market profile assignment updt3 final

7/28/2019 Market Profile Assignment Updt3 Final

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Opportunities forCaf in the UKCoffee Market

Market Profile submitted as part requirement for the B.A. degree in [InternationalBusiness.] at the University of Worcester.

By Alexandra Sanchez-Havard

5/17/2012


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Abstract

Since the introduction of the first coffee shop chains in the UK British

consumers have developed a greater taste for coffee and a coffee

culture. Coffee drinking is becoming very popular and consumers are

getting more knowledgeable about coffee and more demanding. The

Gourmet coffee market in Britain is currently booming as coffee

connoisseurs are seeking more for premium coffee. The UK coffee

market is split into in-home and out-home coffee (coffee shop) market

and more branded coffee shops are starting to enter the in-home

coffee market. The UK coffee shop market is likewise on high, with

constantly growing sales despite of the economic downturn, it has

shown incredible resilience. Visiting coffee shops has become part of

British lifestyle. However, it has been identified that there are a

number of challenges that the branded coffee shop chains are

currently facing in the coffee industry. The biggest challenge is the

increasing competition of non-specialist operators (e.g. quick service

restaurants, pub chains, department store cafes, supermarket cafes,

etc.) who are trying to replicate the coffee shop experience, with the

improved quality of their hot drink range. Coffee shops are therefore

in danger of losing their Unique Selling Proposition (USP), as it is

getting more difficult for them to differentiate themselves from the

competition. Although the UK coffee shop market is very mature and

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highly competitive market, there is still more room for newcomers.

For example the Colombian coffee chain Juan Valdez is attempting to

expand globally through franchising and is looking for new

opportunities within the European Market. The UK bears potential for

Juan Valdez to introduce its premium instant coffee in the in-home

coffee market. However, due to the intense competition it would be a

challenge for any newcomer to built reputation and gain competitive

advantage.

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Table of Contents

Abstract

Table of Contents

Acknowledgements

Introduction....................................................................................................6

The In-home Coffee Market............................................................................8

The Coffee-Shop Market ..............................................................................17

Competitive Analysis....................................................................................26

Analysis of the external environment of coffee shops.................................45

Juan Valdez Colombia...................................................................................53

Conclusion....................................................................................................58

Costa Coffee Club Card (2012) [Online]. Available from:

http://www.clubcard.info/loyalty-cards/costa-coffee-club [Accessed 2nd May

2012]............................................................................................................62

International Trade Center (2012) Exporters: The Coffee Guide. [Online].

Available from: http://www.intracen.org/coffee-guide/the-markets-for-

coffee/Tariffs-and-taxes/ [Accessed 2nd May 2012].....................................64

JD Wetherspoon plc (2010) Annual Report and Accounts 2010. [Online].

Available from: http://www.jdwetherspoon.co.uk/home/investors/finance-

reports/final-annual-report-2010.pdf [Accessed 2nd May 2012]..................64

King, M. (23 September 2011) Store Wars: Caff Nero and Starbucks. The

Guardian. [Online]. Available from:

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http://www.guardian.co.uk/money/blog/poll/2011/sep/23/store-wars-caffe-

nero-starbucks [Accessed 2nd May 2012]....................................................64

Lowery, A. (2012) UK economy is back in recession', claims global think-

tank. [Online]. Available from:

http://www.thisismoney.co.uk/money/news/article-2122099/OECD-forecast-

UK-economy-recession-claims-global-think-tank.html#ixzz1v7P9Lkyj

[Accessed 18th April 2012]..........................................................................65

Lucas, L. (Friday 2nd March 2012) Starbucks to revitalise European stores.

Financial Times. [Online]. Available from:

http://www.ft.com/cms/s/0/87cdc578-63c1-11e1-9686-

00144feabdc0.html#axzz1uECWtPhX [Accessed 2nd May 2012]................65

Manson, E. (23rd May 2007) UK coffee market set to double over the next

10 years. [Online]. Available from:

http://www.caterersearch.com/Articles/24/05/2007/313851/UK-coffee-

market-set-to-double-over-the-next-10-years.htm [Accessed 28th April

2012]............................................................................................................65

Oxlade, A. (2012) Economy watch: What caused the return to recession and

how long will it last? [Online]. Available from:

http://www.thisismoney.co.uk/money/news/article-1616085/Economy-watch-

How-long-Britains-recession-last.html#ixzz1v7QNzNsN [Accessed 18th April

2012]............................................................................................................66

Starbucks (2012) My Starbucks Rewards [Online]. Available from:

http://starbucks.co.uk/card/rewards [Accessed 2nd May 2012]...................66

Wood, Z. (Wednesday 2nd March 2011) Whitbread acquires Coffee Nation in

60m deal. The Guardian. [Online] Available from:

http://www.guardian.co.uk/business/2011/mar/02/whitbread-fooddrinks

[Accessed 30th April 2012]..........................................................................67

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Introduction

This is a study of the UK coffee market with focus on the coffee shop

market. The aim of this study is to analyse the UK coffee market in

order to find out changes and trends of coffee drinking and visiting

coffee shops in the UK. Consequently, after analysing the UK coffee

market, the question whether there are any opportunities for

newcomers to enter a crowded and highly competitive market like the

UK market is, can be answered. As an example for a newcomer the

Colombian coffee chain Juan Valdez will be used in this connection.

The first chapter of this study will give an overview of the in-home

coffee market in the UK, which shows the trends in general of coffee

drinking and the market size and growth. This chapter is essential as

the context for the coffee shop market.

Our main chapter will be the coffee shop market, which will be

analysed in more detail and will lead to the answer to our question. At

first we will have an overview in the market size and growth of the UK

coffee shop market, market segmentation and consumer behaviour.

Marketing tools like Porters five Forces and the Positioning Map will

help us to identify the competition and their position in the coffee

shop industry. In order to identify possible opportunities or threats for

newcomers in the UK coffee shop market the external environment of

coffee shops will be scanned with the help of the PEST-Analysis. The6


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last chapter will give an example of a potential newcomer into the UK

coffee market. The Colombian coffee chain Juan Valdez has already

expanded across Latina America and has a few coffee outlets in the

USA. Now the coffee chain is planning to expand across Europe. The

question in relation to this study is to find out if there any

opportunities for Juan Valdez to enter the UK coffee market and if it

can keep up with the increasing competition.

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The In-home Coffee Market

1.1 Introduction

Coffee is the second most traded commodity in the world after oil and

is worth billions in annual revenue. It is also one of the most popular

drinks worldwide with a consumption of about two billion cups daily

(Franchise Direct 2012). Its importance to the economy and politics of

many developing countries can never be underestimated. The whole

business involved with coffee provides employment for millions of

people around the world. Coffee exports make up an enormous share

of the export earnings for many of the worlds least developed

countries. The two most important exchanges in regards to coffee

beans are London and New York. (International Coffee Organization

2012)

This chapter will give an overview about the current situation and

trends of the in-home coffee market, as a basis for understanding the

UKs coffee drinking culture. This is essential for the analysis of the UK

coffee shop market and for the identification of opportunities for

newcomers to enter the market. The information gathered in this

chapter is mainly from research carried out by Mintel Intelligence

2010, but also from different new articles and business journals.

