Opportunity for differentiation Starbucks Business Case Study. Trusted By Over , Learn More.
Companies may use contracts to buy green coffee and dairy products. Gross margins range between 40 and 60 percent, and higher commercial sales tend to decrease margins.
Chains use comparable store sales to measure growth. Most companies lease store locations for a fixed term. Rent for coffee shops in malls may include a fee for shared area maintenance. Companies compete for prime locations, sometimes with other retailers, and negotiating power may be limited.
Chains periodically close underperforming stores, and set aside a reserve for remaining lease payments. Franchise and license agreements typically include an upfront fee, payments or royalties based on percentage of sales, and renewal options. Master license agreements may allow licensees to grant sublicenses to third parties within a territory.
Ice Cream, Cigarettes, Sweets - Consumers have limited discretionary budget to spend on consumer goods, such as cigarettes, beer and also coffee; coffee shops are therefore fighting for a fraction of this budget. A significant driver in the coffee shop industry is growth in the form domestic and international expansion. Such expansion is considered the number one growth driver for the company which plans to grow from 12, stores to 30, stores in 10 years.
A second driving force in this industry is tied to product innovation. Serious coffee shop contenders now offer a product selection broader than the traditional cup of coffee.
National chain and even local coffee shops boast menus including coffees, teas, hot chocolate, pastries, bottled water, and even sandwiches. Equally critical to the structure of the coffee industry has been the role of service innovation. An example of such innovation which has been hugely successful was the introduction of SVCs — store value cards.
Service innovation is also impacting the industry in that companies are now required to offer a diverse set of services including music, drive-through services and newspapers to stay competitive.
Starbucks was the first to realize the benefits of partnering when it reached out to powerhouse brands like Pepsi, Barnes and Noble, Nordstrom, Kraft and United Airlines to create new products, reach new customers and enter new channels of distribution like grocery, cruise lines and the airline industry. Caribou has followed suit and partnered with General Mills to produce a breakfast bar, USAToday to provide a news services to its customers, and most recently, Coca-Cola, to directly compete with Starbucks ready-to-drink iced coffees.
Americans already spent considerable time at home and work and his vision was to provide a third place for Americans to not only drink coffee but to invest significant personal time. That isn't a problem with Dunkin' Donuts.
A further driving force is the role of technology. Line management is a significant issue for coffee houses as often the demand is concentrated in the early mornings. For example, Starbucks has been able to achieve customer service efficiency by introducing automatic espresso machines.
For example, Starbucks customers, who pay a premium for coffee, seem to miss the elaborate process of brewing and drink creation. Dunkin Donuts, however, has seen less resistance to its technological innovations as its products are generally cheaper and its brand is tied to simplicity. Finally technology is impacting this industry in the form of increasingly sophisticated home brewing machines which are able to at least replicate, if not beat, the quality of coffee prepared at many of these stores.
The outlets offer coffee drinks, food items, beans, coffee accessories and teas. Starbucks owns about 17, of its shops, which are located in about 10 countries mostly in the U. Embracing its value beyond extraordinary coffee, Starbucks tries to make a business out of human connections, and celebration of diversity and culture.
As mentioned, the firm focuses on high-traffic, high-visibility locations. While Starbucks selectively locates stores in shopping malls, it tries to focus on places that provide convenient access for pedestrians and drivers. McDonalds which history began in is the leading global foodservice retailer with more than 30, local restaurants serving nearly 50 million people in more than countries each day. McDonalds competes on price, ubiquity, convenience, service and through offering quality food products.
While currently owning the breakfast segment the company wants to take over the afternoon segment. The company is opening additional shops every year. He is convinced that there is a market opportunity especially among a younger audience that is enamored with Starbucks frothy beverage menu but daunted by its prices.
The company purposely leaves the fancy CD burning stations, mood lighting and comfortable chairs to the competition and focuses, instead, on speed. The company tries to reach a rate of one shop to every 15, - 20, people in their target markets. However, that is an important, but not the most critical, issue because high margins in the coffee business will allow the company to buy key sites. Additionally the enterprise aims at improving its level of service and cross shop consistency in service; a goal that is especially challenging because of the franchising structure.
CEO Luther in to his franchisees: Caribou Coffee was founded in and its headquarters is located in Minneapolis Minnesota. Today it is the second largest specialty coffee company in the U. Caribou's cafes feature mountain-lodge-style decor with exposed beam ceilings, leather chairs, and roaring fireplaces.
Stay awake for it. The company emphasizes the quality and freshness of their products Coffee is packaged immediately after roasting, and it is not sold more than 21 days after roasting or more than seven days after the opening of the package.
Caribou competes by offering a slightly different roast of coffee and a warmer, more relaxing in-store environment compared to the Starbucks shops with a rather sleek, urban atmosphere. The Middle East is the first region Caribou Coffee is seeking to expand internationally. The company believes that there is a small but growing market for American branded coffee houses.
The company also sells its coffee in upscale grocery stores, such as Lund's and Byerly's in the Twin Cities and Heinin's in Cleveland.
The company is known for its extensive selection of coffees and teas, as well as its reputation for innovation, e.
