Processed and Packaged Goods Mitchell Schmitt

Coffee Production in the US “This industry produces coffee, typically by purchasing coffee beans and processing them into roasted or ground coffee products… …the industry excludes tea production and revenue from coffee made on premises, such as in a coffeehouse or cafe. Coffee creamer production is also excluded from the industry.” Supply Industries Baking Mix & Prepared Food Production Hay & Crop Farming Plastic Film, Sheet & Bag Manufacturing Demand Industries Grocery Wholesaling Supermarkets & Grocery Stores Convenience Stores Food Service Contractors Source: IBIS World

Coffee Production in the US Source: IBIS World

Coffee Production in the US Source: IBIS World

Coffee Production in the US Source: IBIS World

Major Industry Players Source: IBIS World

Industry Performance Key external drivers: Demand from supermarkets, grocery wholesalers, and grocery stores Wholesalers are the link to stores, and stores are the link to customers Fighting for in-store advertising and shelf space World price of coffee Risen sharply recently  growing demand in other countries leading to supply shortages Per capita coffee consumption Recent studies have shown positive health effects of coffee World price of crude oil Transportation costs

Industry Performance Current performance: coffee production industry’s revenue has performed well despite increases in commodity pricing, which has been passed on to the consumer. Increased demand: consumers are increasingly demanding specialized, high-quality coffee, particularly in single-serving amounts. Though economic recession curbed consumer income in 2013, consumers view coffee as an affordable luxury item. Media attention pointing to positive health benefits from coffee has also spurred greater demand.

Industry Outlook Life cycle: industry is mature, characterized by saturated domestic market and a range of well-established brands. Premiumization and stable coffee consumption will drive the Coffee Production industry's growth over the next five years. Weak dollar against the currencies of major trading partners will boost industry exports. Revenue is forecast to grow at an annualized rate of 1.0% to $11.5 billion over the five years to 2018.

Products and Markets Key Buying Industries: Grocery Wholesaling Supermarkets & Grocery Stores Convenience Stores Food Service Contractors Key Selling Industries: Baking Mix & Prepared Food Production Hay & Crop Farming Plastic Film, Sheet & Bag Manufacturing Grocery wholesalers are the largest source of immediate sales for coffee manufacturers. However, large supermarkets and grocery stores with enough buying power are starting to buy directly from the manufacturer, a trend that is sweeping across the entire industry. Additives, flavorings and preservatives along with coffee beans are the main ingredients sourced from the baking mix & prepared food production and hay & crop farming industries while the plastic that is required for packaging is obtained from the plastic film, sheet & bag manufacturing industry.

Products and Markets Coffee manufacturing Gourmet and specialty coffee segments Ground roasted coffee Whole bean and other coffee Coffee is manufactured from green coffee beans that are roasted to give it its characteristic color, smell, flavor and density. The two main varieties of bean from which coffee is manufactured are Arabica and Robusta beans, which each have their own unique attributes. Arabica is generally considered to be of higher quality and to produce a richer flavored coffee. Over the past five years, the gourmet and specialty coffee segments have experienced substantial growth. During 2013, the National Coffee Association’s (NCA) annual National Coffee Drinking Trends survey found that about 1/3 of all Americans consume at least one cup of gourmet or specialty coffee every day. Traditional coffee consumption decreased from 56% of total coffee consumption in 2012 to 49% of total coffee consumption in 2013 as a result of the increase in gourmet and specialty consumption. Ground coffee is manufactured by grinding down the coffee beans into a powder. It is easy to produce, ship and store this form of coffee in large quantities helping ground roasted coffee to be the largest product segment within the industry. Whole bean and other coffee appeal to many coffee connoisseurs because it allows them to grind their own coffee beans. Whole bean and other coffee accounted for roughly 13% of revenues within the industry for 2013, substantially lower than ground roasted coffee.

Products and Markets Market Segmentation By age Brewed in home vs. purchased in store Exports The number of daily coffee drinkers for each population increase with age. While consumers aged 40-59 consume the greatest amount of coffee, 76% of consumers aged 60+ consume coffee on a daily basis, making it the highest percentage out of each segment. A greater portion of coffee consumed in the United States is brewed in home as opposed to bought at a coffee shop. Retailers and grocery wholesalers are likely to sell to the brew-at-home market and the food service industry generally sells brewed coffee to consumers. This is a very globalized industry and it relies heavily on revenue generation through exporting products to foreign countries. Instant-coffee is particularly demanded by global consumers from coffee manufacturers in the United States. Exports currently make up 10% of the market and this number is expected to grow at an annualized rate of 5%.

Products and Markets International Trade Imports are increasing Exports are increasing The United States is the single largest coffee importer in the world. In 2012, the U.S. imported over 26 million 60-kilogram bags of coffee. Imports are expected to grow at an annualized rate of 7.5%. Canada accounts for 57.4% of U.S. coffee exports, followed by Mexico at 7% and Japan at 6%. A significant portion of export revenue results from re-exporting industry products after the beans are roasted and ground.