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1.2 Facts and Figures

According to Franchise Direct UK (2012), people in the UK drink

approximately 70 million cups of coffee a day and it is therefore the

nation's third-favourite non-alcoholic beverage, consumed by 70% of

adults compared with 83% for tea and 81% for fruit juice (Manson

2007). Furthermore, research from Mintel (2010) have found out that

coffee drinking is becoming more sophisticated and consumers are

seeking more frequently after posh coffee, such as roast, ground,

instant premium and super-premium.

The demand for higher quality coffee has consequently boosted sales

of coffee in the UK, reported Mintel (2010). The increased demand of

premium coffee as well as the hike in raw coffee and production costs

has led to a 17% growth in value in the UK market for in-home coffee,

over the period between 2005 and 2009. Mintel also adds that the in-

home coffee market has benefitted from the economic downturn and

the price increase in the UK, as consumers are trying to replicate the

coffee shop experience at an in-home price. In 2010, the in-home

coffee market in general was worth, as per Mintel (2011a) 55.3 million

kg in volume sales and 831 million value sales and it was forecasted

to grow by 25%, hitting the 976 million mark, predicted by 2014.

With a market share of 71% and sales of 670 million in 2010

instant coffee remains the Britains favourite in-home coffee type

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(Mintel 2011a). In an article from Food Navigator, from 17th May 2004,

Chris Jones claims that the British are the biggest consumers of

instant coffee in Europe, driven by the desire for speed and

convenience. Figure 1 gives an overview of the different types of

coffee consumed by adults over 16 years in 2011 in the UK.

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However,

Mintels

research

in 2010

have

shown that the traditional cup of coffee has become more

sophisticated than ever before, as consumers tend to seek more

frequently for roast, ground, instant premium and super-premium

coffee. Sales of roast or ground coffee (149 million) account for 19%,

which is an increase of 49% between 2005 and 2009. Sales of

premium (freeze-dried) coffee rose 44% over the same 5 year period,

11

UK consumption of coffee, February 2011

%Instant coffee71Ground coffee36Any branded

24Any supermarket own-label20Instantcappuccinos/latte/mocha coffee17Any fair

trade16Any decaffeinated15Coffee pods (e.g.

Nespresso, Tassimo, Dolce Gusto, Senseo)

10Coffee beans9Chilled ready-to-drink

coffee3Have drunk coffee out of home but not in

home 2

Figure

1

Source: Mintel Coffe UK

2011


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valued at 201 million in 2009, accounting for 36% of the total instant

value sales. Sales of speciality coffee, like decaffeinated coffee, have

witnessed an 8% decline in the past year, accounting for 11% (62

million) of instant sales in 2009.

With regard to coffee sales as a whole, it has been observed that the

trend of Fairtrade coffee is becoming the norm in the UK coffee

market (in-home and coffee shop market) as more of the major coffee

retailers and coffee shop brands are switching their supply to

Fairtrade sources. Fairtrade Coffee was worth 41 million in 2009,

accounting for around 5% of total coffee sales (Mintel 2010).

Having discussed the latest trends in coffee consumption in the UK in-

home coffee market, which is highlighted by the growth in the sector

with particular focus on premium products, despite wider economic

uncertainty, we will now focus in the next chapter on the individual

segments and their attractiveness within the in-home coffee market.

1.3 Segmentation of the In-home Coffee Market

According to Mintels research 2010, the biggest consumer group of

coffee in the UK represent the over 55s, which has been seen as a

powerful buying group. However, there is a crucial proportion of

drinkers among the young consumers which the coffee market is at

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risk of losing if they dont develop a taste for coffee. Moreover, it has

been discovered that the turning point for coffee drinking is at the

age of 35, where a considerable coffee consumption increase has

been observed, amongst the 35 to 44 years-old and steadily after. As

per Mintel 2010, only 39% of the consumers aged 25 to 34 and 17%

of the 16 to 24 year olds drink coffee which they make at work,

compared to 50% of those aged 35 to 44. Meanwhile, 33% of the 16

to 24 year olds and 57% of those aged 25 to 34 drink coffee at home,

this compares to three quarters (75%) of those aged 35 to 44 years

old.

The problem with the younger generation is that they dont drink

instant coffee, which is the largest part of the in-home coffee market.

For that reason big coffee brands have to strive more to make coffee

more appealing to young people. Another consumer group that the

industry is also concerned about, are the over 65s. The coffee

consumption of this age group falls from 13.4 cups per week to 11.9

cups as soon as they reach 65, which is worth millions of pounds as

they account for a fifth of the adult population. As many older people

fear the reputation of coffee increasing health risks, Mintel (2010)

suggests that brands could promote the recently discovered health

benefits of coffee or develop healthier brand extensions to prevent

this consumer group from falling out of the market. Although, for a

long time coffee was considered to be unhealthy, new studies have

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surprisingly found out that if consuming in moderation, it would

actually have some health benefits. An article from the Harvard

Medical School (2006) reports that coffee reduces the likelihood of

developing diabetes, which can lead to heart disease, and lowers the

rates of certain cancers.

As the percentage of instant coffee consumption in the UK remains

high, some branded coffee shops have started to offer instant coffee

in supermarkets. With its brand Via Instant Starbucks has been

selling coffee in the supermarkets since 2011. Now Costa Coffee is

beginning to sell its coffee and other products in supermarkets as

well, in a move to take on rival Starbucks on retailer aisles, claims

John Reynolds in an article dated 11th

April 2012 on the Brand

Republic website. Mintel (2010) claims that by focusing on youth-

target products, Starbucks and Costa could have the opportunity to

enter the in-home coffee market much more aggressively than is

currently the case. In terms of the quality of in-home coffee, a quarter

of 16-24 year old drinkers believe that branded coffee shops make

better coffee than the established supermarket brands like Nescafe

and Kenco (Mintel 2011a).

Another opportunity for coffee brands is to target consumers with

busy lifestyles. Mintel (2011a) suggests that coffee brands could do

more to promote the energy-giving benefits of coffee, as only less

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than half (47%) of in-home drinkers would agree that coffee provides

a welcome energy boost. This fact has been one of the key reasons to

the growth of energy/sports drinks into a billion pound market. Sarah

Labdar claims in an article from the website Articlebase, in October

2011 that coffee is a natural stimulant, containing caffeine, which

would boost the body's metabolism giving the consumer more energy

and spirits uplifting.

Despite the rising growth and trend in coffee consumption, there are

still some issues the coffee market is currently facing. This will be

discussed in the following chapter, where some of those issues will be

highlighted.

1.4 Issues in the UK Coffee Market

As per Mintel 2010, the rising cost of the coffee beans has been a

problem for the UK market since 2005. One of the reasons for the

price increase is the fact that wealthy developing countries such as

China and Russia are increasing their imports of the higher-quality

Arabica beans, which is pushing up the prices as a result.

During the recession in 2009, the price of coffee imports rose to their

highest level in the UK since 1998, leading automatically to a price

increase in the end product, claimed Jonny Forsyth, Senior Drinks

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Analyst of Mintel Report 2011. He also adds that the unfavourable

weather conditions during that period, in one of the key countries,

Colombia, did not help. Moreover, he forecasts that the price rise of

the Arabica bean, as well as the high cost of transport and utilities,

would almost certainly lead to another price increase in 2011. In order

to maintain their 2010 price points, UK coffee makers used up the

majority of their pre-existing coffee stocks.

