1. 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

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

3. 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

4. Industry Structure

5. 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

6. 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

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

8. 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

9. 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

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

11. 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

12. 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

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

14. 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

15. 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

16. 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

17. Pricing Strategies & Raw Data Analysis

18. Premium pricing $2.10 $2.58 $4.23 Offers products at different prices
Regular drinks (coffee, iced coffee, latte) – CHEAP
Specialty drinks (cappuccino, mocha) – EXPENSIVE
Who can engage in this?
Example: Starbucks in the Recession
Lowered the price of regular drinks ($ $0.15)
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

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

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

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

22. 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

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

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

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

26. 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

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

28. 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

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

30. 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

31. 3rd degree price discrimination
Collegetown Bagels
Steph
Introduction
Industry
Pricing Strategies
Recommendations

32. 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

33. 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

34. Goldilocks effect / extreme aversion
Steph
Introduction
Industry
Pricing Strategies
Recommendations

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

36. Recommendations

37. 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

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

39. 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

40. Questions?