aem 4160 april 28, 2015 coffee shop industry kyle brumm | sarah le cam | zach leighton | stephanie...
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AEM 4160April 28, 2015
COFFEE SHOP INDUSTRY
Kyle Brumm | Sarah Le Cam | Zach Leighton | Stephanie Ou
AGENDA
Background
Competitive Landscape
Industry Organization
Major Competitors
Pricing Strategies
Raw Data Analysis
Recommendations
WHY COFFEE?
Introduction Industry Pricing Strategies
Recommendations
Millions of Americans on a daily
basis
Several innovative changes in the past 20
years
Customers are more
sophisticated,
knowledgeable
Retail coff ee industry $28 billion in revenue in the United States Two major categories
At-home Direct sale
Industry at a Glance – Coff ee & Snack Shops Revenue +$12bn from coffee shops Businesses +22,000 coffee shops
INDUSTRY BACKGROUND
Introduction Industry Pricing Strategies
Recommendations
KEY DRIVERS
Introduction Industry Pricing Strategies
Recommendations
• Consumer Spending
• Health Consciousness
• Increased Consumer Confidence
• Growth of Consumption
EXTERNAL• Clear Market
Position
• Effective Cost Controls
• Ability to Franchise
• High-Profile Locations
• Multiskilled Workforce
INTERNAL
Four Firm Concentration Ratio
58.3 Highly concentrated at
the top
Top 20 players control 70% of the coffee shop market
INDUSTRY COMPETITION
Introduction Industry Pricing Strategies
Recommendations
Threat of New Entrants MODERATE
Threat of Substitutes HIGH
Bargaining Power of Buyers LOW/MODERATE
Bargaining Power of Suppliers LOW/MODERATE
Intensity of Competitive RivalryHIGH/MODERATE
PORTER’S FIVE FORCES
Introduction Industry Pricing Strategies
Recommendations
SUPPLY CHAIN
Introduction Industry Pricing Strategies
Recommendations
CoffeeFarm
Factory forWashing
Freight &Transportati
on
Factory forProcessing
Factory for
Roasting
CoffeeBar
Consumers
1 2 3 4
5 6 7
FAIR TRADE
• Support local, small-scale farmers• Long-term sustainability• Links farmers directly with importers
Revenue (2014)$16.5bn
US Stores: 7,303
Ithaca LocationsDowntown/CommonsCollegetown Ithaca MallCampus Dining
STARBUCKS CORPORATION
Introduction Industry Pricing Strategies
Recommendations
Revenue (2014)$748 million
US Stores: 8,047
Ithaca LocationsDowntown/CommonsEast Hill PlazaCollegetown (May ‘15)
DUNKIN’ BRANDS
Introduction Industry Pricing Strategies
Recommendations
LOCAL COMPETITORS – ITHACA MARKET
Introduction Industry Pricing Strategies
Recommendations
Collegetown BagelsCollegetown
Downtown/CommonsEast Hill Plaza
Gimme! CoffeeCollegetown
Downtown/Commons (2)[Other locations in New York State]
Stella’s CafeCollegetown
Manndible CafeCornell Campus
Off ers products at diff erent prices Regular drinks (coffee, iced coffee, latte) – CHEAP Specialty drinks (cappuccino, mocha) – EXPENSIVE
Who can engage in this?Example: Starbucks in the Recession
Lowered the price of regular drinks ($0.05 - $0.15) Increased the price of premium drinks (+$0.30)
PREMIUM PRICING
Introduction Industry Pricing Strategies
Recommendations
$2.58
Iced Coffee (16 oz)
$2.10
Coffee (16 oz)
$4.23
Mocha (16 oz)
“Deltas” between sizing varies Some companies use linear pricing (Stella’s, Gimme!, Dunkin’) Some companies use non-linear pricing (CTB, Starbucks,
Manndible)
Non-linear deltas decrease with increased size on standard drinks On premium drinks this does not hold
LINEAR VS. NON-LINEAR PRICING
Introduction Industry Pricing Strategies
Recommendations
More coff ee More time
Cold brewing technique
Greater expenses Plastic cups more expensive
than paper cups Use of straws Condensation leads to more
