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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, • Wholesale • High


Vietnam, Intermediary competition
Colombia, • High • Low Barriers to
Indonesia Concentration entry
• Rising costs via • High barriers to • Medium
low crop yield entry 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, • Health food trend


thus cost control
• Per capita disposable
• Market position & “high- income
profile” outlets
• Per capital coffee
• Franchising consumption
Product Mix

Brewed Coffee Food & Drink Specials Seasonal Drinks

Iced Coffee 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

2 Manndible
Starbucks
CTB
Price

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
Manndible
Starbucks
3.5
Price

CTB
Campus
3 Mcdonalds
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

$3.50

$3.00
Prices

Starbucks
$2.50
McDonalds

$2.00

$1.50

$1.00
Coffee Iced Coffee Latte Mocha
Drinks
Cost-Plus Pricing
• The retailer works out all costs associated
with the product and adds the amount of Costs Associated with
profit they need to make. Selling a Cup of Coffee:

• Most costs associated with selling a cup of • Coffee Beans


coffee are fixed: example labor- same salary • Wages for barrista
for the barista if she is pouring you brewed etc.
coffee of making espresso drink • Cup/Lid
• Overhead Costs
• Generally speaking, the bigger the drink you (rent, upkeep)
get, the higher the profit margin for the • Any extras (milk,
retailer soy, espresso)
Retailers that use this strategy:
Cost Plus Graph
Manndible Coffee
Price vs. Price/oz
3 0.18

0.16

0.14

2.5 0.12

0.1
Price

Price
0.08 Price/oz

2 0.06

0.04

0.02

1.5 0
12 oz 16 oz 20 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
2 Starbucks
Price

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
2
4
Price

Price
1.8 Gimme Gimme
Manndible 3.8 Manndible
1.6
3.6
1.4
1.2 3.4

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?