1. Retail Coffee Industry
Say why we chose it: we have been noticing that coffee has been getting more expsensive
Kay C., Julie, Mike

2. Agenda Industry Information Local Industry Pricing Strategies
Specific Pricing Strategies
Conclusion

3. 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?

4. Industry Information

5. Chain of Supply Coffee Bean Growers
Brazil, Vietnam, Colombia, Indonesia
Rising costs via low crop yield
Coffee Production (US)
Wholesale Intermediary
High Concentration
High barriers to entry
Coffee Retailer
High competition
Low Barriers to entry
Medium concentration
Pricing power is with the wholesalers. Wholesalers set up contracts with the coffee bean growers, pricing increases are often passed onto the consumer via more expensive coffee

6. 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:
Mention contracts with growers, sets them
16.3%
14.1%
17.6%
24.8%
11.8%

7. Coffee Retailers at a Glance:
Show crisis in ’08-’09, trend of consumer spending going up but so I the price of coffee

8. Industry Key Drivers: Retail Coffee
Internal
External
Consolidation
Wage and input increases, thus cost control
Market position & “high- profile” outlets
Franchising
Consumer Spending
Health food trend
Per capita disposable income
Per capital coffee consumption
Consolidations: you may have read in the news in recent years, companies like Starbucks are cutting back on # of stores to reduce redundancies, cut costs, and boost profit margins. Wages and the prices of coffee are on the up rise, so effect cost control is essential, market position: differentiation from numerous competitors,

9. Product Mix Brewed Coffee Food & Drink Specials Seasonal Drinks
Brewed coffee is a very standardized product so retailers are look for ways to increase profit margins. They are doing this by introducing this like…. Based on the retailer’s target audience and the “specialness” of the drink, retailers use different pricing strategies.
Iced Coffee
Specialty Drinks

10. 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

11. 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
-High concentration because top 5 major players are expected to generate 71.7 % of industry revenue- creates high barriers to entry.
Competition: There are many small and medium sized enterprises that dont have the brand or market power that the leaders do but they still offer many specialty and gourmet products that appeal to many coffee drinkers. BRAND LOYALTY and perceptions of quality will make competition continue to increase.

12. Major Local Players Gimme- unique Starbucks 42 countries
More than 17,000 shops
Well known for superb quality and relaxing atmosphere
Dunkin Donuts
Available in over 31 countries
6,772 stores in the US
Over 3 million customers per day
Cheap and conveinent
CTB
Locally owned, 5 locations in Ithaca
Serves Ithaca Coffee Company coffee
Can charge a premium for local, fair trade coffee
McDonalds
McCafe introduced in US in 2002
Line of café drinks to compliment regular menu
100% Arabica beans, brewed every 30 minutes at low price
Gimme!
Local coffee chain
8 separate locations
Focus on high quality coffee at premium price
Locally grown and sourced
Gimme- unique

13. 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
We collected coffee, iced coffee, mocha, latte the following- Julie will tell you about some of the price st

14. Local Industry Pricing Strategies

15. Coffee Pricing in Ithaca (overview)
Hot coffee is less differentiated, therefore you see less varability in their prices. However, a trend does emerge based on location and volume of customers

16. Coffee Pricing (Overview continued)
Lattes- this graph shows the pricing strategy of each local retailer. As we talked about during out ‘key drivers’ slide, the main criteria for choosing a pricing strategy is their captive audience.

17. Specific Strategies

18. 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:
Expensive Items
Exceptional Reputation
Exceptional Quality and Distinction
-Starbucks is known for purchasing only the highest grade Arabica coffee grounds.
-Arabica coffee is grown at higher elevations and requires a specific climate for optimal conditions
-The mix of high quality coffee and move towards fair trade allows Starbucks to charge premium prices on their products. This pricing strategy helped create the illusion that being seen with a Starbucks cup will make a person look more favorable than just walking around with any cup of coffee
-Manndible has a similar pricing strategy as they operate behind the idea that absolutely everything is organic. Manndible is also the sole coffee choice for those who study and are spending much time in/around Mann Library
Gimme coffee focuses on high quality coffee beans and pushes the idea that they use high quality, fair trade coffe beans and a rainforest alliance campaign- people believe that extra money they pay is going towards a good cause
People also may pay extra for the atmosphere they get at each of these places.
Retailers that use this strategy:

19. Premium Pricing
Comparing Starbucks premium pricing plan vs. McD- obvious difference in the slope of the line between drinks

20. Cost-Plus Pricing
The retailer works out all costs associated with the product and adds the amount of profit they need to make.
Most costs associated with selling a cup of coffee are fixed: example labor- same salary for the barista if she is pouring you brewed coffee of making espresso drink
Generally speaking, the bigger the drink you get, the higher the profit margin for the retailer
Costs Associated with Selling a Cup of Coffee:
Coffee Beans
Wages for barrista etc.
Cup/Lid
Overhead Costs (rent, upkeep)
Any extras (milk, soy, espresso)
A person who wants a larger coffee has a greater demand and higher willingness to pay- the margins on larger cups of coffee are often significantly higher as sizing increases because most of the costs of the cup of coffee are fixed( think the cup, salary, property, rent, upkeep etc)
-variable costs are usually the least expensive components
-Manndible, McDonalds, and Dunkin use cost plus pricing
Mcdonalds and Dunkin charge a slightly lower price because their fixed costs may be lower and they can make strong margins even without premium prices
Manndible uses cost-plus pricing as they charge you for the cup regardless of the size of the drink you want instead of by the ounce.
Retailers that use this strategy:

21. Cost Plus Graph

22. 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.

23. Linear Pricing
How does this graph display linear pricing? See how the lines are linear- as the size of the drink increases by 4oz, the price increases at a set price per unit. This strategy applies well for hot coffee because its more homongeneous product. Manndialbe- has higher prices in general based on the things we talked about (isolated, trargeted market) but still linear prices

24. 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
Manndibucks- prepaid, keeps you coming back, more likely to buy next cup of manndible because you already paid for it. CTB & manndibucks are similar strategy. She said mann has unlimited mug that she helped to price

25. 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

26. 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.
Tool to get you through the door.

27. Gimme! Vs. Manndible Same coffee, different prices. Why?
Switching gears: Captive audience at Manndible & Gimme buys their coffee at cost internally vs.

28. Conclusion

29. 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
Investment vs. company recommendations? What is the difference? People are willing to pay a premium for a socially responsible cup of coffee.
In conclusion do we mention average price?

30. National vs. Local Average national price: Average Ithaca price-
Brewed- $1.38
Espresso- $2.45
Average Ithaca price-
Brewed- $1.58
Espresso- $2.93

31. Questions?