COFFEE SHOP
INDUSTRY
Kyle Brumm | Sarah Le Cam | Zach Leighton | Stephanie Ou
AEM 4160
April 28, 2015
AGENDA
Background
Competitive Landscape
Industry Organization
Major Competitors
Pricing Strategies
Raw Data Analysis
Recommendations
WHY COFFEE?
Millions of
Americans on
a daily basis
Introduction
Several
innovative
changes in the
past 20 years
Industry
Customers are
more
sophisticated,
knowledgeable
Pricing Strategies
Recommendations
INDUSTRY STRUCTURE
INDUSTRY BACKGROUND
 Retail cof fee industry
 $28 billion in revenue in the United States
 Two major categories
 At-home
 Direct sale
 Industry at a Glance – Cof fee & Snack Shops
 Revenue
 Businesses
Introduction
+$12bn from coffee shops
+22,000 coffee shops
Industry
Pricing Strategies
Recommendations
KEY DRIVERS
EXTERNAL
INTERNAL
• Consumer Spending
• Health Consciousness
• Increased Consumer
Confidence
• Growth of Consumption
Introduction
Industry
• Clear Market Position
• Effective Cost Controls
• Ability to Franchise
• High-Profile Locations
• Multiskilled Workforce
Pricing Strategies
Recommendations
CUSTOMER BASE
Introduction
Industry
Pricing Strategies
Recommendations
INDUSTRY COMPETITION
 Four Firm Concentration
Ratio
58.3
 Highly concentrated at the
top
 Top 20 players control 70%
of the coffee shop market
Introduction
Industry
Pricing Strategies
Recommendations
PORTER’S FIVE FORCES
 Threat of New Entrants
MODERATE
 Threat of Substitutes
HIGH
 Bargaining Power of Buyers
LOW/MODERATE
 Bargaining Power of Suppliers
LOW/MODERATE
 Intensity of Competitive Rivalry
HIGH/MODERATE
Introduction
Industry
Pricing Strategies
Recommendations
INDUSTRY ORGANIZATION
Introduction
Industry
Pricing Strategies
Recommendations
SUPPLY CHAIN
1
2
Coffee
Farm
3
Factory for
Washing
5
4
Freight &
Transportation
6
Factory for
Roasting
Introduction
7
Coffee
Bar
Industry
Factory for
Processing
Consumers
Pricing Strategies
Recommendations
FAIR TRADE
• Support local, small-scale farmers
• Long-term sustainability
• Links farmers directly with importers
MAJOR PLAYERS
STARBUCKS CORPORATION
Revenue (2014)
 $16.5bn
US Stores: 7,303
Ithaca Locations
 Downtown/Commons
 Collegetown
 Ithaca Mall
 Campus Dining
Introduction
Industry
Pricing Strategies
Recommendations
DUNKIN’ BRANDS
Revenue (2014)
 $748 million
US Stores: 8,047
Ithaca Locations
 Downtown/Commons
 East Hill Plaza
 Collegetown (May ‘15)
Introduction
Industry
Pricing Strategies
Recommendations
LOCAL COMPETITORS – ITHACA MARKET
Collegetown Bagels
Collegetown
Downtown/Commons
East Hill Plaza
Gimme! Coffee
Collegetown
Downtown/Commons (2)
[Other locations in New York State]
Stella’s Cafe
Collegetown
Introduction
Industry
Manndible Cafe
Cornell Campus
Pricing Strategies
Recommendations
PRICING STRATEGIES &
RAW DATA ANALYSIS
PREMIUM PRICING
 Of fers products at dif ferent prices
 Regular drinks (coffee, iced coffee, latte) – CHEAP
 Specialty drinks (cappuccino, mocha) – EXPENSIVE
 Who can engage in this?
 Example: Starbucks in the Recession
 Lowered the price of regular drinks ($0.05 - $0.15)
 Increased the price of premium drinks (+$0.30)
Coffee (16 oz)
Iced Coffee (16 oz)
Mocha (16 oz)
$2.10
$2.58
$4.23
Introduction
Industry
Pricing Strategies
Recommendations
PREMIUM PRICING
Introduction
Industry
Pricing Strategies
Recommendations
PREMIUM PRICING
Introduction
Industry
Pricing Strategies
Recommendations
PREMIUM PRICING
Introduction
Industry
Pricing Strategies
Recommendations
LINEAR VS. NON-LINEAR PRICING
 “Deltas” between sizing varies
 Some companies use linear pricing (Stella ’s, Gimme!, Dunkin’)
 Some companies use non-linear pricing (CTB, Starbucks, Manndible)
 Non-linear deltas decrease with increased size on standard
drinks
 On premium drinks this does not hold
Introduction
Industry
Pricing Strategies
Recommendations
LINEAR VS. NON-LINEAR PRICING
Introduction
Industry
Pricing Strategies
Recommendations
LINEAR VS. NON-LINEAR PRICING
Introduction
Industry
Pricing Strategies
Recommendations
LINEAR VS. NON-LINEAR PRICING
Introduction
Industry
Pricing Strategies
Recommendations
HOT BREWED VS. ICED COFFEE
 More cof fee  More time
 Cold brewing technique
 Greater expenses
 Plastic cups more expensive
than paper cups
 Use of straws
 Condensation leads to more
napkins per customer
Introduction
Industry
Small
Hot
Iced
% Difference
CTB
$0.15
$0.14
-3.6%
Starbucks
$0.15
$0.19
28.6%
Stella's
$0.15
$0.19
28.6%
Medium
Hot
Iced
% Difference
CTB
$0.11
$0.10
-11.3%
Starbucks
$0.12
$0.15
25.5%
Stella's
$0.11
$0.14
22.2%
Large
Hot
Iced
% Difference
CTB
$0.13
$0.10
-18.7%
Starbucks
$0.13
$0.17
26.2%
Stella's
$0.13
$0.16
25.0%
Pricing Strategies
Recommendations
CUSTOMER LOYALT Y DISCOUNTS
 Punch cards
 Discount for using own mug
 Increases customer loyalty
Introduction
Industry
Pricing Strategies
Recommendations
GIMME! VS. MANNDIBLE CAFE
 Gimme!
