Kyle Brumm | Sarah Le Cam | Zach Leighton | Stephanie Ou Coffee Shop Industry AEM 4160 April 28, 2015 Kyle Brumm | Sarah Le Cam | Zach Leighton | Stephanie Ou

Agenda Background Competitive Landscape Industry Organization Major Competitors Pricing Strategies Raw Data Analysis Recommendations zach

Why Coffee? Millions of Americans on a daily basis Several innovative changes in the past 20 years Customers are more sophisticated, knowledgeable zach Introduction Industry Pricing Strategies Recommendations

Industry Structure

Industry background Retail coffee industry $28 billion in revenue in the United States Two major categories At-home Direct sale Industry at a Glance – Coffee & Snack Shops Revenue +$12bn from coffee shops Businesses +22,000 coffee shops Zach Introduction Industry Pricing Strategies Recommendations

Key drivers EXTERNAL INTERNAL Consumer Spending Health Consciousness Increased Consumer Confidence Growth of Consumption Clear Market Position Effective Cost Controls Ability to Franchise High-Profile Locations Multiskilled Workforce Zach Introduction Industry Pricing Strategies Recommendations

CUSTOMER base Introduction Industry Pricing Strategies Recommendations Zach Introduction Industry Pricing Strategies Recommendations

Industry Competition Four Firm Concentration Ratio 58.3 Highly concentrated at the top Top 20 players control 70% of the coffee shop market Zach Introduction Industry Pricing Strategies Recommendations

Porter’s five forces Threat of New Entrants MODERATE Threat of Substitutes HIGH Bargaining Power of Buyers LOW/MODERATE Bargaining Power of Suppliers LOW/MODERATE Intensity of Competitive Rivalry HIGH/MODERATE Zach Introduction Industry Pricing Strategies Recommendations

Industry organization Sarah The coffee shop industry serves different products  Related goods Introduction Industry Pricing Strategies Recommendations

Supply chain 1 2 3 4 Coffee Farm Factory for Washing Freight & Transportation Factory for Processing Sarah Usually separated  no vertical integration But starbucks is trying to change that 5 6 7 Factory for Roasting Coffee Bar Consumers Introduction Industry Pricing Strategies Recommendations

FAIR Trade Support local, small-scale farmers Long-term sustainability Sarah live in remote locations and lack access to credit vulnerable to middlemen who offer cash for their coffee at a fraction of its value. Fair Trade guarantees farmers a minimum price, and links farmers directly with importers, creating long-term sustainability. farmers earn better incomes, allowing them to hold on to their land and invest in quality. Support local, small-scale farmers Long-term sustainability Links farmers directly with importers

Major players We studied some of the main players in the industry

Starbucks corporation Revenue (2014) $16.5bn US Stores: 7,303 Ithaca Locations Downtown/Commons Collegetown Ithaca Mall Campus Dining Sarah 1971 as a Seattle coffee bean roaster and retailer Introduction Industry Pricing Strategies Recommendations

Dunkin’ brands Revenue (2014) US Stores: 8,047 Ithaca Locations $748 million US Stores: 8,047 Ithaca Locations Downtown/Commons East Hill Plaza Collegetown (May ‘15) Sarah Franchise Introduction Industry Pricing Strategies Recommendations

Local Competitors – Ithaca Market Collegetown Bagels Collegetown Downtown/Commons East Hill Plaza Gimme! Coffee Collegetown Downtown/Commons (2) [Other locations in New York State] Sarah Fairtrade Stella’s Cafe Collegetown Manndible Cafe Cornell Campus Introduction Industry Pricing Strategies Recommendations

Pricing Strategies & Raw Data Analysis

Premium pricing $2.10 $2.58 $4.23 Offers products at different prices Regular drinks (coffee, iced coffee, latte) – CHEAP Specialty drinks (cappuccino, mocha) – EXPENSIVE Who can engage in this? Example: Starbucks in the Recession Lowered the price of regular drinks ($0.05 - $0.15) Increased the price of premium drinks (+$0.30) Coffee (16 oz) Iced Coffee (16 oz) Mocha (16 oz) Kyle $2.10 $2.58 $4.23 Introduction Industry Pricing Strategies Recommendations

