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Market Opportunity Analysis Instant Coffee: QuiCoff

International Marketing Naomi Kliger

20.04.16

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AbstractThe following report has analyzed the Japanese market on various different levels. With our product, QuiCoff Instant Coffee, numerous different factors had to be taken into account. The macro environment of Japan has been accounted for as well as the specific factors relating to instant coffee, the general coffee market, and the hot drink market. After conducting research, a recommendation has been made regarding entering the market and limitations in the analysis are noted.

TableofContents Abstract....................................................................................................................................................2

TableofContents..................................................................................................................................2

Introduction...........................................................................................................................................3Filter1:MacroEnvironmentalFactorsandChosenProductDescription.........................3

Filter2:GeneralMarketRelatingtotheProduct.......................................................................4Filter3:SpecificFactorsAffectingtheProduct..........................................................................5

Filter4:TargetMarketProfileandMarketEntryStrategy....................................................7

DoOpportunitiesExist?......................................................................................................................8Recommendations................................................................................................................................8

Limitations..............................................................................................................................................8Appendices..............................................................................................................................................9AppendixA........................................................................................................................................................9AppendixB.....................................................................................................................................................10AppendixC......................................................................................................................................................11

Bibliography........................................................................................................................................12

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Introduction Numerous macro and micro environmental factors have been analyzed throughout this report. We start with a PESTEL analysis of Japan and become more specific as the report goes on. The Japanese coffee consumption and market have had extremely significant growth in the past ten years or so. Consumers have started to shift away from tea and joined the coffee culture that Westerners and Australians embrace. The ready-to-drink (RTD) market is a huge competitor for our soluble, instant coffee and is a important part of our analysis. We also discuss our primary and secondary markets, which factor greatly into our market entry decision. Due to Japan’s close relationship with Australia, importing our product to Japan is one of the less difficult factors in this analysis. The careful consideration of all aspects of the Japanese culture, environment, and relevant markets resulted in a entry decision

Filter1:MacroEnvironmentalFactorsandChosenProductDescription Political and Economic Factors Japan has a strong commitment to democracy, human rights and the rule of law.3 It has a democratic monarchy, with a parliamentary government, prime minister and an imperial family as well. Emperor Akihito currently has executive power. The government structure includes the national, prefectural and local tiers, each governed by elected assemblies. The two lower tiers are highly dependent on the national government. Japan is the most similar Asian country to Australia. Australia is a critical supplier to Japan and Japan is Australia’s second largest export market. Japan experienced a economic recession in 2008 and 2009, and has been recovering since. It is a nation of quality and innovation, in which consumers always want high quality and the “next best thing”. Japan has the third largest industrialized market in the world and one of the world’s largest consumer markets. Manufacturing is the most renowned feature of Japan’s economy, and it is a world leader in manufacturing of electrical appliances, electronics, automobiles, ships, machine tools, optical and precision equipment, machinery and chemicals. However, Japan has started to outsource manufacturing production to lower cost countries. The service sector plays a far more prominent role in the economy, counting for about 75% of Japan’s GDP from 2014. International trade also plays a significant role in the economy, at 16% of Japan’s 2014 GDP. The signing of the Japan Australia Economic Partnership Agreement in July of 2014 strengthened the bilateral economic relationship with Australia. Social and Technological Factors The Japanese culture stresses the importance of conformity and consensus when decision-making. The common Japanese saying, “The nail that sticks out gets hammered down,” reflects this mindset. 4 It is a very homogeneous society. There is also a strong commitment and loyalty

3 Japan country brief. (n.d.). Retrieved April 17, 2016, from http://dfat.gov.au/geo/japan/Pages/japan-country-brief.aspx 4 Japan - Country Profile, Key Facts and Original Articles. (n.d.). Retrieved April 17, 2016, from http://globalsherpa.org/japan/

