Essay, Pages 6 (1299 words)
The coffee industry is one of the most popular industries in the world. It is said that on average two cups of coffee are consumed daily. Coffee as a drink is made from brewing the coffee seeds. Retailing of coffee consists of two broad categories i.e caffeinated and decaffeinated coffee. In the USA, the demand for coffee is growing phenomenally and so is the demand for instant coffee that can be made at home. According to a survey by the National Coffee Association (NCA), in the USA more than 70% of consumers prefer having their coffee at home.
However, the trend is changing and inclining towards the retail coffee market. The sales of coffee as a takeaway beverage is increasing. Therefore, the demand for coffee retailing is increasing.
The coffee market is segmented into three categories – coffee growers, roasters, and retailers. In terms of coffee growing, South America is ranked as a major coffee producer. US coffee retailing’s top product was dry coffee and generated revenue of over 9 billion USD in sales and liquid coffee sales was about 2.
66 billion dollars. According to statistics, the United States coffee market is expected to grow at a compounded annual rate of 8.1% during 2019-2024.
In 2015, the National Coffee Association (NCA) conducted a survey to measure the contribution of the coffee industry to the economy. The research was as follows-
- The total impact of the coffee industry on economy was $225.2 billion.
- Contributes 1.6% towards US GDP.
- Total consumer spending for coffee in 2015 was $74.2 billion
- The coffee industry gives employment for 1,694,710 jobs.
- Generated taxes of $28 billion
Despite coffee is one of the oldest beverages, there are many new trends that are emerging in this market such as cold brew and nitro coffee. Cold brew coffee is growing consistently since 2016. Recent statistics tells that in US most of Americans prefer having their coffee at home, followed by their workplace. The following figure shows the consumption of coffee by their location in US.
Retail Market for Coffee industry sell coffee online and offline of hot, iced, instant, cold brew, nitro, beans, and ground coffee. The sales of this market include sales from retail, specialty stores, general merchandise, and online retailers.
Major products in this industry are iced coffee, espresso, instant coffee, ground coffee, and coffee consumed on-premises. The following figure shows the products and their revenue generated in 2018.
Its seen that coffee sellers usually compete with other sellers of coffee to attract consumers towards their different products such as hot coffee, brewed coffee, iced coffee, ground coffee, beans, ready to drink coffee, single cup coffee, free refills, and more. Price is typically the basis for competition and the quality of coffee is another important factor. Starbucks coffee and Dunkin’s coffee are the major contenders in the US market. Most of these are location-specific, Boston consumers are inclined towards Dunkin’s coffee and West coast consumers are inlined to Starbucks. However, in a few regions of the US, small cafés are very famous.
Typically, competition on the basis of price is high for products such as instant coffee. The demand for instant coffee is high is for its convenience rather than taste. McCafé coffee has less price when compared to Dunkin’s and Starbucks. If McCafe medium café latte is for $2.89 whereas Starbucks medium café latte is for $4.78. It is a game of quality and quantity in this case. McCafe is planning to be the cheapest of the coffee chains in the market ever since the all-day-breakfast hype died they had difficulties to cope up. Coffee can also be treated as a product that has less differentiation if you are looking for a normal cup of coffee, therefore, coffee sellers are coming up with unique product differentiation to attract customers. For example, Starbucks on march 5th 2019 had launched new spring products such as Cloud Macchiato, Matcha green latte, and cold brew with cascara cold foam. Convenience is another major factor in determining instudry competition. Starbucks has a comparatively high wait time of an average of 4.44 minutes whereas Dunkin’s coffee has a wait time of 2.90 minutes.
Foundation of the retail market for the coffee industry have low barriers to entry. Coffee retailers need to purchase equipment, furniture, and fittings, these can be leased. Because of the industry being divided, top three players represent less than 45% of yearly industry income. Potential entrants can enter into the market craft a business to look after the niche needs of customers. For example, Starbucks operates under a monopolistic competitive market so new entrants should make efforts to differentiate from other competitors typically by creating its own price.
Many franchisees can enter the market that will enable potential administers to acquire equipment, furnishing, and more. The franchisee usually are with a brand name coffee thus leading to cutting down costs. Its difficult to get a place to sell coffee due to high competition, Most of the franchising operators tie up with malls, common area, single building and so to reduce the operating cost. Coffee as a beverage requires no license to entry therefore doesn’t create any huge barriers to entry into the market.
Substitutes and Complements
The biggest substitute for coffee retailing is coke or carbonated drinks, tea etc. Over the years carbonated drinks pose very little threat as most of them are avoiding carbonated drinks in terms to be healthy. There are new trends in the beverage industry such as Kombucha, infused teas, fruit infusers etc. are the healthier options that people are considering to substitute coffee with.
Most of the people are now tending to eat out and people don’t want a mediocre coffee, they expect and want more from the coffee sellers. So companies like Starbucks are changing their products and creating new variations so that there is something for everyone’s demand. If caffeine is not demanded by many customers then decaf is an option for customers. Most of the retailers of coffee are making many efforts to maintain loyalty with the customers and reduce the brand switching cost by gift cards, free complimentary coffee, membership, cards with complimentary points and more. Coffee for a long time is a trend and the demand for coffee is great, With variations and proliferation, the demand has increased drastically.
The retail market of coffee is distributed to restaurants, coffeehouses, supermarkets, gas stations, a convenience store that offer coffee consumption on the area and off the area ( to-go services). The top three in the industry have a concentration ratio of 42.0% of total revenue this could be because of internal rivalry.
In the early days, most the suppliers were not connected to each other, Now all of the suppliers are united under the head of Fair Trade Certified Coffee. Coffee has a high variety of suppliers with moderate size. There is a variety of suppliers and this weakens their bargaining power. This could further be weakened because of the large overall supply. Most of the big chains of coffee retailers are planning on diversifying their supply chain to improve the benefits of large supply or have long term contracts with the coffee supplier.
There are two different buyers for coffee, one being an individual buyer and another being a group buyer, i.e. for example when a company decides to have a particular retailer’s coffee in their space. In the case of specialty coffee, any changes with the price will make very little difference to the buyer as they are not very price sensitive. With the expansion of the coffee industry and with the internal rivalry, most of the coffee retailers have their USP and is known for quality. Therefore, the buyer has no much switching cost within the industry.