Premium pricing Introduction Industry Pricing Strategies Kyle Introduction Industry Pricing Strategies Recommendations

Premium pricing Introduction Industry Pricing Strategies Kyle Introduction Industry Pricing Strategies Recommendations

Premium pricing Introduction Industry Pricing Strategies Kyle Introduction Industry Pricing Strategies Recommendations

Linear vs. Non-linear pricing “Deltas” between sizing varies Some companies use linear pricing (Stella’s, Gimme!, Dunkin’) Some companies use non-linear pricing (CTB, Starbucks, Manndible) Non-linear deltas decrease with increased size on standard drinks On premium drinks this does not hold Kyle Introduction Industry Pricing Strategies Recommendations

Linear vs. Non-linear pricing Kyle Introduction Industry Pricing Strategies Recommendations

Linear vs. Non-linear pricing Kyle Introduction Industry Pricing Strategies Recommendations

Linear vs. Non-linear pricing Kyle Introduction Industry Pricing Strategies Recommendations

Hot Brewed vs. Iced Coffee More coffee  More time Cold brewing technique Greater expenses Plastic cups more expensive than paper cups Use of straws Condensation leads to more napkins per customer Kyle Introduction Industry Pricing Strategies Recommendations

Customer loyalty discounts Punch cards Discount for using own mug Increases customer loyalty Kyle Introduction Industry Pricing Strategies Recommendations

Gimme! Vs. Manndible cafe 8 oz $1.75 12 oz $2.00 16 oz $2.25 Manndible 12 oz $2.13 16 oz $2.39 20 oz $2.60 Steph Introduction Industry Pricing Strategies Recommendations

Gimme! Vs. Manndible cafe Steph Introduction Industry Pricing Strategies Recommendations

2nd degree price discrimination Offer small, medium, and large (and even extra large) options Starbucks – Trenta (30 oz) Dunkin Donuts – XL (24 oz) Allows customers to self select Add-ons / Substitutes Steph Introduction Industry Pricing Strategies Recommendations

3rd degree price discrimination Collegetown Bagels Steph Introduction Industry Pricing Strategies Recommendations

Price bundling / Complementary Pricing Bundle with complementary goods (i.e. baked goods or sandwiches) Cheaper to purchase as a bundle or “combo” than separately Lower prices for coffee to incentivize consumers to buy higher priced complementary products Steph Housemade muffin or scone $2.25 16 oz Gimme! drip coffee $2.39 Buying separately $4.64 Introduction Industry Pricing Strategies Recommendations

Goldilocks effect / extreme aversion Survey 1 12 vs. 16 oz N = 64 Survey 2 12 vs. 16 vs. 20 oz N = 61 Steph Introduction Industry Pricing Strategies Recommendations

Goldilocks effect / extreme aversion Steph Introduction Industry Pricing Strategies Recommendations

Survey findings Introduction Industry Pricing Strategies Steph Introduction Industry Pricing Strategies Recommendations

Recommendations

Positioning - ITHACA Prime Location Fast Service Either in Collegetown or on campus Fast Service High Quality Coffee and/or Fair Trade Multiple locations in Ithaca using different submarkets Collegetown Downtown/Commons East Hill Plaza/Ithaca Mall On Campus Understand developing consumer tastes Sarah Industry is mature  going towards growth -- growth rate -- there are many Multiple locations which establishes consistency and convenient brand loyalty Understanding consumer trends - health consciousness - cater to younger audiences Introduction Industry Pricing Strategies Recommendations

Customer Loyalty Programs Pricing strategies Use Premium Pricing Customer Loyalty Programs Price Bundling Offer 3 sizes Sarah Need considerable Introduction Industry Pricing Strategies Recommendations

Conclusion Ithaca does NOT show strong signs of third degree price discrimination This changes when the analysis is expanded to include other geographic locations Coffee shops charge higher prices on premium drinks due to high WTP National leaders do NOT preclude local players from the market Coffee shops can benefit from differentiation Sarah Local players Introduction Industry Pricing Strategies Recommendations

Questions?