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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 % Food Budget Spent Dining Out Dollar Value


$
18-25 46.4% 2,351
$
25-30 44.8% 2,668
$
35-50 42.3% 3,165
$
50-65 42.8% 2,911
$
65+ 37.0% 1,926
Spending by Income
Levels

Income/year % of Market Dollar Value

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


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 DEMAND INDUSTRIES


Beef & Pork Wholesaling
Coffee Production
Coffee Consumers

Dairy Wholesaling & Snack


Egg & Poultry Wholesaling
Fish & Seafood Wholesaling Shops in
Frozen Food Wholesaling
Fruit & Vegetable Wholesaling
the US
RELATED INDUSTRIES RELATED INTERNATIONAL
Specialty Food Stores INDUSTRIES
Chain Restaurants Global Fast Food Restaurants
Single Location Full-Service Restaurants Full-Service Restaurants in China
Caterers Fast-Food Restaurants in China
Street Vendors Fast Food Services in Australia
Bars & Nightclubs Cafes and Coffee Shops in Australia
Fast Food Restaurants 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 Assistance NONE Industry Globalization LOW
Concentration Level 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%
Total 31 100%

b.
# Age Response Percentage%
1 18-25 27 87%
2 25-40 3 10%
3 40-65 1 3%
Total 31 100%
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%

Total 31 100%
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%

Total 31 100%
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
$2.85 $2.99 $2.75
(12oz.)

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 low-


where 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 Latte
Price 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


High margins
$1.80 $0.034 $2.50 $0.095
$1.60 $0.033
$1.40 $0.032 $2.00 $0.090
$1.20 $0.031

Cost per oz.

Cost per oz.


Profit/size

Profit/size
$1.50 $0.085
$1.00 $0.030
$0.80 $0.029
$1.00 $0.080
$0.60 $0.028
$0.40 $0.027 $0.50 $0.075
$0.20 $0.026
$0.00 $0.025 $0.00 $0.070
12oz. 16oz. 20oz. 12oz. 16oz. 20oz.
Hot coffee Profit/size Hot coffee Cost/oz. Profit/size Cost/oz.

Hot Coffee 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?