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expected to be upheld with your business partners. This involves a strong gift culture. More than 75% of the Japanese population lives in cities and single person households are rising. However, Japan’s population is rapidly ageing and fertility rates are down. This will reduce the size of the workforce and tax revenues, and increase health and welfare costs necessary. Japan is the world leader in manufacturing electronics, with a recent investment in more information and communication technologies. There are more engineers in Japan than in the United States, even thought the United States’ population is twice that of Japan. It leads the world and patents and has the advanced system of MAGLEV (Magnetic Levitation) high-speed trains Environmental and Legal Factors Japan has very few natural resources of its own and its agricultural sector remains heavily protected. Its main imports include mineral fuels and there has been increasing investment in overseas natural resources. Japan also has some of the highest carbon dioxide emissions in the world, polluting much of the air in its crowded cities and towns. The Japanese government encourages firms to secure stable energy, practice green efforts and invest in overseas resources. Japan’s foreign policy aims to promote a peaceful and stable international community while contributing to international solutions. It describes Australia as the second most important security partner next to the United States. Taxes have been rising and overtime work laws are highly regulated. There are also very strict restrictions on the termination of employees, and Japanese businesses hire for the long-term and are highly selective. Chosen Product Description We have chosen to explore the market opportunity for instant coffee in Japan. The brand name is QuiCoff and it will have regular, decaf and flavored versions including caramel, vanilla, mocha and hazelnut. It will be packaged in small, single serving packets as a powder that creates the coffee liquid when mixed with water. It can be sold in a pack of 25, 50 or 100.

Filter2:GeneralMarketRelatingtotheProduct Japan is the third largest consumer of imported coffee in the world and has maintained steady numbers. In 2013, 253,000 tons of coffee were roasted and 31% of this was for home consumption. Since 2000, the amount of people drinking single serve coffee has increase greatly, however has not been growing at all in recent years. The initial increase in coffee consumption in Japan was mainly due to the innovations of ready-to-drink market (RTD) and RTD coffee became widely popular.5 In the beverage market, RTD drinks are the largest segment in terms of sales. In 2015, coffee sales remained static with the rise of retail prices for coffee products. This made consumers refrain from buying as much coffee in coffee shops as they had been. Single serving, at-home methods and stick types like our product have been popular for their convenience and

5 Coffee Market in Japan. (n.d.). Retrieved April 17, 2016, from http://coffee.ajca.or.jp/english

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are useful for the growing single-person household population. As of 2010, 39% of Japanese coffee consumers drink coffee for its quality of taste, while only 14% use it for daily use and 26% use it for convenience (Appendix A-1). According to the All Japan Coffee Association, the most coffee consumption is done in the household and is consumed via ground coffee almost twice as much as single serving methods (Appendix A-2). The coffee culture in Japan is in its infancy, however it is prevalent for the working class and single households. In Japan, coffee shop visits are very brief, unlike the culture in Australia and the United States, where many people meet at the coffee shop to talk or work, get their coffee, and stay for at least thirty minutes. In Japanese coffee shops there is space for people to sit if they have time and want to, however they are set up to handle a rapid consumer flow.6 Most of Japan’s coffee consumption is done in the home (Appendix A-3)7. Coffee imports to Japan are taxed at 15% if the amount is worth 200,000 ($2,380.82 AUD) or less, in addition to any consumption and other internal taxes. In general, the consumption tax on goods imported to Japan is 8%.

Filter3:SpecificFactorsAffectingtheProduct Competition Since 2006, the instant coffee market has been well established. In 2010, 90.6% of soluble coffee (instant coffee) went to the retail market and the remaining percentage was used as raw material for RTD and canned coffee products. It has sold extremely well and there are already two major soluble coffee makers in Japan.8 The RTD segment is extremely competitive and chilled coffee beverages have increased by about 80% since 2005. The competition has resulted in tons of new brands and also the emergence of a young female demographic joining the coffee drinking target market. Coffee Boss is a major RTD coffee brand in Japan (Appendix B-1). In 2015 Nestlé led the competition in the Japanese coffee market with a retail value share of 34%. Nestlé has multiple single serve machines that allow consumers to make a quick cup of coffee for just themselves at home. Delonghi is the other main direct competition, providing numerous single-serve machines. Indirect sources of competition are coffee shops and cafes along with chains such as Starbucks and McDonald’s Café. Japan’s national drink, tea, also plays a major role when discussing the coffee market and culture. Lauren Sung, a researcher of Japan and Korea, explains the significance of tea in Japan on her blog:

In Japanese, the same is done by saying 'ocha demo shimasenka' (won't you go for tea?), which indicates the cultural significance of tea over coffee. Sure, you could substitute

6 Oakland, M. (2011, October 24). JapanToday. Retrieved April 17, 2016, from http://www.japantoday.com/category/opinions/view/japans-coffee-culture 7 Coffee Market in Japan. (n.d.). Retrieved April 17, 2016, from http://coffee.ajca.or.jp/english 8 Ibid.