This is a challenging time for coffee producers and coffee brands, as

inflation in the UK is still high (reported by Bank of England in an

article from The Guardian, appeared on 18th April 2012) and there is

the prospect of interest rates rising, which means that consumer

incomes are more stretched this year than has been the case over the

past three years.

1.5 Conclusion

It is surprising that despite the economic downturn and the price

increase in coffee, the demand for coffee is still growing, in particular

the demand for premium coffee. This shows that British consumers

have developed a taste for coffee and are more knowledgeable about

the product. Coffee is seen as an affordable treat, what makes

consumers less price sensitive. As a result branded coffee shops are

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now entering the in-home coffee market with premium instant coffee

and other products, in order to target those consumers who are trying

to replicate the coffee shop experience at home. This could be an

opportunity for branded coffee shops to make more effort in targeting

those younger consumers, who dont drink instant coffee, as they

believe that branded coffee shops offer better quality products.

This chapter gave us an insight of the coffee drinking behaviour of UK

consumers, which is important to understand in order to analyse the

coffee shop market, which will be done in more detail in the next

chapter.

The Coffee-Shop Market

1.6 Introduction

There has been an explosion of coffee shops on the UK High Streets

over the last few years. According to a research released by Costa

Coffee in the Eat Out Magazine, on 14 th November 2008, coffee shops

have officially overtaken pubs as the UKs favourite social hang outs,

with 72% of the population preferring coffee shops for catch ups. John

Derkach, managing director of Costa Coffee commented on the

research findings:

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"It is quite clear that UK coffee shops have become an integral part of

everyday life. With their warm and welcoming environments, they are

quite simply the perfect place to meet friends and enjoy an affordable

luxury whilst taking a break from our hectic lifestyles."

Given this fact, we will analyze in this chapter at first the current

situation of the coffee shop market in the UK, under consideration of

the current economic downturn and based on secondary data

gathered from Mintel, Allegra and other sources. Next we will carry

out a competitive analysis of the UK coffee shop market, using the

following tools: Porters five forces, Brand Positioning Map and SWOT-

Analysis (Opportunities & Threats).

1.7 Facts and Figures

Allegra (2010a), a strategic research consultancy, found out in a

research released on the 17th December 2010 that the recession in

the UK has not materially affected the visiting frequency of UK coffee-

shops. With a 5.0 billion annual turnover and 14,022 outlets in 2010,

including branded chains,independents and non-specialist operators,

the coffee shop market in the UK is still in the boom. Many people in

the UK see visiting coffee shops as an affordable regular treat that

would not stretch their budget too much.

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Anya Gascoine Marco (head of food and beverage insight at Allegra)

was cited in the Independent on 18th December 2010:

Coffee has become an Integral part of the fabric of the British way

of life. Coffee is almost like lipstick. You want something in your life

that is a treat and makes you feel better.

In another consumer research carried out by Allegra (2010b), in

December 2009 consumers admitted that going to coffee shops is

either habitual or an important treat, that they would not give up.

As per Mintel (2011b) only 9% of the coffee consumers had drunk

more coffee at home since the start of the recession in order to save

money.

Furthermore, Mintel (2011b) reports that around 57% of consumers

now use coffee shops, with amongst them 47% sitting in and only 8%

buy take-away coffee. Usage has only minimally increased in recent

years, with a rate of sit-in growing faster than takeaway.

Costa Coffee is the largest and most popular coffee shop in the UK

with 1,069 outlets in 2010 and 27% visits of the population aged 15+,

compared to Starbucks with 23% and 700 outlets and Caff Nero with

12% and 400 outlets.

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The Independent (2010), a British Newspaper, refers to Allegras

report Project Caf10 UK, a definitive annual study of the UK coffee

shop market where impressive sales growth of 12.9% in 2010 by the

branded coffee shop segment (including Costa, Starbucks, Caff Nero

and Pret A Manger) have been exposed, exceeding 1.94 billion in

revenue.

Jeffrey Young the Managing Director of Allegra Strategies was cited in

the Independent on December 18th 2010:

I have never seen such exciting developments in the UK coffee shop

market. This year the market grew by more than 12% compared to

2.5% for the UK retail sector, adding more than 800 outlets in 2010 in

challenging economic times. With increasing quality of coffee, better

environments from both chains and independents and greater

consumer appreciation of coffee and coffee houses, the market is

poised for significant further growth over the next 3-5 years.

In 2010 the branded coffee shop segment in the UK was estimated at

4,650 outlets with growth stable at 6.1%. Further on, Allegra (2010)

adds that branded coffee chains, including coffee-focused and food-

focused operators would account for 33% of outlets and 39% of total

market revenue.

However, with the increasing number of value-driven non-specialists

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like McDonalds and JD Wetherspoon, department store cafes and

motorway forecourt operators and high quality artisanal

independents, the established coffee chains are now facing pressure

on quality and price. Together these have added 468 outlets,

accounting for 54% of overall outlet growth in 2010 (Allegra 2010a).

1.8 Market Segmentation

According to a research carried out by Mintel in December 2010 with

adults aged over 15, coffee shop users in general tend to be more

women (62.8%) and they are also those who most likely would sit in,

compared to men (54.5%), who tend to take away. Age is also an

important factor that affects the usage of coffee shops. For example

those who sit in (predominantly women) tend to be older consumers

and third age/retired or part-time worker, whilst takeaway drinkers

(predominantly men) tend to be aged 15-34, single in full-time work

(Mintel 2011b). Segmentation by Age however, depends on the age

group a coffee shop retailer (specially the branded ones) is trying to

target.

In general, the biggest usage of coffee shops in the UK is in Greater

London and consumers tend to be split between younger pre-/no

family consumers and older retired consumers.

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However, Mintel (2011b) also reports that coffee shops are arguably

failing to engage with older consumers. These consumers tend to be

over-55s, socio-economic group D, Moderate Means, third age

single/retired single and those are the 7% of the consumers who do

drink hot drinks, but havent had in the last three months, when the

research was carried out in December 2010. In this connection it is

also reported that there is a small percentage (17%) of consumers

who do not drink tea/coffee/other hot drinks out of home at all. These

consumers are more likely to be men, over-75s, socio-economic group

E, Hard Pressed, however, this has been also observed amongst

families, particularly with children aged 10-15.

The reason why this older consumer group is overlooked, as per

Mintel (2011b) is that the older generation may struggle to engage

with the selection of fancy coffees and may prefer a simpler product

range.

There is a small percentage of another consumer group that is also

causing concern to the coffee shop market, this is the younger

generation, aged 15-34, pre/no family/family, socio-economic group E.

Those consumers (around 7%) do not drink tea/coffee/other hot drinks

at all. They would choose to go to alternate venues such as Pret A

Manger and Eat, where they will be offered a wider range of cold

drinks than in coffee shops. The challenge here is to create a USP to

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attract these consumers into coffee shops instead.

In order to be able to find out how to attract consumers to visit a

coffee shop, it is essential to investigate the reasons why consumers

visit coffee shops and what persuades them to choose one venue

over the other, which will be discussed in the next chapter.

1.9 Consumer Behaviour

Based on a nationally representative survey amongst 1,962 adults

aged 15+ in December 2010, Mintel (2011b) has analysed consumer

behaviour in the UK coffee shops, as follows:

What do consumers order in coffee shops?