napkins per customer
HOT BREWED VS. ICED COFFEE
Introduction Industry Pricing Strategies
Recommendations
Small CTB Starbucks Stella'sHot $0.15 $0.15 $0.15Iced $0.14 $0.19 $0.19
% Difference -3.6% 28.6% 28.6%
Medium CTB Starbucks Stella'sHot $0.11 $0.12 $0.11Iced $0.10 $0.15 $0.14
% Difference -11.3% 25.5% 22.2%
Large CTB Starbucks Stella'sHot $0.13 $0.13 $0.13Iced $0.10 $0.17 $0.16
% Difference -18.7% 26.2% 25.0%
Punch cardsDiscount for using own
mug Increases customer
loyalty
CUSTOMER LOYALTY DISCOUNTS
Introduction Industry Pricing Strategies
Recommendations
GIMME! VS. MANNDIBLE CAFE
Introduction Industry Pricing Strategies
Recommendations
Gimme! 8 oz $1.75 12 oz $2.00 16 oz $2.25
Manndible 12 oz $2.13 16 oz $2.39 20 oz $2.60
Off er small, medium, and large (and even extra large) options Starbucks – Trenta (30 oz) Dunkin Donuts – XL (24 oz)
Allows customers to self selectAdd-ons / Substitutes
2ND DEGREE PRICE DISCRIMINATION
Introduction Industry Pricing Strategies
Recommendations
Collegetown Bagels
3RD DEGREE PRICE DISCRIMINATION
Introduction Industry Pricing Strategies
Recommendations
Coffee Collegetown Commons East Hill Plaza12 oz $1.75 $1.75 $1.7516 oz $2.05 $2.05 $2.0520 oz $2.29 $2.29 $2.29
Iced Coffee Collegetown Commons East Hill Plaza16 oz $2.25 $1.94 $2.2524 oz $2.50 $2.42 $2.5032 oz $3.25 $2.99 $2.75
Latte Collegetown Commons East Hill Plaza12 oz $3.25 $3.25 $3.2516 oz $3.75 $3.75 $3.7520 oz $4.25 $4.25 $4.25
Bundle with complementary goods (i.e. baked goods or sandwiches)
Cheaper to purchase as a bundle or “combo” than separately
Lower prices for coff ee to incentivize consumers to buy higher priced complementary products
PRICE BUNDLING / COMPLEMENTARY PRICING
Introduction Industry Pricing Strategies
Recommendations
Housemade muffin or scone$2.25
16 oz Gimme! drip coffee $2.39Buying separately
$4.64
GOLDILOCKS EFFECT / EXTREME AVERSION
Introduction Industry Pricing Strategies
Recommendations
Survey 112 vs. 16 oz
N = 64
Survey 212 vs. 16 vs. 20 oz
N = 61
A few times a month 19%1-3 cups a week 23%4-6 cups a week 14%1 cup a day 22%2 cups a day 14%More than 2 cups a day 10%
GOLDILOCKS EFFECT / EXTREME AVERSION
Introduction Industry Pricing Strategies
Recommendations
12 oz.56%
16 oz.44%
When Given 2 Options...
12 oz.46%
16 oz.43%
20 oz.11%
When Given 3 Options...
SURVEY FINDINGS
Introduction Industry Pricing Strategies
Recommendations
Starbucks26%
On-Campus Café22%Dunkin Donuts
14%
CTB14%
Manndible13%
Stella's5%
Other3%
McDonald's2%
Coffee Shop Preferences
Convenience30%
Coffee Fla-vor/Taste
27%
Location16%
Brand11%
Coffee Op-tions8%
Offers Other Products6%
Other2%
Reasons for Coffee Pref-erences
Prime Location Either in Collegetown or on campus
Fast ServiceHigh Quality Coff ee and/or Fair TradeMultiple locations in Ithaca using diff erent submarkets
Collegetown Downtown/Commons East Hill Plaza/Ithaca Mall On Campus
Understand developing consumer tastes
POSITIONING - ITHACA
Introduction Industry Pricing Strategies
Recommendations
Use Premiu
m Pricing
Customer
Loyalty Program
s
Price Bundlin
g
Offer 3 sizes
PRICING STRATEGIES
Introduction Industry Pricing Strategies
Recommendations
Ithaca does NOT show strong signs of third degree price discrimination This changes when the analysis is expanded to include
other geographic locationsCoff ee shops charge higher prices on premium drinks
due to high WTPNational leaders do NOT preclude local players from
the marketCoff ee shops can benefit from diff erentiation
CONCLUSION
Introduction Industry Pricing Strategies
Recommendations