Coffee retail Essay

1. Introduction The report revolves around the Retail Industry. As it is a very generic industry we have taken the Coffee Retail Market as the highlight of scrutiny. Our scope of study is focused taking in consideration only India as the geographic segment. We broadly look at the Porter’s Five Forces of the industry specifically. Also the complementors are observed and how they affect the retail business of coffee houses. The major players identified in the industry are Starbucks, Cafe Coffee Day, Barista, Costa Coffee, and Nescafe. Grilling down further the report includes SWOT analysis, External Factor analysis matrix ,Internal Factor analysis matrix and PESTEL analysis. 2. Porter’s Five Forces The porter’s five forces model framework is very helpful in understanding the industry and market closely. It further helps in determining the profitability of the industry as a whole. Also helps the management in taking strategic decisions accordingly. 2. 1 Threat of New Entrants In the present world coffee has become a really popular beverage among Indians. This makes it an attractive market for the potential companies who are looking up for opening their retail coffee houses in India. Entering the industry is not that cumbersome in case a business house admires to open up a small coffee shop. Problem arises in respect to entering the industry when they aspire to set up retail coffee chains or speciality coffee shops. Due to many established names in the industry like Cafe Coffee Day and Costa Coffee, establishing brand name also becomes an issue. Companies already with established brand names like Coca Cola, Starbucks can enter the industry easily without much caution as they already have marketing strategies designed in their favour. As a conclusion, we can state that barriers to entry are Low especially for global brands and they can easily enter the coffee retail industry with established marketing strategy, name, and huge capital and financial stability. Otherwise, hard for new and unknown firms admiring to be in the business. 2. 2 Bargaining Power of Suppliers The suppliers for the coffee retail industry in India generally come from southern India i. e. Kerala, Karnataka and Tamil Nadu. Though these days different types of coffee are becoming popular among the Indians like, Gourmet, Organic, Eco-friendly coffee, and they are being sold for better prices in comparison to the traditional brewed coffee. Still the situation is not really in favour of these suppliers. These coffee growers are poor, competitive and rely on the buyers to a great extent. Therefore, power remains to be limited. This proves to be good for the retail outlets in the business. 2. 3 Bargaining power of Customers. The whole retailing coffee industry depends upon the customers. So it is of vital importance to satisfy the customers in order to give them a reason to visit again. In this case word-of mouth plays an important role. So, if people appreciate about a particular coffee shop or chain, others are likely to try it. Thus, retailers must find new strategies and techniques of luring away the customers. But it is very important for the localities coffee retail shops to understand that they cannot charge prices as high as the industry players like Starbucks, Barista or Cafe Coffee Day. They need to maintain a low price profile in order to attract customers. So in case of these small locality retail shops the bargaining power of customers is very high. Otherwise the other coffee retail chains (industry players) do hold some control over the prices charged but it becomes important to consider the customers purchasing power. Otherwise they would switch over to other brand as there is no switching cost for them. This establishes that the bargaining power of customers is high and really important measure for the conduct of efficient business. Also these coffee retail chains should understand that the customers can also make the coffee at home which justifies their higher bargaining power. 2. 4 Threat of Substitute products There are a lot of substitutes for the coffee retail industry in general. Specially, the soft drinks industry has always given fierce competition. Also, other products like ice cream, candy, and beer are also a part of substitute products. It becomes important for these retail houses to make coffee more popular and drinkable amongst the masses. People should never consider switching from their coffee shops. But with changing preferences of Indian masses in favour of coffee the players within the industry are making maximum efforts in favour of differentiating its products from the substitute products. Also strategic decisions and marketing activities are initiated to shift the customer base from the substitutes resulting in high demand of coffee from the retail sector. So the threat of substitutes is also moderate. 2. 5 Competitive Rivalry within the Industry Considering the entire coffee retail industry as the scope of study, there are number of retail chains serving the industry effectively. To top the list is Starbucks, and than many more such as Cafe Coffee Day, Barista, Costa Coffee, Gloria Jeans, Nescafe, Bru Cafe, Dunkin Donuts, Mc Donalds, and small Kiosks and coffee points are also emerging in localities. They all are different in size and serve different segments of the society but are competing with each other in some or the other way. Each retailer follows different marketing strategy to lure away their target segments. Also with moving times the industry is occupying a stable position in the retail sector and is saturated . Therefore, we can say that the competitive rivalry though on the higher side does not affects the profit margins for the industry. 