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Coffee shop INDUStry. Isaure Dacre -Wright Richard Horgan Amy Mitchell Tanali Hamlet. Why coffee shop industry ?. Based on an everyday consumer product : coffee Typical in the American culture Increase in recent years Attract an increasing number of consumers.

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coffee shop industry

Coffee shopINDUStry


Richard Horgan

Amy Mitchell

Tanali Hamlet

why coffee shop industry
Why coffee shop industry?
  • Based on an everyday consumer product: coffee
  • Typical in the American culture
  • Increase in recentyears
  • Attract an increasingnumber of consumers
why coffee shop industry1
Why coffee shop industry?
  • Sell a good and a service at the same time
  • Based on a relatively cheap rawmaterials
  • Pricingstrategy to maximize profit

1. Industry Structure

2. Pricing Strategies

• Raw Data

• Results and Analysis

3. Analysis and Recommendations

coffee shop industry products
Coffee shop Industry Products
  • Drip-coffee products
  • Espresso products
  • Iced-drink products
  • Complimentary items
technology in the coffee shop industry
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
demand determinants
Demand Determinants
  • Sensitive to factors that impact growth in household disposable income
  • Baby boomers greatly impact revenue growth
  • Business locations distributed according to the population size
  • Brick and mortar locations
    • Drive-thrus
firms in the industry
Firms in the Industry
  • 38,868 businesses in the industry
  • HHI: (36.62)+(24.52)+(2.12)+(1.62) = 1945.78 relatively concentrated
barriers to entry
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
business differentiation
Business Differentiation
  • Complex Products
  • Price differentiation
  • Target market differentiation
  • Service differentiation
the supply chain
The Supply Chain


Consumer Spending

Healthy Eating Index

Consumer Sentiment Index

Per Capita Coffee Consumption


Beef & Pork Wholesaling

Coffee Production

Dairy Wholesaling

Egg & Poultry Wholesaling

Fish & Seafood Wholesaling

Frozen Food Wholesaling

Fruit & Vegetable Wholesaling



Coffee & Snack

Shops in the US


Specialty Food Stores

Chain Restaurants

Single Location Full-Service Restaurants


Street Vendors

Bars & Nightclubs

Fast Food Restaurants


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

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
dunkin brands group inc 1946
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
starbucks corporation 1971
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
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)
einstein noah restaurant group inc
Einstein noah restaurant group, inc.
  • Responsible for 1.6% of the market share
  • Subsidiaries: Noah’s New York Bagels, Einstein Bros., and Manhattan Bagel
raw data
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
pricing strategies
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
nonlinear pricing
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
nonlinear pricing cont
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
second degree price discrimination
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
second degree price discrimination2
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
complementary pricing
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
price bundling
Price Bundling
  • Bundle together a cup of coffee and a sandwich
  • Large cappuccino-$3
  • Sandwich-$5
  • Cappuccino and sandwich-$7
price bundling cont
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
reference pricing
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
reference pricing cont
Reference pricing (cont.)
  • If your beverage of choice is only offered in two sizes, 8oz. and 12oz., which would you buy?
reference pricing cont1
Reference Pricing (cont.)
  • If your beverage of choice is offered in 3 sizes, 8oz., 12oz., and 16oz., which would you purchase?
flexible pricing
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
customer loyalty discounts
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
my starbucks reward
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
charm pricing
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
perception gap
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
quality and quantity pricing
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
quality and quantity pricing1
  • 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
competition based pricing
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
high margins
High margins
  • Competition: Price of coffee < Price of latte
  • High profit per size
  • Insignificantcost for providing a higherquantity
  • Illustration of referencepricing
high margins1
High margins

Hot Coffee


  • Profit goes up
  • Price per oz. goes down
  • Prices are set in order to makecustomerschoose the bigger item.
trends for the future
Trends for the future
  • Mature industry
  • Increase of the sales after a recessionperiod
  • New consumers
  • Increase of the profit
    • Over the four years to 2017, consumer

spending is expected to increase at an

average annual rate of 2.8%

  • International extention for the main actors
  • Externalcompetition:
    • Positioning as a specialist
    • Advertising: Brand and corporate communication
  • Internalcompetition:
    • Variety and diversity
    • Level of service provided
    • Price level
    • Loyalty programs
recommendations cont
Recommendations (cont.)
  • Adaptproduct to currentconsumersconcerns
  • Extract the highestwilligness to pay
  • Attract new segments of consumers
    • Children
    • Coffee experts
  • Low-cost/High profit
  • Track sales to reduce the Perception Gap