Coffee Bean has also made a push overseas, finding niches in Starbucks-free markets such as Israel. With nearly all of its drinks certified as kosher, the company has opened several locations in that area. Peet's strength is the taste of its coffee, which appeals to java connoisseurs. The company roasts its beans in small batches, replaces brewed coffee every 30 minutes, and never re-steams milk. Peet's beans are also sold in more than 4, grocery stores. Though no chain has approached Starbucks global scale, the coffee shop industry is increasingly competitive.
With the coffee selection improving elsewhere it is unclear how many customers will continue to pay premium prices if that experience is no longer unique. Experts expect the price-value equation of the competitors to change in the future.
Several key factors within the coffee shop industry are essential components that will likely lead to success or failure of market participants. Many customers focus on the special atmosphere each store has and which is characterized by the location, music, interior design, seating or whether internet access is provided.
Coffee shops have to establish a unique image that prevents customers from buying products from another shop or use home-brewing systems which are also on the rise in American households. Furthermore it is important to have state-of the art technology in the shop in order to serve high quality and differentiated products.
Advantages of high level technology and machines are shorter waiting times for the customers and the ability to create a variety of fresh, new and unique flavors. On the other hand it is essential that the level of automation and machinery is well chosen and that there is a clear plan how to integrate the new machinery into the business.
This could be beneficial for developing a relationship with the customers which in turns leads to greater brand loyalty. Informed customers are able to make educated decisions and will be less likely to switch just based on gut feeling.
Furthermore this education might motivate coffee buyers to pay a higher price for better products. Several companies have proven already that a key factor in the future will be the ability and willingness to cooperate with other market participants without losing control of the business.
Besides the cooperation with other partners in the industry the coffee shop companies have to ensure that the quality of products and services as well as the cleanliness of the location are consistent and at the desired level from shop to shop including especially franchisees and licensees so that the consumers can build trust in the brand. The barista is the personality and sole representative of the specialty coffee supply chain to the consumer.
They not only can make drink suggestions or recommendations, but their skill can be the difference between an everyday latte and an amazing specialty coffee experience.
In addition to that companies in the coffee shop industry have to make sure that they can meet the increasing future demand. Per capita consumption of total volume is predicted to reach 2. Therefore the market participants should support their suppliers in providing differentiated, quality beans and focus on business strategies that try to prevent farmers from running into debt and poverty.
However, shifting into the specialty segment is no panacea, since it is a rather small part of the overall market — only 7. The trend of stricter regulations in the coffee industry started already, e. In addition to that, if these social movements gain more attention in the market, the companies could also benefit from the positive public relation associated with the social commitment and engagement.
To sum it up, coffee shops have to target their customers effectively in terms of product portfolio, company image and atmosphere as well as advertising and coffee shop location while paying attention to the partners along the value chain and look out for beneficial cooperation within and between industries.
Consumers are expected to maintain increasing levels of coffee consumption between and Per capita consumption of total volume retail and foodservice is predicted to reach 2. Growing demand for specialty coffee : Consumption of specialty coffees has increased by 10 percent a year since the early s, compared with 2 percent for the overall market.
If this trend continues, demand for them could conservatively be expected to grow by 5 percent annually—an additional 2. This is a very positive development as specialty coffee might be perceived less as a commodity.
Furthermore sales are generally strong. Popularity of the product: Diversity of functions of coffee shops: Coffee shops have a great potential because they are different things to different people: Therefore coffee shops can address a variety of issues when promoting their outlets. Growth potential for companies by franchising and licensing: Franchising Coffee has become a popular low-risk alternative to setting up an independent store. Furthermore specialty coffee is the fastest growing franchise segment in America.
Dominance of big companies: High investments to start franchise: Rather low investment for independent coffee shops: Setting up a single and independent coffee shop, in contrast to franchising, a significant smaller amount of capital is needed which in turn leads to low entry barriers. Besides that eating-and-drinking places are by nature extremely labor-intensive.
Additionally coffee companies have to overcome the loyalty of the customer to local coffee shops and the increasing threat posed by sophisticated home brewing machines. More and more U. Increasing power of substitutes: Per capita consumption of coffee dropped to about 17 gallons in , down from 36 gallons in , while soft drink consumption grew from 23 to 55 gallons, over the same period - an increase of more than per cent. Different drinking habits of following generations: Therefore the coffee industry needs to address young adults and change the drinking habits as they enter the working world and establish own households.
Further risks of the industry: Trends in the coffee industry 2. Coffee Industry Partnerships 3. A closer look at Starbucks 4. Starbucks Gift Card 5. Caribou Coffee- menu extract 7. Coffee taste test, surveys etc. Additional information about franchising 9. The result was that the former one edged out Starbucks for the first time.
A reason might be the increased level of automatic machines and bagged coffee at Starbucks which leads to a loss in uniqueness. Additionally the franchisee benefits from the established brand name and business knowledge of the company.
Foremost is the high cost of entry. The top franchise opportunities require considerable investment on the front end, usually more of an investment than if the entrepreneur started a similar venture on his own. The franchisee might also be required to buy supplies from the franchisor, including inventory, paperwork, software, computer systems, and anything else the franchisor decides that they should supply.
Organic, Shade and Fair trade coffees- collectively known as sustainable coffees — fill a market niche that is often rewarded with a premium price and can provide superior environmental, economic and social benefits to producers.
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