Drinks

50% of those consumers who have visited a coffee shop in the last 3

months (from the date, when the research was carried out) have

ordered cappuccinos, lattes and mochas; those products are the most

popular hot drinks of UK coffee shops, followed by 26% choosing hot

chocolate, 25% filter coffee and 24% traditional tea (e.g. English

breakfast tea). Espresso, Espresso Machiatto and Americano are less

popular, chosen by only 16% of coffee drinkers. Only 4-6% of

consumers tend to choose drinks such as herbal tea, decaf tea/coffee,

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speciality tea (eg Earl Grey, Chai) or iced coffee/tea. Whilst, cold

drinks are slightly more popular they still represent only a small

section of sales: 12% of diners have chosen soft drinks such as water

or juice, whilst 9% have chosen pure fruit juice/smoothies.

Food

Sandwiches, baguettes and paninis are most popular amongst

younger consumers. Around a quarter have ordered one of those

products in a coffee shop in the last three months, whilst 22% who

have ordered a cake/pastry/biscuit are aged 35-44. However,

according to Allegra (2011a), consumers have reduced their food

purchases in coffee shops from 71% in 2010 to 69% in 2011, in order

to save money.

Enticements for visiting coffee shops

One of the consumers main reasons for choosing one venue over

another is the number of comfortable seats available in a coffee shop.

This is one of the most important enticements that will attract and

persuade a customer to stay, over other coffee shops. Consumers

preoccupation seems also to be more with Interiors and design, rather

than suggesting menus as they are already extensive enough,

although more hot food options do seem to appeal.

Other popular enticements which in particular branded coffee shops

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are now focusing more on, in order to increase customer loyalty are,

free newspapers, magazines, books, free Wi-Fi and loyalty/reward

schemes.

Overall, the biggest drive of the consumers decision to chose one

coffee shop over another is the experience.

Furthermore, Mintels consumer research shows that younger

consumers are potentially easier to target with pre-/no families

interested in hot food options, free Wi-Fi, loyalty cards, speciality

teas, in-house entertainment, low-calorie products, smoothies and

flavoured syrups. While on the other side, the older and retired are

the least easy to influence and families are the ones demanding more

comfortable seating and free magazines/newspapers.

From these investigations we conclude that in a growing market, like

the coffee shop market it is important for coffee shops to focus on a

specific target group, as it is very difficult to please everyone.

However, as the competition is growing with non-specialists trying to

copy the success of coffee shops, more branded coffee shop retailers

are attempting to expand into other segments in order to keep their

USP. In this context it is crucial to identify the competition in order to

achieve the optimal brand positioning, which will be analysed in the

next chapter.

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Competitive Analysis

1.10Introduction

In order to determine the long-term attractiveness of a market or

market segment it is essential to identify the competition. As markets

have become too competitive it is not enough anymore to focus on

the consumer alone (Kotler et al. 2009). Competition within the coffee

shop industry grows more intense every year and players are seeking

for new strategies to secure their competitive advantage. In order to

create and implement effective brand-positioning strategies

companies must pay high attention to the competition (Kotler et al.

2009).

The following marketing tools will help to analyze the competition and

to identify their position within the coffee shop market.

1.11Porters 5 Forces for the UK Coffee Market

The competitive structure of the coffee shop industry can be analysed

using Porters five forces, which will give a complete picture of what is

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influencing profitability in the coffee shop market and identify its

attractiveness.

1. Bargaining power of buyers

The force of the buyers bargaining power corresponds to the ability

of buyers to force down prices, bargain for higher-quality products or

more services and pit competitors against each other (Hunger and

Wheelen 2000).

In the coffee-shop industry a single buyer usually purchases coffee

for its personal consumption and not in large volumes. Besides, the

cost of buying a cup of specialty coffee does not necessarily

represent a significant fraction of the buyers living costs, which

makes buyers less sensitive to price fluctuation and gives players

within the coffee-shop industry more control over pricing (Kotler et

al. 2009). Moreover, buyers are less sensitive to price fluctuations,

once customers loyalty has been built up. Therefore, it is important

for the coffee retailer to build its brand around quality and service, in

order to increase its customer base and customer loyalty. Individual

consumers are willing to pay extra cents for good quality coffee. All

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of these factors reduce the relative bargaining power of buyers in

the coffee shop industry.

As more and more non-specialists are expanding their hot drink

range and improving their quality, it is harder for coffee shops to

differentiate themselves through quality, which leads in turn to an

increase in the bargaining power of buyers (Kotler et al. 2009).

Therefore it is important for the players of the coffee shop industry

to stay innovative and find new Marketing Strategies to maintain

their USP.

Moreover, consumers are getting more knowledgeable about coffee.

Through the Internet and other media they are able to access more

easily information about the taste and the quality of the different

coffee types on offer. In addition, customers can freely switch from

one coffee brand to another, as there are no or low switching costs

and there is a very large selection of retailers in the coffee-shop

industry. This also increases the bargaining power of buyers (Kotler

et al. 2009).

Overall it can be said that the accessibility of information to the

buyers has lead to an increase in the bargaining power of buyers,

resulting in medium to high threat to the coffee shop market.

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2. Bargaining bower of suppliers

Suppliers bargaining power can affect the industry, through the

suppliers ability to raise prices or reduce quantity of the purchased

goods (Kotler et al. 2009).

As consumers are showing an increasing interest in sustainability of

the coffee production, more and more branded coffee chains are

marketing their coffee under certified schemes (Fairtrade Certified,

Organic certification, Rain Alliance Forest Certified), which can be

powerful tools for value addition and access to a fast-growing market

segment (International Coffee Organisation). Many of the coffee

producers who sell premium coffee to coffee chains are united by the

various sustainability initiatives and through those initiatives they are

able in unity to exert bargaining power over their buyers.

The substitution for Arabica beans are the cheaper Robusta beans

which are coming to a close and demand for Arabicas should start to

increase, said Michael Haigh, New York-based global head of

commodities research at a bank, cited in a report from Isis Almeida on

the 20th March 2012, in the Blomberg Business Week. Hence, it is

unlikely, that a big premium coffee retailer (e.g. Starbucks) would

adopt this substitution, as the Arabica beans are the favoured ones

for specialty beverages (Almeida 2002). This means that the Robusta

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coffee bean is an indirect substitute and therefore it would not

decrease their bargaining power.

Originally, the majority of sales made by the premium coffee farmers

comprised predominantly specialty coffee retailers. As the industry is

growing, more independent coffee shops and non-specialists are now

also offering specialty coffee and buying it from the premium coffee

farmer, which has made the relative size and importance of the

organisations within the coffee-shop industry less significant to the

farmers (Larson 2008). Now that there are other customers to supply,

the coffee farmers are less dependent on the specialty coffee industry

and its specific demand. This leads to an increase in the power of

bargaining of the coffee suppliers.

Coffee beans are the most important input to the brewing process of

a specialty coffee retailer. As competition increases within the coffee-

shop industry, the focus on differentiating products through superior

quality becomes more important. For many specialty coffee

companies their success lies on their ability to produce higher quality

coffee than competitors, which acts to further increase supplier

bargaining power (Larson 2008). Currently, many coffee-shops are

locking their coffee suppliers into long-term contracts to decrease

potential price volatility. These contracts have specific terms and

conditions, which place a financial burden on the coffee suppliers in

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case they would choose to supply a different company (Larson 2008).

