness to pay
• Must charge a price similar too or lower than consumer
willingness to pay
• When competition offers similar items
Reference pricing
• To adapt to each consumer segment, different sizes for
beverages are proposed
• Let consumer choose between different sizes
• More people choose the middle option when there are 3
options rather than when there are 2
• Consumer buy more coffee than they wanted
• Charged a higher price
Reference pricing
(cont.)
• If your beverage of choice is only offered in two sizes, 8oz. and
12oz., which would you buy?
#
Size
Response
Percentage %
1
8oz.
25
81%
2
12oz.
6
19%
31
100%
Total
Reference Pricing
(cont.)
• If your beverage of choice is offered in 3 sizes, 8oz.,
12oz., and 16oz., which would you purchase?
#
Size
Response
Percentage %
1
8oz.
12
39%
2
12oz.
14
45%
3
16oz.
5
16%
31
100%
Total
Flexible pricing
• Sellers must determine what prices to charge in order to
breakeven
• Raise or lower the prices of certain items to achieve desired
profit
• Menu format makes it easy to change, and reflect costs
• Change prices in small increments
• Feature high profit items as daily specials
• Can design prices to help increase sales of certain items
Customer loyalty
discounts
• Offering customers something for free or discount
• May decide to charge a discount on coffee to customers
who bring their own cups
• Grow customer loyalty by offering membership discount
cards or by using “buy nine get one free” cards
• Builds loyalty and repeat business
My starbucks reward
• Earn 1 star every time you pay with a registered Starbucks
card or Starbucks mobile app
• Welcome Level
• One use of card earns first reward; free drink or food on birthday
• Green Level
• 5 stars; free birthday drink and free refills in store
• Gold Level
• 30 stars in 12 months; get all the benefits from welcome and
green level plus: personalized gold card, special offers
Charm pricing
• Sellers back off the rounded number by a few cents or a
few dollars
• Makes item look less expensive, first number of price is
lower
• Pushes product into lower price bracket, so it appears to
cost much less
Charm Pricing
(cont.)
Starbucks
Ithaca Bakery
Bear Necessities
Cappuccino
(12oz.)
$2.85
$2.99
$2.75
Latte (12oz.)
$3.35
$2.99
$2.95
Mocha (12oz.)
$3.35
$3.49
$3.35
Perception Gap
• People are fine with the price of fountain soda or draft beer
• Upset with the price of coffee
• High coffee prices exist as a result of perception
• At a bar you are not walking away with the glass
• At a coffee shop you walk away with the cup
• Coffee drink composed of multiple ingredients and freshly
prepared in front of you
• The cup, heat sleeve, the chocolate, the espresso and the milk
Quality and
quantity pricing
• Starbucks
• Lowering cost of standard drinks and raising prices of specialty
drinks
• Maintain both sales volumes and premium brand values
• Goal: continue to find ways to balance the value they
provide for customers
• Challenge: not losing customers to lower-price coffee
outlets, and maintaining the brand’s premium value
• Customers still value the premium Starbucks offering,
especially in specialty coffees
QUALITY AND
QUANTITY PRICING
• Customers are willing to pay more to maintain an
everyday luxury
• Helped the brand keep its high-earning coffee connoisseurs
• Same time attract mid-market consumers who will
appreciate the added value of the lower-end coffees on the
menu
Competition based
pricing
• The control coffee shops have over prices is far from 100 %
• Sellers have to find a compromise between a price too lowwhere no money will be made and a price too high- where no
one will buy products
• Prices are based on the competition, looking at what prices
they set and trying to set a price similar to it or less
Analysis &
RecommEndations
High margins
Hot coffee
Price
Latte
Profit/size Cost/oz.
Price
Profit/size Cost/oz.
12oz.
$
1.65
$1.26
$
0.033 $
3.35
$1.75
$
0.092
16oz.
$
1.95
$1.48
$
0.029 $
4.05
$2.21
$
0.084
20oz.
$
2.25
$1.70
$
0.028 $
4.45
$2.37
$
0.079
• Competition : Price of coffee < Price of latte
• High profit per size
• Insignificant cost for providing a higher quantity
• Illustration of reference pricing
12oz.
16oz.
Hot coffee Profit/size
20oz.
Hot coffee Cost/oz.
Hot Coffee
$2.50
$0.095
$2.00
$0.090
$1.50
$0.085
$1.00
$0.080
$0.50
$0.075
$0.00
$0.070
12oz.
16oz.
Profit/size
Cost per oz.
$0.034
$0.033
$0.032
$0.031
$0.030
$0.029
$0.028
$0.027
$0.026
$0.025
Profit/size
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Cost per oz.
Profit/size
High margins
20oz.
Cost/oz.
Latte
• Profit goes up
• Price per oz. goes down
• Prices are set in order to make customers choose the bigger item.
Trends for the
future
• Mature industry
• Increase of the sales after a recession period
• New consumers
• Increase of the profit
• Over the four years to 2017, consumer
spending is expected to increase at an
average annual rate of 2.8%
• International extention for the main actors
Starbucks in the world
Recommendations
• External competition:
• Positioning as a specialist
• Advertising: Brand and corporate communication
• Internal competition:
•
•
•
•
Variety and diversity
Level of service provided
Price level
Loyalty programs
Recommendations
(cont.)
• Adapt product to current consumers concerns
• Extract the highest willigness to pay
• Attract new segments of consumers
• Children
• Coffee experts
• Low-cost/High profit
• Track sales to reduce the Perception Gap
Questions?

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