Coffee shop INDUStry

1. Coffee shopINDUStry IsaureDacre-Wright Richard Horgan Amy Mitchell Tanali Hamlet

2. Why coffee shop industry? • Based on an everyday consumer product: coffee • Typical in the American culture • Increase in recentyears • Attract an increasingnumber of consumers

3. Why coffee shop industry? • Sell a good and a service at the same time • Based on a relatively cheap rawmaterials • Pricingstrategy to maximize profit

4. overview 1. Industry Structure 2. Pricing Strategies • Raw Data • Results and Analysis 3. Analysis and Recommendations

5. Industry structure

6. Coffee shop Industry Products • Drip-coffee products • Espresso products • Iced-drink products • Complimentary items

7. Product Breakdown by revenue

8. Technology in the Coffee shop Industry • Technology is used to reduce labor and costs, reduce waste, and increase sales • Social Media and Smart Phone integration • Redesigned kitchen layouts and ordering systems • LED displays • Communication devices

9. Technology in the coffee shop industry

10. Demand Determinants • Sensitive to factors that impact growth in household disposable income • Baby boomers greatly impact revenue growth

11. Spending by Income Levels Total $27.8 Bln

12. Macroeconomic Factors

13. Logistics • Business locations distributed according to the population size • Brick and mortar locations • Drive-thrus

14. Firms in the Industry • 38,868 businesses in the industry • HHI: (36.62)+(24.52)+(2.12)+(1.62) = 1945.78 relatively concentrated

15. FIRMS IN THE INDUSTRY

16. Barriers to Entry • Barriers to entry are low • Medium level of fragmentation • Entry into the market through signing a franchise agreement • Competition among franchisees for prime real estate

17. Business Differentiation • Complex Products • Price differentiation • Target market differentiation • Service differentiation

18. The Supply Chain KEY ECONOMIC DRIVERS Consumer Spending Healthy Eating Index Consumer Sentiment Index Per Capita Coffee Consumption SUPPLY INDUSTRIES Beef & Pork Wholesaling Coffee Production Dairy Wholesaling Egg & Poultry Wholesaling Fish & Seafood Wholesaling Frozen Food Wholesaling Fruit & Vegetable Wholesaling DEMAND INDUSTRIES Consumers Coffee & Snack Shops in the US RELATED INDUSTRIES Specialty Food Stores Chain Restaurants Single Location Full-Service Restaurants Caterers Street Vendors Bars & Nightclubs Fast Food Restaurants RELATED INTERNATIONAL INDUSTRIES Global Fast Food Restaurants Full-Service Restaurants in China Fast-Food Restaurants in China Fast Food Services in Australia Cafes and Coffee Shops in Australia Source: IBISWorld Industry Report 72221b

19. Industry structure

20. INDUSTRY LIFE CYCLE • Mature, some argue that it could be on the end of the Growth phase • High “price based” competition • Mergers and acquisitions over the past few years have changed the outlook of the industry • Carlyle Group/Bain Capital’s acquired Dunkin’ Brands • Joh. A. Benckiser acquired Peet’s Coffee & Tea

21. Major Players

22. Dunkin’ brands GROUP, inc. (1946) • 16,800 locations in 58 countries • Subsidiaries: Dunkin’ Donuts & Baskin-Robbins • Dunkin’ Donuts (1950) • 10,083 stores • Sells over 1 billion cups of coffee annually • Baskin-Robbins (1946) • 6,000 outlets in 35 countries • Services 3.7 million people weekly

23. 5-Year Financial performance

24. Starbucks corporation (1971) • Added 1,063 stores between 2012 and 2011 • Recently acquired Evolution Fresh (2011) and Teavana (2012) • Main Products • Coffee/Coffee Accessories • Pastries • Extended Breakfast Items • Sandwiches

25. 5-YEAR FINANCIAL PERFORMANCE

26. KRISPY KREME DOUGHNUTS, INC. (1937) • Responsible for 2.1% of the market share • Presence: • 92 Company Stores • 142 Domestic Franchise Stores • 460 International Franchise Stores (in 20 countries)

27. Einstein noah restaurant group, inc. • Responsible for 1.6% of the market share • Subsidiaries: Noah’s New York Bagels, Einstein Bros., and Manhattan Bagel

28. PricingStrategies & raw data

29. Raw Data • Conducted two surveys asking age range, reasons for visiting, and products purchased • Surveys differed in the size options • Used to test our reference pricing hypothesis • Collected prices from 6 different coffee shops in the Ithaca market • N=62