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that word for coffee and the meaning would come through just fine, but it's just not as conventional. Similarly, if you ask a friend to bring something to drink (en route from a convenience store, say, when you're cooking them dinner) without being specific, they are most likely to get you some form of tea. I don't mean to suggest in place of coffee, but in place of carbonated drinks or juice, which is what we'd probably do in the West. This is the sort of position that tea has in Japan- it's the go to drink, for both hot and cold.9

Tea has been and will continue to be a significant player in the hot drink market in Japan. It may be declining in popularity compared to the past, however it is a much more of a major competitor for coffee than it is in other countries, such as Australia or the United States. While the coffee consumption has made major progress in recent years, there is also still tea’s significant positioning in people’s brains. Ease of Market Entry Compared to other countries, Japan’s coffee consumption is miniscule. In 2015, Japan’s coffee consumption was .245 cups per capita, while the United States, Canada, and most European countries were between .931 and 2.414 cups per capita (Appendix B-2).10 Between 70% and 80% of total sales of canned RTD coffee are from vending machines.11 The rest is sold in convenience stores or supermarkets. The RTD coffee market and the use of vending machines in Japan take care of the convenience factor that consumers want and the cafés and shops provide the quality. In 2013, 40% of roasted coffee was used for RTD, 29% for cafés and restaurants, and 31% for household use (Appendix B-3).12 The RTD has a huge market share and gives soluble coffee (aka instant coffee) a run for its money. The emergence of the coffee consumption market is relatively new, beginning around the 1970s in Japan. Compared to other countries, there may be a space for our instant coffee brand to enter. However, looking exclusively at Japan, there are already major instant coffee and RTD coffee brands that have taken over the relatively small market (in comparison to other international markets). Another major barrier is the culture regarding coffee consumption. In addition to tea’s significance in the market, Japanese consumers want quality and high-end goods. Positioning instant coffee as a premium, high-quality product is a daunting task and will fall short of the single-serve coffee machines that consumers use in their homes. On the other hand, there are numerous factors that favor us entering the market. The single-serve and soluble, stick type coffee have become much more popular in recent years due to their convenience. This trend has been continuing for the past few years due to increasing two person and single person households (Appendix B-4). The desire for new brands and innovation could

9 Sung, L. (n.d.). Quora.com. Retrieved April 17, 2016, from https://www.quora.com/Do-people- in-Japan-drink-coffee 10 Ibid. 11 Instant coffee market in Japan. (n.d.). Retrieved April 17, 2016, from https://www.ukessays.com/essays/marketing/instant-coffee-market-in-japan-marketing-essay.php 12 Ohnishi, T., & Nakahara, K. (2014). Japanese RTD Coffee Market. Retrieved April 17, 2016, from http://www.probat.com/fileadmin/user_upload/Files/Connecting_Markets_Coffee/ 01_Japanese_RTD_Coffee_Market.pdf

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play in favor of our product since consumers may buy into the novel brand at first. However, since instant coffee already exists and is in use in Japan, this cultural factor may not work in our favor. Japan’s close relation with Australia and continuous international trade will be extremely beneficial if we decide to enter the market.

Filter4:TargetMarketProfileandMarketEntryStrategy Target Market Profile The likely primary target market for our product will be the working class population of metropolitan areas in Japan, which house more than 75% of the entire country’s inhabitants. They are between the ages of 25 and 55. As of 2010, this age group consumed the most cups per week compared to people between the ages 12 and 24 (Appendix C-1).13 They drink coffee in the mornings and buy it for convenience, on their way to work or on their way home to stay awake for dinner and the night. Our secondary target market will be college-aged students. Targeting the younger population will be important, so that they continue to use our product as they grow older after hopefully becoming hooked on it during their studious years. The working class in Japan has a very high income, 90% of the population being middle class. The Japanese consumers place a very large importance on brands and logos. They like wearing and using well-known, respected brands. It “conveys a double message: social appurtenance and insurance of quality.”14 However, the younger generation is more individualistic and in the future may stray away from this need for affirmation from others. That could be beneficial for us when targeting the younger, secondary target market. The market is very health conscious and aware. They strive for quality and nutrition in their food at reasonable prices.15 Since the recession in Japan, consumers have become more price sensitive than before. This could help the positioning of our product as an affordable alternative to buying a cup of coffee at Starbucks. The common Japanese consumer always wants the next best thing and loves innovation. Our product is not new to the market; however seeing a new brand could spark an initial purchase from a Japanese consumer. If we were to enter the market, indirect exporting would be the best decision due to Japan’s well-established relationship with Australia. Japan has limited production and manufacturing capabilities and doing so in Australia would be preferred. Our Australian company would not be responsible for the shipping logistics nor any credit risks. Generally, it will make things more simplified and the use of a middleman will take care of the many formalities associated with entering a foreign market. 13 Coffee Market in Japan. (n.d.). Retrieved April 17, 2016, from http://coffee.ajca.or.jp/english 14 Key Characteristics of Japanese Consumers. (n.d.). Retrieved April 17, 2016, from http://www.slideshare.net/rpretet/key-characteristics-of-japanese-consumers 15 The Japanese Consumer Behaviour, Attitudes and Perceptions toward Food Products. Retrieved April 17, 2016, from https://www.gov.mb.ca/agriculture/market-prices-and statistics/trade-statistics/pubs/japan_consumer_report_en.pdf