3. Complementors There is a sixth force to the porter’s five forces model, the power and competence that the complementors provide to the business. The complementors are those that help in selling and adding value to the existing products of the industry. When these products are used together they help in satisfying customer demands more effectively. It is also to be believed that these complementors play an important role in drawing in the demand for the industry. This in turn helps in scaling up the profits. Conversely, the poor products being manufactured or supplied by the complementors may harm the profits and demand. So it becomes important on part of managers to analyse all the six forces and then think systematically how their strategic choices would affect the industrial competition. Majorly the complementors can be associated with high-tech industries wherein they literally help in hiking the sales and profits for the industry. In our case, coffee retailing is not an industry that has any such complementors that would help in boosting sales or profits. But certain products are identified by us that in a slight way might affect the coffee retailing business. Like, merchandising, snacks offered for sale in coffee retail chains. Merchandising includes apparels and coffee mugs and other products such as soft toys and key chains available for sale by many coffee retail houses Cafe Coffee Day, Barista, Starbucks etc. Snacks are offered mainly by all the coffee houses in the form of cookies, patties, croissants, sandwiches, pasta, oats etc. So these complementors directly help in pushing up the sales of the business. 4. SWOT Analysis 5. External factor Analysis External strategic forces. Weight Rating Weighted score Comments Opportunities 1. India Large market .18 4 .72 Second most populated nation of the world 2. Increase in spending power .15 3 .45 The GDP or the purchasing power is rising adequately 3. Youth population .13 4 .52 Youth are the ones who are more prone and exposed to cafes 4. Favourable labour cost .07 2 .14 Easily available manpower at lower costs 5. Favourable infrastructure cost .07 2 .14 Low and easy access to infrastructure 6. Opportunity to serve the tea drinking segment .05 1 .05 A major portion of population is attracted towards tea drinking. Threats 1. Low per capita income. .07 3 .21 Huge requirement to extend products at competitive prices 2. Increasing health consciousness .04 1 .04 3. Competiton from fast food joints .04 3 .12 Mc Donalds, Pizza Hut, Subway 4. Hiking coffee prices .06 3 .18 5. Tea drinking segment .10 4 .4 This segment consumes tea at least twice a day 6. Rare habit of travelling to cafes .04 1 .04 Total score 1. 00 3. 01 The EFE matrix is made by comparing the coffee industry with the other beverage industry in India and weights and ratings are assumed according to personal knowledge. Considering the external factors effecting the industry EFE matrix is created. A score of more then 2. 5 reflects that the industry has more than average capability in response to external forces particularly the beverage industry in India. 6. Internal Factor Analysis Internal strategic forces Weight Rating Weighted Score Comments Strengths 1. Increasing Coffee demand .18 4 .72 Changing lifestyle leading to coffee adaptation 2. Favourable labour relations .15 3 .45 3. Non-perishable commodity .12 4 .48 Coffee is a non-perishable commodity which has no threat of being spoiled easily. Weakness 1. Low dominance over price .15 2 .3 Due to competitors in the industry. 2. Heavy export of coffee .05 1 .05 Low domestic consumption 3. High operating cost .2.5 1 .25 Total 1 2. 25 In the above tables, Column 1 depicts the strategic factors Column 2 depicts weight assigned to each strategic factor from 0 to 1 i. e. not important to most important Column 3 depicts the rating assigned to each factor wherein a scale of 1-4 is used. It signifies industry’s present response to each factor. In EFE matrix 1-4 is responses from poor to superior and In IFE 1-2 is major and minor weakness and 3-4 is major and minor strength. Column 4 gives in the weighted score. Column 5 represents the comments for the strategic factors Since internal factor analysis is used to judge wether the company is performing inline with the expected strengths and weaknesses or not. Generally an average score of 2. 5 on 10 is expected. After the analysis, we conclude that the internal weigted score of coffee industry in India is almost in line with 2. 5,reflected that the respected industry is running as astrong business internally as well. 7. Value Chain It is a series of activities aimed at delivering maximum value to a customer, through a product or service, at the minimum cost. This model analyses how a firm procures raw materials, adds value to these material through various processes and sells the finished product to the ultimate consumer. All these functions are performed with the objective of maximizing customer value at minimum cost. The value chain of the retail coffee industry consists of the following processes and activities: 7. 1 Primary activities 7. 1. 