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?