With these switching costs, resulting from the contract, the premium

coffee suppliers do not have many possibilities to play buyers against

each other, which decreases their bargaining power.

A last component to the analysis of supplier bargaining power within

the current specialty coffee industry environment is the threat of

forward integration (Hunger and Wheelen 2000). In this case

Colombian farmers were able to integrate forward by creating the

coffee chain Juan Valdez and competing with their customers, which

increases their bargaining power.

Overall, the increased unity among the suppliers has led to a high

threat of suppliers bargaining power.

3. Threat of substitute products

Caffeinated drinks are primarily coffee, tea, soft drinks and energy

drinks. The main substitute products posing a potential threat to the

specialty coffee industry are soft drinks and energy drinks offered by

companies such as Pepsi and Coca-Cola. However, coffee has

gradually gained preference by the consumers over soft drinks

because of health concerns associated with carbonated soft drinks

and new evidence (from the Havard Medical School in 2006) showing

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that coffee is a relative healthy alternative. Besides, to protect

themselves from the higher demand for cold drinks in the hot

seasons, many coffee shop companies have now added a variety of

cold drinks (including cold coffees) to their product range. Therefore,

these substitute products pose little threat to the premium coffee

industry which decreases the force created by substitute products.

The threat of substitutes is therefore low.

A substitute for drinking coffee in coffee shops can be drinking coffee

at home. Many consumers are trying to replicate the coffee shop

espresso-based beverages at home and as there are more, cheaper

and better quality espresso machines offered on the market, many

coffee shops have been under pressure (Allegra 2010a). However,

presently this substitute does not feature a high threat, as according

to Mintel (2011b) only 9% of the coffee consumers had drunk more

coffee at home since the start of the recession in order to save

money. Therefore it can be said that the threat of substitute products

remains low.

4. Threat of new entrants

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Newcomers are threats to an established corporation, because they

bring new capacity, a desire to gain market share, and substantial

resources (Hunger and Wheelen 2000). The main obstructions to

newcomers into any industry are the various barriers to entry. The

higher the barriers to enter an existing industry are, the smaller the

threat of new entrants to that industry will be (Kotler et al. 2009). One

of the possible barriers to entry, are the economies of scales within

the branded coffee shop industry (Hunger and Wheelen 2000). The

larger coffee retailers, like Costa Coffee, Starbucks and Cafe Nero are

able to acquire high economies of scale through their purchasing by

negotiating long term contracts with coffee farmers and purchasing

coffee beans in bulk quantities at discount prices (Larson 2008).

Another possible barrier within the branded coffee shop industry is

product differentiation (Hunger and Wheeler 2000), which is not any

more defined by the coffee taste, store convenience and prices but

rather by the store ambience, the companies social responsibility and

the brand identification. Many of the leading coffee retailers have

developed a very loyal customer base resulting from previous

advertisements, customer services, product differentiation and early

entry into the industry, which makes it more difficult for newcomers

to gain a solid customer base (Larson 2008). Moreover, as there is no

large capital requirement for the coffee shop industry, it makes it

easier for new coffee shops to enter the market, which has caused a

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radical increase in the number of independent coffee shops in the last

few years (Allegra 2010a). However, independent coffee shops dont

possess a major threat to the big branded coffee shop chains, as it is

very unlikely that they would expand greatly and the effects they

have singly on the overall demand in the coffee shop market are less

relevant (Larson 2008). Nevertheless, there is high capital

requirement involved for big branded coffee shop chains attempting

to enter the UK coffee shop market as they will have to invest a lot in

marketing in order to create brand awareness and brand recognition.

Lastly, as the industry matures, some branded coffee chains (e.g.

Starbucks) are selling premium coffee and other products in

supermarkets and online. Newcomers using this distribution strategy,

though could face difficulties in obtaining supermarket shelf space for

their products, because according to Wheeler (2000:p.39) larger

retailers charge for space on their shelves and give priority to the

established firms, who can pay for the advertising needed to generate

high customer demand.

This analysis shows that there are many barriers for new companies

wanting to enter the branded coffee shop market, which on the other

hand it decreases the potential threat of new entrants. Since small

independent coffee shops dont have a significant effect on the

overall demand in the consumer market, they are not a real threat for

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the branded coffee shops. Overall it can be said that as there are

more demanding barriers to enter the coffee industry, the threat of

potential new entrants is low.

5. Threat of intense segment rivalry

Increasing competition is one of the coffee shop industrys greatest

threats. The coffee shop market in the UK is a very mature and high

competitive market. The UK is the most developed branded coffee

shop market with 4,871 outlets and represents 41% of the total

European market (Allegra 2011b).

In the last few years the number of non-specialists, who are trying to

copy the success of the specialty coffee shop market, has intensively

increased. According to Allegra (2010a) these non-specialists,

together with department store cafs and motorway and forecourt

operators, accounted 54% of overall outlet growth in 2010 and are

the main driver of total outlet growth in the UK coffee industry.

Amongst thenon-specialist operators are in-store restaurants in shops

and supermarkets, sandwich shops, fast food outlets and pubs. For

example in September 2010 the McDonalds fast food chain launched

a full bean espresso for 79p (Mintel 2011b). In the same month the

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company had seen a rise in the number of coffee cups sold by 39%

over a period of two years, since the reintroduction of the coffee

range in 2007 (Mintel 2011b). Some of its growth was attributed to a

focus on sustainability and fair trade sourcing. It was also reported

that McDonalds is now the biggest seller of coffee in Britain, selling

84 million cups of coffee in 2010 (with Costa, Tesco, Caffee Nero and

Starbucks following in consecutive order). In 2010 Pret A Manger, a

British sandwich chain, launched the flat white and in October of the

same year an article in the Guardian confirmed that coffee accounted

for 20% of the companys sales (compared to 20-25% of sandwiches,

baguettes and bloomers sales) (Mintel 2011b). The pub and

restaurant JD Wetherspoon is another non-specialist operator that

increased its coffee sells up to 40% with 600,000 coffees sold each

week in 2010 (JD Wetherspoon 2010). The company also claims to be

worldwide the number one seller of Tierra, Lavazzas Rainforest

Alliance Certified sustainable coffee and recently it became the only

pub company to be made an honorary lifetime member by the

Rainforest Alliance (JD Wetherspoon 2010).

However, the three leading players within the UK coffee-shop industry

are Costa Coffee, Starbucks Coffee Company and Cafe Neros. These

three top branded chains compete directly against each other and

have a combined market share of 52% (Allegra 2011a).

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Costa Coffee

With 1,342 outlets and an estimated 531 million annual turnover in

2011, Costa Coffee continues being the coffee shop leader and the

largest coffee chain in the UK branded coffee shop market (Allegra

2011a). With 27% visits it is also the most popular coffee shop in the

UK, followed by Starbucks (23%) and then Caff Nero (12%).