1 Inbound Logistics: This is primarily concerned with the procurement of raw materials in the form of coffee beans and various types of dairy products, required by all the coffee retail outlets. The aim is to procure high quality materials so that best of the flavours is served to the customers. Cafe Coffee Day does in-house sourcing through coffee estates owned by the company. Starbucks Coffee and Barista Lavazza chains have sourcing agreement with Tata Coffee. Cafe Nescafe, owned by Nestle works through community farming, where it provides high yielding quality, disease resistant seeds to the farmers for improved productivity. The company provides regular and fair remuneration to the farmers. Dairy products are also sourced through community farming. 7. 1. 2 Operations: There are various operations involved in the business of retail coffee outlets. The most important operation to be performed is roasting of the coffee beans, which gives the taste, flavor and smell to the coffee. Tata coffee provides roasting services to Starbucks and Barista through its own roasting facility. The outlets undertake all the operations to run an outlet like preparation of items, serving them to the customers and billing, etc. Starbucks and Cafe Coffee Day work on the model wherein order is taken and served to the customers on the table, whereas Barista works as self-service outlet. 7. 1. 3 Outbound Logistics: The customers are serviced through company owned or licensed retail outlets, which may be in the form of lounge, highway cafes or store-in-store. The stores are set up in centralized locations, which are easily accessible to the customers, in order to achieve maximum footfall. According to a business standard report, top 40 cities in India have around 1700 coffee outlets. CCD is the largest coffee chain in India with 1200 outlets, followed by Barista having 154 outlets and Starbucks having 21 outlets. Starbucks also sells some of its products through retail stores and super markets. 7. 1. 4 Marketing and Sales: Companies undertake various promotional activities to attract a large number of customers, which may be in the form of sponsorships and co-marketing initiatives. Customers are also benefited through loyalty card programs, carrying various offers and advantages. Value meal combos attract students who have low purchasing power. Marketing is also done through TV and media sources. All this is done to maximize sales. 7. 1. 5 Services: Coffee retail industry relies on the quality of service to the customers. These chains don’t sell coffee, they sell experience. For this, highly trained staff is recruited to provide high quality customer service. Other services offered are newspapers, magazines and free Wi-Fi to the customers. 7. 2 Support services 7. 2. 1 Firm Infrastructure: In order to have a smooth flow of operations, the companies need to have sound infrastructure for accounting, planning, finance, management, etc. The retail outlets have inviting interiors and comfortable seating space. 7. 2. 2 Human Resource Management: Human Resources are the most valuable assets of any organization, and same also goes with these retail coffee chains. Highly trained people are recruited to provide high quality customer service. Various training and motivation programs are conducted to further enhance the skills of these people, which will add to the customer value. 7. 2. 3 Technology: Companies have started using latest technology to perform their operations. Computerized roasting machines are being used to maintain the consistency in the flavour of coffee beans. Barista has installed control systems like Total Quality Management to ensure the quality of materials distributed. Latest software is being used to achieve maximum operational efficiency. 7. 2. 4 Procurement: In order to achieve maximum customer satisfaction, companies need to procure raw materials that are of best quality available in the market. Companies also need to source furniture, kitchen equipment, utensils, etc. , which act as complements in the operations of coffee retail outlets. All the above-mentioned activities aim to maximize the customer value at the minimum cost. 8. PESTEL Analysis A strategic framework of macro economic , political, economical, socio-cultural, technological, environmental, and legal factors include :- 8. 1 Political factors. Indian coffee board has proved a helping hand to the coffee industry of the same after 1996 de-regulation of coffee marketing. after it it has grown up as a free market leading to a four times growth in its trade. around 70-80% of the country’s production is exported . A coffee produced with set standards named fair trade coffee is one of the major constituents to coffee retailing. the one managing this in the country is fair trade alliance , kerela. Starbucks in India is certified to fair trade coffee provider ,whereas barista lavazza has fair trade coffee compliance abroad buit not in India and same is the case with dunkin donuts. 8. 2 Economical factors Development in lifestyle of people and coffee turning as a delighting factor in the economy ,the consumption of coffee is taking a pace. Increase in consumption by urban young generation is expected to take the industry at a whopping business of around 2250 crores by the year 2017. Though it currently stands at Rs. 1100 with its major players trading like barista, CCd etc. The infrastructure developements, the enhancing demand and smoothing trade procedure leads to incremental trade for the industry. A coffeeproduced with set standards named fair trade coffee is one of the major condstituents to coffee retailing. The one managing this in the country is fair trade alliance,kerela. Starbucks inIindia is certified to fair trade coffee provider , whereas barista lavazza has fair trade coffee compliance abroad but not in India and same is the case with dunkin donuts 8. 