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

Agenda Industry Information Local Industry Pricing Strategies Specific Pricing Strategies Conclusion

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?

Industry Information

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

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%

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

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,

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

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

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.

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

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

Local Industry Pricing Strategies

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

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.

Specific Strategies

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:

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

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:

Cost Plus Graph

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.

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

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 coffee @ manndible because you already paid for it. CTB & manndibucks are similar strategy. She said mann has unlimited mug that she helped to price

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

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.

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

Conclusion

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?

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

Questions?