30. Pricing strategies • Nonlinear Pricing • Second Degree Price Discrimination • Complementary Pricing • Price Bundling • Reference Pricing • Flexible Pricing • Customer Loyalty Discounts • Charm Pricing • The Perception Gap • Quality and Quantity Pricing • Competition Pricing

31. Nonlinear pricing • Characterized by marginal prices that vary with coffee size and quality • Appear in markets where marginal or average costs change with product size • Most common nonlinear prices are quantity discounts • Nonlinear pricing is also used with second degree price discrimination when consumers hold private information about their tastes

32. Nonlinear pricing (cont.) • Use nonlinear pricing as a screening mechanism to induce different types of consumers to buy different products • Generally coupled with product design decisions that determine how much of a product the consumer will receive • Screening incentives cause firms to make the small version of their product “too small” • Allows them to collect more profit from consumers who purchase the larger version

33. Second degree price discrimination • There are different groups and classes of consumers • The seller is aware of this but cannot distinguish • Set high, mid, and low prices and the different classes self select • Use consumer preferences to distinguish classes of consumer

34. Second degree price discrimination a. b.

35. Second degree price discrimination • Most of the coffee buyers in the Ithaca market were between the ages of 18 and 25 • Most likely undergrad and grad students who may not have as much income as a professor or working adult • Sellers are aware of this and as such assess their coffee prices • Prices would be relatively lower than the prices in the market in NYC

36. Complementary Pricing • Common items are priced low (coffee) • Prices of other items are higher (sandwich or baked good) • Attract customers to store with low priced coffee • Customers unintentionally buy the more expensive item

37. Price Bundling • Bundle together a cup of coffee and a sandwich • Large cappuccino-$3 • Sandwich-$5 • Cappuccino and sandwich-$7

38. Price bundling (cont.) • Sellers must consider willingness to pay • Must charge a price similar too or lower than consumer willingness to pay • When competition offers similar items

39. Reference pricing • To adapt to each consumer segment, different sizes for beverages are proposed • Let consumer choose between different sizes • More people choose the middle option when there are 3 options rather than when there are 2 • Consumer buy more coffee than they wanted • Charged a higher price

40. Reference pricing (cont.) • If your beverage of choice is only offered in two sizes, 8oz. and 12oz., which would you buy?

41. Reference Pricing (cont.) • If your beverage of choice is offered in 3 sizes, 8oz., 12oz., and 16oz., which would you purchase?

42. Flexible pricing • Sellers must determine what prices to charge in order to breakeven • Raise or lower the prices of certain items to achieve desired profit • Menu format makes it easy to change, and reflect costs • Change prices in small increments • Feature high profit items as daily specials • Can design prices to help increase sales of certain items

43. Customer loyalty discounts • Offering customers something for free or discount • May decide to charge a discount on coffee to customers who bring their own cups • Grow customer loyalty by offering membership discount cards or by using “buy nine get one free” cards • Builds loyalty and repeat business

44. My starbucks reward • Earn 1 star every time you pay with a registered Starbucks card or Starbucks mobile app • Welcome Level • One use of card earns first reward; free drink or food on birthday • Green Level • 5 stars; free birthday drink and free refills in store • Gold Level • 30 stars in 12 months; get all the benefits from welcome and green level plus: personalized gold card, special offers

45. Charm pricing • Sellers back off the rounded number by a few cents or a few dollars • Makes item look less expensive, first number of price is lower • Pushes product into lower price bracket, so it appears to cost much less

46. Charm Pricing (cont.)

47. Perception Gap • People are fine with the price of fountain soda or draft beer • Upset with the price of coffee • High coffee prices exist as a result of perception • At a bar you are not walking away with the glass • At a coffee shop you walk away with the cup • Coffee drink composed of multiple ingredients and freshly prepared in front of you • The cup, heat sleeve, the chocolate, the espresso and the milk

48. Quality and quantity pricing • Starbucks • Lowering cost of standard drinks and raising prices of specialty drinks • Maintain both sales volumes and premium brand values • Goal: continue to find ways to balance the value they provide for customers • Challenge: not losing customers to lower-price coffee outlets, and maintaining the brand’s premium value • Customers still value the premium Starbucks offering, especially in specialty coffees

49. QUALITY AND QUANTITY PRICING • Customers are willing to pay more to maintain an everyday luxury • Helped the brand keep its high-earning coffee connoisseurs • Same time attract mid-market consumers who will appreciate the added value of the lower-end coffees on the menu

50. Competition based pricing • The control coffee shops have over prices is far from 100 % • Sellers have to find a compromise between a price too low-where no money will be made and a price too high- where no one will buy products • Prices are based on the competition, looking at what prices they set and trying to set a price similar to it or less