3 Socio- Cultural factors Catering to the ever increasing population of the country, it is the responsibility of the businesses to look for to the socio economic factors in place . For instance, the development in lifestyle of people is leading to increase in the coffee consumption in the country. Keeping these factors into mind businesses like cafe coffee day claims of training 400-500mpeople every month to enhance employment and as a part of responsibility to the society, MC Donalds along with CCD keep staff to clean right under your feet. Similar to those dunkin donuts provides 21 day training program to the staff to help customers better. As a part of social responsibility 50% Costa coffee employees in Delhi and NCR are deaf people. 8. 4 Technological factors With the changing lifestyle and gezmo addicted generation, one cannot afford to have a internet free cafe . The presence of bluetooths and wifi within the outlets of coffee companies is the basic requirement to get on the customer to the shop. The comfort of checking the emails, organising commercial meetings in the coffee shops an sitting there for hours requires the business to have a wifi enabled cafe. For eg -starbucks (India) uses help AT&T(India) to provide a click, no password facility for easy internet accessSalong with there mobile apps and various online facilties. Moreover whotspot also helps in proving in these facilities. Barista lavazza uses strategy ‘ internet with mugs’ named strategy to lure customers in contract with spectranet. Along with this value addition it also provide facilities like hot deals with customers downloading deal on their tablets or smartphones and avail the services on the spot. 8. 5 Environmental factors The weather conditions play a major role in production of coffee. Environmental factors in case of coffee is the seasonal dependecy of the amount of coffee produced across different seasons. For instance:- with on time monsoon this year in the country,the coffee production in southern area of country raised upto 8-10%. in india other factors on which the coffee production depends are the pest infestation and limitation of mechanisation. conserving water, recycling,energy and plastic management etc are also few termenologies which companies takecare off. 8. 6 Legal factors Legal establishments popping up prooved as aiding cushions to the domestic market of the industry as well along with the outside trade. with liberalisation of industries in 1991 this particular industry was also benefited. One of the drastic help was with the FDI in retail industry i. e around 51% which turned trade more smoother then before. Tarrif charges in india are 40-605 on raw material and 60-100% on semi finished goods. Mc Donalds bring its coffee reatailing from its brand mccafe originated in melbourne,australlia. Starbucks got the way to enter in Indian markets after FDI was allowed by government but still restriction to get 30% of sourcing from SME’s of India. Indian institute of plantation management, Banglore (IIPM)usually takes up the responsibility of coffee retailing in the country along with its entrepreneurship and development. 9. Conclusion The coffee retail industry in India is on the expansion path and has doubled over the last decade. The present size of the market is estimated at Rs. 1520 crore, which is expected to reach Rs. 3775 core by the year 2018, a CAGR of around 20%. Earlier there was no such demand for moving out of the houses for coffee consumption but the emerging coffee retail chains have changed the scenario triggering consumption need amongst the young adults. Serving the evolutionary phase exceptionally well, these coffee retail chains are overwhelmed with the response in the Indian market are planning further expansion of their networks in the country. The above analysis of porter’s five forces highlights that the profitability of the industry is expanding with westernised culture being adapted by Indians. (Porters 5 force analysis). The snack and merchandise industry are complementing the coffee retail industry very effectively thereby leading to inflated sales and profits for these retail houses. (complementors). Reflected by the study of strategy of coffee industry hereby conclude that the Indian coffee industry is a strong respondent to the external factors (EFA matrix) as well as internally also industry is doing well(IFA matrix). To increase the figures of sales and profitability, a number of varieties of coffee and eatables are offered, targeted at different price-points of the market. The companies are using innovative strategies and marketing tactics. A large young population, rapid urbanization and changing lifestyle, coupled with not-so-difficult entry into the market have attracted a large number of domestic and foreign players in the country. Global brands like Starbucks are keen in investing in the Indian market due to the huge potential it displays. This is evident from the sizeable revenues that these brands have generated over the years. (PESTEL and Value chain). Only home grown coffee is served in the Indian market as coffee import attracts a duty of 120%. Coffee beans are sourced from company owned estates or through the means of community farming. Companies with established brand names are able to run their business successfully, whereas small business houses are in a way struggling to compete in the market. 10. Bibliography Unknown. 2013. [online] Available at: http://pure. au. dk/portal-asb-student/files/3785/khrystyna_diaz_final_theses. pdf [Accessed: 12 Oct 2013]. Unknown. 2013. 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