 8 oz
 12 oz
 16 oz
$1.75
$2.00
$2.25
 Manndible
 12 oz
 16 oz
 20 oz
Introduction
Industry
Pricing Strategies
$2.13
$2.39
$2.60
Recommendations
GIMME! VS. MANNDIBLE CAFE
Introduction
Industry
Pricing Strategies
Recommendations
2 ND DEGREE PRICE DISCRIMINATION
 Of fer small, medium, and large (and even extra large) options
 Starbucks – Trenta (30 oz)
 Dunkin Donuts – XL (24 oz)
 Allows customers to self select
 Add-ons / Substitutes
Introduction
Industry
Pricing Strategies
Recommendations
3 RD DEGREE PRICE DISCRIMINATION
Collegetown Bagels
Coffee
12 oz
16 oz
20 oz
Collegetown
$1.75
$2.05
$2.29
Commons
$1.75
$2.05
$2.29
East Hill Plaza
$1.75
$2.05
$2.29
Iced Coffee
16 oz
24 oz
32 oz
Collegetown
$2.25
$2.50
$3.25
Commons
$1.94
$2.42
$2.99
East Hill Plaza
$2.25
$2.50
$2.75
Latte
12 oz
16 oz
20 oz
Collegetown
$3.25
$3.75
$4.25
Commons
$3.25
$3.75
$4.25
East Hill Plaza
$3.25
$3.75
$4.25
Introduction
Industry
Pricing Strategies
Recommendations
PRICE BUNDLING / COMPLEMENTARY PRICING
 Bundle with complementary
goods (i.e. baked goods or
sandwiches)
 Cheaper to purchase as a
bundle or “combo” than
separately
 Lower prices for cof fee to
incentivize consumers to buy
higher priced complementary
products
Introduction
Industry
Housemade muffin or scone
16 oz Gimme! drip coffee
Buying separately
Pricing Strategies
$2.25
$2.39
$4.64
Recommendations
GOLDILOCKS EFFECT / EXTREME AVERSION
Survey 1
12 vs. 16 oz
N = 64
Survey 2
12 vs. 16 vs. 20 oz
N = 61
A few times a month
1-3 cups a week
4-6 cups a week
1 cup a day
2 cups a day
More than 2 cups a day
Introduction
Industry
Pricing Strategies
19%
23%
14%
22%
14%
10%
Recommendations
GOLDILOCKS EFFECT / EXTREME AVERSION
When Given 2 Options...
When Given 3 Options...
20 oz.
11%
16 oz.
44%
12 oz.
46%
12 oz.
56%
16 oz.
43%
Introduction
Industry
Pricing Strategies
Recommendations
SURVEY FINDINGS
Coffee Shop Preferences
Stella's
5%
Other
3%
McDonald's
2%
Reasons for Coffee Preferences
Offers Other
Products
6%
Starbucks
26%
Manndible
13%
Coffee Options
8%
Other
2%
Convenience
30%
Brand
11%
CTB
14%
On-Campus Café
22%
Location
16%
Coffee
Flavor/Taste
27%
Dunkin Donuts
15%
Introduction
Industry
Pricing Strategies
Recommendations
RECOMMENDATIONS
POSITIONING - ITHACA
 Prime Location
 Either in Collegetown or on campus
 Fast Service
 High Quality Cof fee and/or Fair Trade
 Multiple locations in Ithaca using dif ferent submarkets




Collegetown
Downtown/Commons
East Hill Plaza/Ithaca Mall
On Campus
 Understand developing consumer tastes
Introduction
Industry
Pricing Strategies
Recommendations
PRICING STRATEGIES
Use
Premium
Pricing
Introduction
Customer
Loyalty
Programs
Price
Bundling
Industry
Pricing Strategies
Offer 3
sizes
Recommendations
CONCLUSION
 Ithaca does NOT show strong signs of third degree price
discrimination
 This changes when the analysis is expanded to include other
geographic locations
 Cof fee shops charge higher prices on premium drinks due to
high W TP
 National leaders do NOT preclude local players from the
market
 Cof fee shops can benefit from dif ferentiation
Introduction
Industry
Pricing Strategies
Recommendations
QUESTIONS?