The company was found in London in 1971 and now is a subsidiary of

the leisure group, Whitbread PLC (Whitbread 2010). Costa Coffees

image of social responsibility has been promoted by using only coffee

beans from certified farms by the Rainforest Alliance, the use of

recyclable coffee cups and energy-efficient coffee machines (Mintel

2011b). Furthermore, the company helps with the improvement of

coffee-growing communities in developing nations through its Costa

Foundation. Costa Coffee claims to differentiate itself from its

competitors through its coffee beans blend called Mocha Italia (Mintel

2011b). Due to the rising number of non-specialists, the pressure to

compete in the market is increasing and like many other coffee

brands Costa Coffee is now focusing more on marketing and

advertising. In October 2010 the company launched its first TV advert

with the campaign Monkeys and Typewriters which aimed to

demonstrate the brands skill in coffee making (Mintel 2011b).

Starbucks

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The Starbucks Corporation is the largest coffee shop chain in the

world. The international coffeehouse company, based in Seattle,

entered the UK market for the first time in 1998, 27 years after Costa

Coffee was founded (Mintel 2011b). With regard of brand awareness

Starbucks (93%) is the most recognised coffee shop brand in the UK,

followed by Costa Coffee (92%) and Cafe Nero (84%), according to

Allegras Report, published at the close of 2009 (Allegra 2010b).

However, with 742 shops in 2011 in the UK the coffee giant is way

behind Costas 1,342. The Guardian News and Media Ltd reported

that Starbucks losses in Britain in the year 2010 had grown to almost

10 million, closing 45 stores in October 2010 in order to save

margins. The company accounts the loss to the economic downturn,

unfavourable media coverage and increased market competition. The

Guardian also adds that Starbucks has been losing ground to its rival

and strongly performing Costa Coffee. In order to acquire more

market share in the UK the Independent reported in an article

appeared on the 18th June 2011 that Starbucks was planning to spend

24 million pounds to refurbish 100 stores a year to adapt them to

the needs of their neighbourhoods. Over the next five years the

coffee retailer is opening 300 new outlets in the UK, and Starbucks

lattes could soon be available on planes and trains across the UK, and

through vending machines (Lucas 2012). Another newspaper reported

that out of the 300 new outlets Starbucks 200 will be drive-thrus

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(Channel 4 News 2012).

Caff Nero Group Ltd. was founded by Gerry Ford in London in 1997

(Caff Nero 2012). Gerry wanted to bring an authentically Italian-style

Cafe to Great Britain; serving premium espresso based coffee, fresh

high quality food and to become a neighbourhood gathering spot. By

the end of 2001, Caff Nero joined the London Stock Exchange and

with 80 outlets in 24 different cities, it became the largest publicly

listed coffee house in the UK. In 2008, the company began to expand

internationally, entering new markets in Turkey and the Middle East.

With 50 new stores opened in 2011, the company now operates a

total of 490 outlets in the UK and has achieved 57 consecutive

quarters of like-for-like sales growth in 2011 (Allegra 2011a). Besides,

in 2009 Allegra reported that it was Caffe Nero who were ranked

highest overall by Key Performance Indicators. In seven out of 10 KPIs

(coffee quality, atmosphere, value for money, speed of service,

friendly service, food quality and cleanliness) the coffee chain

achieved the first place, whereas Starbucks was ranked first in three

out of 10 KPIs (ethical, practices, convenient location and food

choice).

Caff Nero claims to use a special blend of seven coffee bean

varieties for its espresso-based coffee, a portion of which is obtained

from sustainable farms (Mintel 2011b). In addition, the coffee shop

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chain also offers iced coffee drinks and a food selection. To appeal to

health-conscious individuals, the company states that it uses natural

ingredients with minimum additives and colorants (Mintel 2011b). In

order to keep regular customers interested, Caff Nero offers

seasonal and monthly specials.

According to Mintels researches (2011b), another trend and at the

same time another threat that the coffee shop market is facing, are

the home coffee-making systems and coffee vending machines which

also creates competition to coffee shops.

Coffee Nation is the leading provider of self-serve gourmet coffee

bars to garage forecourts and motorway service areas (Mintel 2011b).

The company operates 65% of its business through its partners,

selling over 1.8 million cups of coffee a month. (Coffee Nation 2010).

According to the Guardian (2nd March 2011), Coffee Nation has been

acquired by the Hotel and restaurant group Whitbread, who owns the

Costa Coffee chain, in a 60 million deal.

In this highly competitive environment the importance of customer

loyalty is crucial (Kotler et al. 2009). This has urged coffee companies

to be more innovative and to invest more money in implementing

reward programmes. For example, Costa has introduced a Costa Club

card that allows customers to collect points for every pound spent

and then exchange them for free food or drink in store (clubcard.info

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2012). Starbucks operates a Starbucks Card which can be charged

with money. Customers will receive one star every time they pay with

their Starbucks Card. Rewards vary from a free drink to free extra

shots, free select syrups and many other benefits. (Starbucks 2012).

Caff Neros loyalty card is a simple stamp card (King 2012). For

every cup of coffee purchased customers get a stamp. Nine stamps

entitle loyalty-card holders to a free coffee.

In summary it can be said that due its intense rivalry, the segment for

out-home coffee is becoming less attractive, as it is getting more

difficult for coffee shops to differentiate themselves from the growing

competition, offering specialty coffee and the fact that many coffee

shops are therefore risking to lose their USP (Unique Selling

Proposition).

From this force can be concluded that as the intensity created by

industry rivalry is high, branded players within the coffee shop sector

are urged to continue to proactively respond to consumer demands in

order to retain leadership.

1.12Positioning Map

An important marketing tool that can be used to plot the position of a

brand against the competition is the positioning map (Kotler et al.

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2009). In order to maximise the potential benefit to a company it is

highly recommended to establish a distinctive place for their brand in

the minds of consumers. In this connection the company has to

identify characteristics that are important to the potential/ actual

customer (Bournemouth University 2012). Two of those

characteristics can be selected and based on two dimensions the

brands can be plotted as the examples in Figure 2.

The aim of this tool is to find out spot gaps in the marketplace and

identify if the coffee retailer is launching into a crowded marketplace.

It also helps to identify the closest competitors and to find out, which

are the most important criteria customers' use when 'positioning'

different brands in their mind. The following brand map will illustrate

how the three leading branded coffee shops Starbucks, Costa Coffee

and Nero are positioned against the two biggest non-specialists

McDonalds and Whetherspoons and the independent coffee shops.

Figure 2

42

Independent

Coffee shops

Whetherspoon

High

price

High

quality

Low

quality

Low

price


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In figure 2 the positioning map is suggesting that two of the important

characteristics used by consumers, when making judgements in this

marketplace are based on the coffee quality and the coffee price.

Starbucks and Costa Coffee are revealed as high quality and high

price. Cafe Nero is revealed as high quality, but relatively cheaper

than Starbucks and Costa. Independent coffee shops and Non-

specialists, such as McDonalds and JD Whetherspoons are offering

good value for money coffee, but lower quality. This map shows that

there is still space for new entrants to offer specialty coffee for a

lower price than the big leaders.

1.13Conclusion

The analysis of porters five competitive forces gives us a complete

picture of what influences profitability in the coffee shop industry.

Porter et al. (2008) suggests, to build defences against the

competitive forces. In this case branded coffee shops can come

against the force of buyers bargaining power by developing new

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distribution strategies that will enable them to offer better value

specialty coffee, for example like Starbucks is planning to do by

selling its coffees through vending machines. In order to come against

the increased threat of suppliers bargaining power, many branded

coffee shops are trying to lock their coffee suppliers into long-term

contracts, to ensure a fixed coffee price. The force of substitute

products has decreased as consumers are unlikely to directly

substitute coffee for caffeinated soft drinks. As the number of entry

barriers in the branded coffee shop segment has increased, it has

lowered the threat of new entrants. Finally, in order to come against

the force of high/intense rivalry within the coffee shop industry

branded players have to focus more on marketing and advertising,

reward programs and stay innovative.

