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Retail Coffee Industry Kay C., Julie, Mike. Agenda Industry Information Local Industry Pricing Strategies Specific Pricing Strategies Conclusion.

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Presentation on theme: "Retail Coffee Industry Kay C., Julie, Mike. Agenda Industry Information Local Industry Pricing Strategies Specific Pricing Strategies Conclusion."— Presentation transcript:

1 Retail Coffee Industry 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

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: 17.6%14.1%11.8%16.3%24.8%

7 Coffee Retailers at a Glance:

8 Industry Key Drivers: Retail Coffee Internal Consolidation Wage and input increases, thus cost control Market position & high- profile outlets Franchising External Consumer Spending Health food trend Per capita disposable income Per capital coffee consumption

9 Product Mix Brewed CoffeeFood & Drink SpecialsSeasonal Drinks Iced CoffeeSpecialty 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

12 Major Local Players 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

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

14 Local Industry Pricing Strategies

15 Coffee Pricing in Ithaca (overview)

16 Coffee Pricing (Overview continued)

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: Retailers that use this strategy:

19 Premium Pricing

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) 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

24 2 nd Degree Price Discrimination Bundling: breakfast deals Coffee Cards- frequent user incentives Add ons- soy milk, extra espresso, extra flavor shot Manndibucks- prepaid Unlimited mugs

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.

27 Gimme! Vs. Manndible Same coffee, different prices. Why?

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

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

31 Questions?

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