Retail Coffee Industry

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 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:

17.6%

14.1%

11.8%

16.3%

24.8%

Coffee Retailers at a Glance:

Industry Key Drivers: Retail Coffee

Internal

• Consolidation

• Wage and input increases, thus cost control

• Market position & “high-profile” outlets

• Franchising

External

• Consumer Spending

• Health food trend

• Per capita disposable income

• Per capital coffee consumption

Product Mix

Brewed Coffee

Food & Drink Specials

Seasonal Drinks

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

Major Local Players

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

Local Industry Pricing Strategies

Coffee Pricing in Ithaca(overview)

12 oz 16 oz 20 oz0.5

1

1.5

2

2.5

Hot Coffee

ManndibleStarbucksCTBTrilliumOlin CaféMcdonaldsDunkin Donuts

Pri

ce

Coffee Pricing(Overview continued)

12 oz 16 oz 20 oz2

2.5

3

3.5

4

4.5

Latte

ManndibleStarbucksCTBCampusMcdonaldsDunkin DonutsP

rice

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

Retailers that use this strategy:

Premium Pricing

Coffee Iced Coffee Latte Mocha $1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Starbucks 16 oz vs. McDonalds

Starbucks McDonalds

Drinks

Pri

ces

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)Retailers that use this strategy:

Cost Plus Graph

12 oz 16 oz 20 oz1.5

2

2.5

3

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Manndible CoffeePrice vs. Price/oz

PricePrice/oz

Pri

ce

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

12 oz 16 oz 20 oz1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

Hot Coffee

ManndibleStarbucksCTBTrilliumOlin CaféDunkin DonutsP

rice

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

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.

Gimme! Vs. Manndible

• Same coffee, different prices. Why?

_x0005_12 oz

_x0005_16 oz

_x0005_20 oz

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

Coffee

GimmeManndible

Pri

ce

_x0005_12 oz

_x0005_16 oz

_x0005_20 oz

3.2

3.4

3.6

3.8

4

4.2

4.4

4.6

Mocha

GimmeManndible

Pri

ce

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

National vs. Local

• Average national price:• Brewed- $1.38• Espresso- $2.45

• Average Ithaca price-• Brewed- $1.58• Espresso- $2.93

Questions?