The positioning map in connection with the competitor analysis shows

that coffee quality is not anymore sufficient for branded coffee shops

to differentiate themselves from the increasing competition. They

now have to focus more in providing a better store ambience, with

more comfortable seats and a relaxed atmosphere. Starbucks for

example has planned to refurbish 100 of its coffee shops.

Having analysed the competitive environment of the coffee shop

industry we will now focus on its external environment.

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Analysis of the external environment of

coffee shops

1.14Introduction

Changes in the external environment of a company can influence

decisions taken by marketing management (Kotler et al. 2009). An

organization needs to be in tune with its external environment in

order to be successful over the time. As a changing environment

creates uncertainty, this in turn will present new opportunities or

threats to a company (Hunger & Wheeler 2000). According to Hunger

& Wheeler (2000) the external environment is defined by four forces

(political-legal, economic, sociocultural and technological) which

cannot be controlled by the company, but can influence its long-run

decisions.

In this chapter, we will analyze the coffee shops environment, with

the help of the PEST-Analysis and subsequent we will be able to

identify opportunities and threats for the coffee shop market.

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1.15PEST-Analysis

The PEST-Analysis is according to Hunger & Wheelen (2000) a

marketing tool that helps marketers to monitor, evaluate and

disseminate information from an organisations external environment

in order to identify possible opportunities and threats. This tool can be

used by organisations to avoid strategic surprises and to ensure long-

term health. The variables of a societal environment according to

Hunger & Wheelen (2000) include forces, such as political, economic,

socio-cultural and technological forces. Those forces do not directly

touch on the short-run activities of a company, but influence its long-

run decisions (Hunger & Wheelen 2000). Therefore knowledge of the

global marketing environment is from great importance to the

survival of the coffee shop market, as this knowledge could be a

crucial source of competitive advantage.

Political-legal Factor

A political factor that influences coffee shops is the taxation imposed

on coffee exports and imports. This means that coffee shops would

pay a higher price for the coffee they purchase and in turn pass it on

the end consumers. Any fluctuations in taxation levels within the

coffee industry will also lead to a price rise or decline in the coffee

offered to the consumers. Tariffs and taxes are considered to be part

of a broader group of legal, political and administrative barriers to

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coffee consumption and it has been recognized that they influence

coffee consumption (International Trade Centre). According to the

International Coffee Agreement 2007, members of the International

Coffee Organisation (ICO) have committed themselves to recognize

the exceptional importance of coffee to the economies of many

countries and the sustainable development of the coffee sector. Many

countries where coffee is produced are mainly dependent upon this

commodity, for their export earnings and for the achievement of their

social and economic development goals. With this new Agreement,

exporting and importing countries of coffee have agreed to undertake

the removal of obstacles (such as export, import and domestic taxes

(VAT)) which may hinder trade and consumption. Consequently there

are no taxes on exports and imports of green caffeinated coffee by

importing members, such as EU (International Coffee Council 2011).

As consumers are demonstrating an increasing interest in economic,

social and environmental aspects of coffee production, various

sustainability initiatives, such as Fair-trade, Organic, Rainforest

Alliance, have emerged and are becoming relevant to the coffee shop

market.

Economic Factor

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Britains economy is recovering from the recession that started in

2008 very slowly. In fact, as reported by Andrew Oxlade in the

financial website This is Money, it looks like the UK economy is back

in recession. According to Oxlade, GDP dropped 0.3% in the last

quarter of 2011, resulting in a total economy growth of paltry 0.8%

for the full year, worse than the below-par 2.1% expansion in 2010.

Oxlade also adds that if the economy shrinks again in the first three

months of 2012, Britain will experience the first double-dip

recession since 1975. According to Oxlade, the official definition of a

double-dip recession is when recession returns before the economys

even grown back to the size it was before the downturn began.

However, Allegra Strategies declares in its press release Project

Cafe11 UK that despite the recession the UK branded coffee shop

market had shown incredible resilience, with growing sales by 10% to

an estimated turnover of 2.1 billion with the market doubling since

2005. The recession has not affected the visiting frequency of

consumers, with 1 in 10 UK adults now visiting coffee shops daily. As

the coffee culture is becoming more and more engrained through the

UK, coffee shops can expect to outperform the retail sector.

Nevertheless, the fact that a number of weaker operators (BBs

Coffee & Muffins, Coffee Republic, OBriens and Tchibo) failed during

2009, should not be left disregarded. This highlights the importance

of strong brands and operational excellence (Allegra 2009). Moreover,

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as the branded coffee shop market is expanding with a total of 1,342

new outlets, it is creating new jobs and boosting the economy (Allegra

2011a).

Sociocultural Factor

Consumer lifestyle in the UK is moving more and more towards a

hectic lifestyle, which is creating a positive influence on the coffee

shop market. The need for coffee as stimulant and visiting coffee

shops as convenience, but also as an affordable treat, where

consumers can relax, boosts coffeehouse market among skilled

workers, young and professional with no family. As visiting coffee

shops has become a well established habit amongst consumers, many

people are seeing it now as an affordable regular treat, which is also

driven by consumers continuing demand for convenience products

(Mintel 2011b).

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Technological Factor

As more high quality espresso machines are being offered on the

market, more branded coffee shops are coming under increasing

pressure to provide an authentic experience that cannot be replicated

in the home (Allegra 2010).

As the trends in global application development and social

networking, is exceptionally increasing, Allegra (2010) predicts that

many outlets will launch and use those marketing tools over the next

1-2 years.

1.16Opportunities and Threats in the UK Coffee Shop

Market

Opportunities

As British lifestyle is becoming more busy and hectic, consumers

are seeking more and more for convenience products and products

that increase alertness or give an energy boost.

As it is getting harder for coffee shops to differentiate themselves

from the increasing competition, they are required to stay

innovative. Tea brands are marketing speciality and herbal teas

based on functionality and matching consumer moods. This could

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be taken as an inspiration by coffee shops.

As the trend in global application development and social

networking is exceptionally increasing coffee shops will have more

opportunities to use those channels as marketing communication

tools.

Positive health messages around coffee are encouraging

consumers to drink coffee without worrying about negative health

effects.

The ageing population poses the opportunity to gain access to a

consumer group that has been disregarded, in particular by

branded coffee shops.

Growing online shopping activity provides opportunities for coffee

shops to widen their product range.

Threats

The unstable economy in the UK is still challenging the coffee

shop market.

Coffee shops are in danger of losing their USP as more and

more non-specialists are focusing on expanding their hot drinks

ranges and improving their product quality.

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The desire to replicate the coffee shop experience at home is

increasing the demand for high quality espresso machines and

consequently threatening the coffee shop market of losing

customers to the in-home coffee market.

The growing awareness of sustainability by consumers are

pushing branded coffee chains to work harder to prove they are

doing more social and environmental efforts than just signing

up to accreditation schemes.