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DoOpportunitiesExist? While vending machines and canned RTD coffee controls a good amount of the market, there is an opportunity for our instant soluble coffee to enter in convenience stores and super markets. It could also be sold in coffee shops to be taken home, instead of buying a large bag of coffee grounds. Sales for coffee in cafes and shops have slowed was the prices have risen.. This creates an opportunity for our product as well. With over 75% of the population living in cities, key locations will be the convenience stores by train stations, work buildings, and high-traffic areas. However, one major drawback is the decreasing population in Japan. As the fertility rate decreases, the population is aging and reducing the workforce size majorly. The workforce is a major part of our key target market and with this decreasing in size we would lose revenue. Other drawbacks include the dominance of RTD coffee in the market and existing instant coffee brands already in Japan.

RecommendationsAlthough there is a market for instant coffee in Japan, and the coffee culture has increased great amounts in the 21st century, entering the market at this point in time doesn’t have enough benefits to make it worthwhile. At home single-serve coffee machines already provide the convenience and quality that consumers look for and the RTD products serve as convenience as well. The competition in the coffee market is too strong and established for product that not only already exists, but isn’t at the same quality standard as freshly brewed coffee in cafés and shops. The aging population is also a major reason not to enter at the moment. With our target market being affected greatly by this factor, profits would most likely not be as high as needed.

LimitationsOne major limitation with this market analysis was the lacking recent data on coffee sales and profits in Japan. General information was available about the market and consumption. However, specific numbers and comparable figures were hard to come by. The more specific the information sought after, the more difficult it was to find. Japan’s culture, economy and other external factors are well researched and available. Some primary sources were found, in forms of blogs and forums. While these were very insightful and informative, some credibility is questioned. Furthermore, numerous secondary sources were from around 2010 through 2013, with only a few from 2015 and present day.

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Appendices

AppendixAFigure 1:

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AppendixBFigure 1

Figure 2

Figure 3

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Figure 4

AppendixCFigure 1

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Bibliography Coffee Market in Japan. (n.d.). Retrieved April 17, 2016, from http://coffee.ajca.or.jp/english Instant coffee market in Japan. (n.d.). Retrieved April 17, 2016, from

https://www.ukessays.com/essays/marketing/instant-coffee-market-in-japan-marketing-essay.php

Japan - Country Profile, Key Facts and Original Articles. (n.d.). Retrieved April 17, 2016, from

http://globalsherpa.org/japan/ Japan country brief. (n.d.). Retrieved April 17, 2016, from

http://dfat.gov.au/geo/japan/Pages/japan-country-brief.aspx Oakland, M. (2011, October 24). JapanToday. Retrieved April 17, 2016, from

http://www.japantoday.com/category/opinions/view/japans-coffee-culture Ohnishi, T., & Nakahara, K. (2014). Japanese RTD Coffee Market. Retrieved April 17, 2016,

from http://www.probat.com/fileadmin/user_upload/Files/Connecting_Markets_Coffee/01_Japanese_RTD_Coffee_Market.pdf

Key Characteristics of Japanese Consumers. (n.d.). Retrieved April 17, 2016, from

http://www.slideshare.net/rpretet/key-characteristics-of-japanese-consumers Sung, L. (n.d.). Quora.com. Retrieved April 17, 2016, from https://www.quora.com/Do-people-

in-Japan-drink-coffee The Japanese Consumer Behaviour, Attitudes and Perceptions toward Food Products.

Retrieved April 17, 2016, from https://www.gov.mb.ca/agriculture/market-prices-and statistics/trade-statistics/pubs/japan_consumer_report_en.pdf