Competitive Landscape Market Share Concentration High industry concentration Expected market share going forward Basis of Competition Competition is medium and increasing Internal Competition External Competition The top four players in the Coffee Production industry are estimated to account for roughly 75% of total industry revenue. These key players being J.M. Smucker, Green Mountain Coffee Roasters, Starbucks and Nestle. There has been significant increase in market share for these four companies over the past 8 years. For example, J.M. Smucker has experienced rapid growth driven by aggressive marketing campaigns and acquisitions. Green Mountain Coffee Roasters has experienced exponential growth due in part to its specialty products that have created a niche market for consumers. Market shares are expected to continue to grow as companies continue to innovate their products, build brand loyalty, implement new marketing strategies and continue to diversify their portfolios. The four major players are constantly competitng for market share. However, there are many smaller firms with less brand and market power who continue to fragment the industry, but competing with the larger firms is difficult for these new entrants. Price sensitivity of consumers is a big internal competition factor. While there are big brand names that have been around for years, consumers are willing to accept less known, cheaper coffee products if necessary. The perceived quality of the coffee determines the price that the consumer is willing to pay for the product and this forms the most important base of competition in the industry. Developing downstream relationships with suppliers is also very competitive. Securing space on a coveted grocery store or supermarket shelf helps to set leaders apart form their competitors. Lastly, players within the industry compete on their ability to innovate and differentiate their products in order to surpass the competition. Companies within this industry also compete with other beverage producers such as tea, energy drink and soda companies. As the choices in these categories increase so does the competition from outside of the industry.

Competitive Landscape Barriers to Entry High and increasing Major players have established high brand and customer loyalty Contracts with key suppliers Competition Medium Concentration High Life Cycle Stage Mature Capital Intensity Technology Change Regulation & Policy Industry Assistance Low Source: www.ibisworld.com There are big threats facing potential new entrants to the industry. Specifically, the extremely well fixed position of the industry’s major players. These major players have high customer and brand loyalty and have the resources necessary to invest in advertising and promotions needed to secure and improve market share. The major players also experience favorable contracts with key coffee bean suppliers. The highest quality beans have been attained from producers in Brazil and Colombia have been attained at the lowest possible negotiated price. New entrants will have trouble attaining the same quality beans for the same low prices. Additionally, new entrants will not have the established distribution channels in place that more mature firms already operate. Overall, there is little threat from new entrants into the coffee industry.

Market Participants Kraft 10.9% 15.6% 16.2% 21% 22% Starbucks Nestle Major Companies Percent Market Share Brands Kraft Starbucks Nestle J.M. Smucker Co. Green Mountain Coffee Roasters 10.9% 15.6% 16.2% 21% 22% Maxwell House, General Foods, Seattle’s Best, Starbucks Nescafe, Taster’s Choice, Coffee-Mate Folgers, Dunkin, Millstone, Café Bustelo Green Mountain, Keurig, Tully’s, Diedrich

Operating Conditions High levels of Capital Intensity Plants require sophisticated technology Recent CapEx Expenditures for major companies Increased automation, decrease in labor hours $.38 is spent on capital per labor dollar Technology and Systems Level of technology is determined by processing method 2 Methods: Dry and Wet Change in the technology necessary to roast and grind coffee beans is low

Operating Conditions pt.2 Industry is defined by high levels of revenue volatility Revenue is dependent upon  cost of raw materials, energy and oil prices, weather conditions, exchange rates, and household incomes Extremely sensitive to economic conditions Industry revenues have been rapidly increasing in recent years Average levels of regulation Governed by FDA Required to label nutrition contents Consumers are demanding more detailed information Failure to abide by regulations can cause product recalls

Operating Conditions pt. 3 Environmental Regulation Industry Assistance Governed by EPA Eco-friendly operations are used as selling points to potential customers Adherence has created more efficient operations and improved quality Low amounts of tariff protection exists for manufacturers The U.S. protects coffee bean to prevent there rusting Further research is being conducted by Global Agriculture and Food Security Program International Coffee Organization is made up of coffee importing and exporting countries to facilitate trade

Starbucks Coffee Company

Relevant Facts CEO is Howard Schultz (Highly Regarded) Headquartered in Seattle, WA $13.3 B in revenues in 2012 with operating margins of 15% Nearly 80% of stores are company-owned vs. franchised SBUX has paid a dividend for the past 12 quarters

Brief History First Store opened in 1971 in Seattle, WA; Only sold coffee beans and equipment 1980’s- Howard Schultz started Il Giornale coffee bars and bought out Starbucks 1990’s- Franchise expands beyond Seattle and becomes a leading coffee provider in North America 06/26/1992- Starbucks is taken public at $17 per share Present Day- 18,000 stores in 62 countries with stock trading around $75 per share

Strategy Mission Statement: To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time. Product Differentiation; Sell premium products with large profit margins Outstanding Marketing Campaigns Repeat Business (Starbucks cards) Keep Employees Satisfied Make entering their stores an experience Company Operated stores

Products Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world Frappuccino, Lattes, Iced Coffees, Espresso Also sell tea, other beverages, and fresh food items Sell packaged products through licensed stores, grocery stores, and other foodservice accounts K-Cups and Coffee Grounds

Business Units and Markets Segmented into four markets Americas (75%) Europe, Middle East, and Africa(EMEA) (9%) China- Asia Pacific (CAP)(5%) Global Consumer Products (10%)

Competition Premium coffee sales compete against quick service restaurants and specialty coffee shops Main competitors for this segment include Dunkin Donuts, McDonald’s, and Caribou Coffee Competes with all packaged coffee and tea products sold through supermarkets and other retailers

Risk Factors Global Economic Conditions Increased prices of Arabica Coffee Beans Success is dependent upon perceived value of brands Adverse public or medical opinion about health effects of products Changes in healthcare laws may induce employees to elect Starbucks’ insurance plan

SWOT Analysis Weaknesses Strengths Difficulty adopting café culture in Europe Heavily dependent on sales in the Americas Strengths Customer Loyalty Employees #1 coffee sales Strong management Product Innovation

SWOT Analysis Opportunities Enter emerging Economies Expand Retail Sales Increase Product Offering Vertical Integration Threats Health effects Rising price of coffee beans Low barriers to entry for competition

Recent Performance