1.17Conclusion

The resulted opportunities and threats from the PEST-Analysis create

a new playing field in which creativity and innovation can play a major

part in strategic decisions (Hunger & Wheelen 2000). Coffee shops

have to keep focusing on trends in each area of their external

environment. For example, although the branded coffee shop market

has been resilient and is showing growth sales, players have to keep

monitoring the changes in the economy, as they still influence

consumers behaviour.

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Juan Valdez Colombia

1.18Company Profile

At first Juan Valdez was just a fictional character, created by the

National Federation of Coffee Growers of Colombia, who represent

more than 500,000 Colombian coffee-growers. The image of the

coffee grower Juan Valdez with his mule Conchita, carrying coffee

beans in sacks has been used as a marketing campaign. Since 1959

this character has been promoting Colombian coffee globally,

particularly in the U.S., with the goal to distinguish its 100% pure

Colombian coffee beans from the coffee blend from other countries.

(Juan Valdez Company Profile) With this campaign, not only a coffee

brand was created, but also a country brand that represented a

tranquil countryside, in a time of violence and fear (Gracia 2011). The

Juan Valdez image has been extremely popular since and so

successful (especially among U.S. consumers) that it was elected the

Advertising Icon of the Year, by Advertising Week 2005 (USA TODAY

2006).

In 2002, the National Federation of Coffee Growers created the

company Procafecol SA, which was designed to create expansion

opportunities for the Juan Valdez brand. One opportunity was to

market coffee under the Juan Valdez name. Another brand marketing

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http://en.wikipedia.org/wiki/Federaci%C3%B3n_Nacional_de_Cafeteros_de_Colombiahttp://en.wikipedia.org/wiki/Colombian_coffeehttp://en.wikipedia.org/wiki/Federaci%C3%B3n_Nacional_de_Cafeteros_de_Colombiahttp://en.wikipedia.org/wiki/Colombian_coffee


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idea was the introduction of the Juan Valdez Cafe chain that started in

Colombia and expanded across the USA. By the end of 2007, there

were 100 Juan Valdez Cafes in Colombia, ten in the USA and two in

Europe (Brandchannel 2011).

Meanwhile, the coffee retailer has 147 coffee shops in Colombia and

abroad. It has 120 locations in Colombia, 10 in Ecuador, 10 in Chile,

one in Spain and six in the United States, which are mainly, located at

major airports (Reuters 2011).

1.19Companys Strategies

1.19.1 Expansion Strategy

In an article appeared in the newspaper Caribbean Busniess, on the

22nd December 2011, Procafecol S.A., parent company of the Juan

Valdez Caf announced, that in order to accelerate the introduction of

Colombian coffee to global consumers, it would be basing its

international strategic development on a franchise model.

Another article in the Website Brandchanel, stated that Juan Valdez

Cafe was positioned to arise some challenge to the American coffee

house giant Starbucks and to other coffee house chains, but after the

global recession in 2008, international expansion of the Colombian

coffeehouse company seemed to decline.

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However, within the Colombian market Juan Valdez seems to be

omnipresent, especially in Bogota with over 60 coffee shops, reported

Daniel Gross in the Website Brandchanel. Moreover, while in 2010

Procafecol was announcing on its website that they were defining

their new strategy of international expansion, with priority on the

USA, Canada, Central and South America, they were closing few Juan

Valdez Cafes in New York City, Seattle and Washington D.C. According

to Luis Genaro Munoz head of the Federation, the reason why they

had to close those stores was because the model of the stores in the

streets didnt work in the USA. Nevertheless, Juan Valdez continues

selling its coffee in the American supermarkets. They also had

planned to open 4 new shops in Ecuador, 6 shops in Spain and 5 in

Colombia.

The Caribbean Businness reported that Procafecol is seeking to

develop the coffee franchise in Puerto Rico, which could help Juan

Valdez to expand its shops to more mainstream retail area in top U.S.

Hispanic markets.

1.19.2 Other Marketing Strategies

The tourism industry is an important brand-engagement vehicle for

Juan Valdez. Just recently the coffee house company placed a

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multiyear contract with American Airlines to use plastic form cups

with both, the American Airline and the Juan Valdez logo, on all Latin

American and Caribbean flights. A result from the in-flight beverage

service was the Juan Valdez Cafe at the brand new terminal at JFK

International. (Caribbean Business 2011)

1.19.3 Distribution Strategy

In order to offset the businesses decline at U.S. shops Juan Valdez is

planning to increase sales at American supermarkets. It is expecting

to double sales at supermarkets from $2 million in 2009 to $4 million

in 2010, Catalina Crane, president of Procafecol, reported at

Brandchanel. Currently Juan Valdez coffee is sold mainly at Wal-Mart

Stores and other U.S. chains. It was also reported that Juan Valdez

had begun selling coffee in 65 supermarkets in South Korea.

1.19.4 Competition

In the UK the Juan Valdez coffee shop model will have to compete

with a range of branded coffee shops, independent artisanal coffee

shops, as well as with an increasing number of non-specialists (e.g.

quick food restaurants, pubs) that are trying to imitate the coffee

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shop experience. As analysed through Porters five forces model the

UK coffee shop market is a highly competitive market and this force is

the biggest threat Juan Valdez would have to face if they would enter

the UK market.

1.19.5 Strengths and weaknesses

Strengths

Juan Valdez is the only coffee shop chain from a coffee

producing country that was created and is owned by its coffee

farmers.

New distribution strategies for coffee sales: Juan Valdez is

expanding its sales into more supermarkets and through

Internet.

Colombian coffee is known as high quality Arabica coffee.

Strong brand identity through very popular and successful

brand logo.

Environmental sustainability

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Weaknesses

Closing down of US coffee shops due to insufficient market

research.

Not enough experience in the European coffee shop market

(only one store in Spain).

Restricted Budget to grow significantly.

Conclusion

From the analysis of the coffee shop market it can be concluded that

due to the high demand for coffee and visiting coffee shops, the UK

coffee market is not saturated yet. Although the UK coffee market has

matured and has become very competitive there is still enough room

to grow.

According to Allegras (2011b) forecast, the coffee shop market will

continue to grow, with branded players increasing the numbers of

their locations over the next five years and more non-specialists

entering the market, as consumers are making coffee drinking as part

of their lifestyle.

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However, generally speaking it can be said that although there are

opportunities for branded coffee shops to grow, they have to

continuously monitor changes and trends in the coffee market, in

order to stay competitive in an increasingly uncertain and challenging

environment.

The analysis of the UK coffee market reveals that a newcomer like the

Colombian coffee chain Juan Valdez, would have more opportunities

in entering the in-home coffee market instead of entering the highly

competitive branded coffee shop market, as they would need a high-

up front investment in order to grow significantly (for distribution

system: shops, equipment, premium locations and for marketing:

creation of brand awareness/recognition and customer retention).

Juan Valdez profits from the strong reputation of Colombias high

quality Arabica coffee and as the UK is Europes largest consumer of

instant coffee and there are no many branded coffee shops offering

premium instant coffee, this could be an opportunity for the

Colombian coffee chain to enter the UK coffee market. The company

could target specifically younger consumer s with advert campaigns

and other marketing strategies that would attract this consumer

group. Once the company has gained brand awareness and customer

retention it wont need to invest as much in marketing. Also, as

consumers are more conscious of the importance of sustainability,

Juan Valdez can focus more on this in its marketing strategies.

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