Retail Coffee Industry Kay C., Julie, Mike Agenda • Industry Information • Local Industry Pricing Strategies • Specific Pricing Strategies • Conclusion Why? • US $40 billion dollars spent on coffee every year • 54% of Americans drink coffee every day • Average price of espresso-based drink is $2.45 • Average price of brewed coffee is $1.38 • How does this compare to price in Ithaca? Industry Information Chain of Supply • Brazil, Vietnam, Colombia, Indonesia • Rising costs via low crop yield • Wholesale Intermediary • High Concentration • High barriers to entry • High competition • Low Barriers to entry • Medium concentration Coffee Suppliers at a Glance: Total Number of Coffee Establishments in the United States : 359 Revenue: $8.8 billion Profit: $798.6 million Top 5 players are estimated to generate 71.7 % of industry revenue Key External Drivers: world price of coffee, demand from grocery wholesale, per capita coffee consumption, world price of crude oil Market Share: 16.3% 14.1% 17.6% 24.8% 11.8% Coffee Retailers at a Glance: Industry Key Drivers: Retail Coffee Internal External • Consolidation • Consumer Spending • Wage and input increases, thus cost control • Health food trend • Market position & “highprofile” outlets • Franchising • Per capita disposable income • Per capital coffee consumption Product Mix Brewed Coffee Iced Coffee Food & Drink Specials Seasonal Drinks Specialty Drinks Concentration, HHI • High concentration in the retail coffee industry • HHI of =1907.5 • Market structure of a few major global player with world-wide brand recognition facing competition regionally with high quality local providers Concentration, HHI • HHI index based on the Industries major players: 1549 • Concentration in the coffee industry is HIGH • Major players low value, high-volume, branded products • Smaller players high-value, low volume, niche products • Competition in this industry is increasing due to brand loyalty and different perceptions of quality • Barriers to entry are HIGH and increasing because of the market power of the major players Major Local Players Our Analysis • Collected prices of 4 standard drinks from: • • • • • • • Starbucks (2 locations) Dunkin Donuts McDonalds Collegetown Bagels Gimme Coffee shop Manndible Café Trillium Express & Olin Cafe Local Industry Pricing Strategies Coffee Pricing in Ithaca (overview) Hot Coffee 2.5 Manndible 2 Price Starbucks CTB Trillium 1.5 Olin Café Mcdonalds Dunkin Donuts 1 0.5 12 oz 16 oz 20 oz Coffee Pricing (Overview continued) Latte 4.5 4 Price Manndible Starbucks 3.5 CTB Campus Mcdonalds 3 Dunkin Donuts 2.5 2 12 oz 16 oz 20 oz Specific Strategies Premium Pricing • Keeping the price of the product relatively high in order to encourage favorable perceptions among buyers, based solely on price • May exploit the tendency for buyers to assume that: Retailers that use this strategy: Premium Pricing Starbucks 16 oz vs. McDonalds $4.50 $4.00 Prices $3.50 $3.00 Starbucks $2.50 McDonalds $2.00 $1.50 $1.00 Coffee Iced Coffee Latte Drinks Mocha Cost-Plus Pricing • The retailer works out all costs associated with the product and adds the amount of profit they need to make. • Most costs associated with selling a cup of coffee are fixed: example labor- same salary for the barista if she is pouring you brewed coffee of making espresso drink • Generally speaking, the bigger the drink you get, the higher the profit margin for the retailer Retailers that use this strategy: Costs Associated with Selling a Cup of Coffee: • Coffee Beans • Wages for barrista etc. • Cup/Lid • Overhead Costs (rent, upkeep) • Any extras (milk, soy, espresso) Cost Plus Graph Manndible Coffee Price vs. Price/oz 3 0.18 0.16 0.14 2.5 0.12 Price 0.1 Price 0.08 2 0.06 0.04 0.02 1.5 0 12 oz 16 oz 20 oz Price/oz Linear Pricing • Linear pricing is defined as paying a set amount per oz, multiplied by the # of oz in the drink • All the coffee retailers exhibited this strategy within each drink category. This is seen in the different size options. Linear Pricing Hot Coffee 2.6 2.4 2.2 Manndible Starbucks Price 2 CTB 1.8 Trillium Olin Café 1.6 Dunkin Donuts 1.4 1.2 1 12 oz 16 oz 20 oz 2nd Degree Price Discrimination • Bundling: breakfast deals • Coffee Cards- frequent user incentives • Add ons- soy milk, extra espresso, extra flavor shot • Manndibucks- prepaid • “Unlimited” mugs Price Bundling • Companies often bundle items together to achieve maximum consumer surplus. • Dunkin Donuts coffee complements their bakery products and breakfast sandwiches. • Although these can be bought separately, buying them together as a value meal is cheaper. • Manndible offers a breakfast bundle of Coffee and a Bagel with Cream Cheese Complementary Pricing • Charging a very low price for an item compared to its competitors, while raising price on other items. • McDonalds offers a small cup of coffee for $1, and runs a seasonal campaign of any size coffee for $1. • Artificially low price of coffee stimulates interest, brings in customers who are then more likely to buy some food along with their inexpensive cup of coffee. Gimme! Vs. Manndible • Same coffee, different prices. Why? Coffee Mocha 2.6 4.6 2.4 4.4 2.2 4.2 1.8 Gimme 1.6 Manndible Price Price 2 4 Gimme 3.8 Manndible 3.6 1.4 3.4 1.2 1 3.2 12 oz 16 oz 20 oz 12 oz 16 oz 20 oz Conclusion Analysis & Recommendations • Investment Recommendations: • Large opportunity for national and international expansion • Non-coffee sales • Homebrew • Company Recommendations • • • • • Specialty coffee Coffee bean sales Social responsibility & community relations Customer service Product innovation National vs. Local • Average national price: • Brewed- $1.38 • Espresso- $2.45 • Average Ithaca price• Brewed- $1.58 • Espresso- $2.93 Questions?