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SUBMITTED TO SUBMITTED BY PROF.NEERAJ SINGHAL SONAM MIGLANI IB/01/41

Coffee Chain

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Page 1: Coffee Chain

SUBMITTED TO SUBMITTED BY

PROF.NEERAJ SINGHAL SONAM MIGLANI

IB/01/41

Page 2: Coffee Chain

OVERVIEW OF COFFEE INDUSTRY

Growth of Café Industry in India

Hot beverages have always been a part of the tradition of India, especially South India. Coffee

took the first seat in South India when the traditional Brahmin classes brought down. In order to

spread the drink, coffee houses emerged at various places in the country, which also served as

the opposite places for lawyers and the educated class to hold discussions ranging from politics

to cinema. It is also believed that many scripts and ideas for films evolved here.

The drink also became famous and as a result even five star hotels began cashing in on it.

Several hotels all over the country started opening coffee- shops that catered to high- end

customers. This showed the popularization of coffee cafés, to all sections of society.

The drink has now become more of a concept than merely a drink itself. The last decade

witnesses the growth of numerous coffee pubs in the country. A number of coffee café owners

tried to westernize the taste in contrast to the filter coffee.

Now, large retail chains like Qwikys, Barista, and Café Coffee Day have opened up around the

country. The concept of a café today is not merely about selling coffee, but about developing a

national brand. Retail cafés now form a multi-crore industry in the country, and have huge

potential for growth locally, and internationally.

The more than US $150 million organized coffee retail business in India is coming into its own,

fed by rising incomes and a fast-food sector that is growing at 40 per cent annually. Coffee

consumption has increased from 55,000 tons to 80,000 tons after decades of stagnation. Industry

sources say the niche coffee retail format is growing at 10-12 per cent a year, with branded

coffee accounting for 53 per cent of sales, unbranded 40 per cent and cafes 7 per cent.

The Coffee Café Industry

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The Coffee Café industry is currently one of the biggest and fastest growing sectors in business.

The industry consists of a mix of individual cafés, hotel cafés and retail café chains.

Individual Cafés: The main bulk of revenue is earned by small, individual cafés, run mostly by

families and friends. It is a relatively unorganized sector. There are millions of such cafés around

the world, and they provide customers with a homely, casual experience.

Hotel Cafés: Ever since the popularization of coffee, hotels all over the world started opening 24

hour coffee shops, where visitors to the hotel could walk in for a cup of coffee and some food at

any time.

Retail Café Chains: The last, and the most organized sector in the coffee café industry, is the

retail café chain. Off late, these chains have become extremely popular and are growing at an

ever increasing pace. These retail chains have work with an organized structure of man, material

and money. The work on developing a recognized brand consistent to all their outlets, which

customers can easily relate to, wherever they go. They provide customers with a standardized

level of service and quality at each of their outlets. The vast popularity of these retail chains is

shown in the rapid international growth of brands like Starbucks. The main focus of my project

is on two nationally recognized retail café chains: Barista & Café Coffee Day.

Sale and distribution

Coffee ingestion on average is about a third of that of tap water in North America and Europe. Worldwide, 6.7 million metric tons of coffee were produced annually in 1998–2000, and the forecast is a rise to 7 million metric tons annually by 2010.

Brazil remains the largest coffee exporting nation, but in recent years, Vietnam has become a major producer of robusta beans. Indonesia is the third-largest exporter and the largest producer of washed arabica coffee. Robusta coffees, traded in London at much lower prices than New

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York's arabica, are preferred by large industrial clients, such as multinational roasters and instant coffee producers because of the lower cost.

As a commodity

While coffee is not technically a commodity (it is fresh produce; its value is directly affected by the length of time it is held), coffee is bought and sold by roasters, investors and price speculators as a tradable commodity. Coffee futures contracts for Grade 3 washed arabicas are traded on the New York Mercantile Exchange under ticker symbol KT, with contract deliveries occurring every year in March, May, July, September, and December.[56] Higher and lower grade arabica coffees are sold through other channels. Futures contracts for robusta coffee are traded on the London Liffe exchange and, since 2007, on the New York ICE exchange. As of 2006 green coffee has been purported to be the second most traded commodity in the world, however Mark Pendergrast in "Uncommon Grounds: The History of Coffee and How It Transformed Our World" (Basic Books, 1999) who originaly wrote about this comparison now believes after further research that his statement is wrong, and so is everyone else who keeps repeating this myth.

Fair trade

The concept of fair trade labeling, which guarantees coffee growers a negotiated preharvest price, began with the Max Havelaar Foundation's labeling program in the Netherlands. In 2004, 24,222 metric tons (of 7,050,000 produced worldwide) were fair trade; in 2005, 33,991 metric tons out of 6,685,000 were fair trade, an increase from 0.34% to 0.51%. [58][59] A number of studies have shown that fair trade coffee has a positive impact on the communities that grow it. Coffee was incorporated into the fair-trade movement in 1988, when the Max Havelaar mark was introduced in the Netherlands. The very first fair-trade coffee was an effort to import a Guatemalan coffee into Europe as "Indio Solidarity Coffee".

The production and consumption of fair trade coffee has grown in recent years as some local and national coffee chains have started to offer fair trade alternatives. For example, in April 2000, after a year-long campaign by the human rights organization Global Exchange, Starbucks decided to carry fair-trade coffee in its stores. A recent study done in Belgium concluded that consumers' buying behavior is not consistent with their positive attitude toward ethical products. On average 46% of European consumers claimed to be willing to pay substantially more for ethical products, including fair-trade products such as coffee. The study found that the majority of respondents were unwilling to pay the actual price premium of 27% for fair trade coffee.

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Health and pharmacology

Scientific studies have examined the relationship between coffee consumption and an array of medical conditions. Findings have been contradictory as to whether coffee has any specific health benefits, and results are similarly conflicting regarding the potentially harmful effects of coffee consumption. Variations in findings, however, can be at least partially resolved by considering the method of preparation. Coffee prepared using paper filters removes oily components called diterpenes that are present in unfiltered coffee. Two types of diterpenes are present in coffee: kahweol and cafestol, both of which have been associated with increased risk of coronary heart disease via elevation of low-density lipoprotein (LDL) levels in blood. Metal filters, on the other hand, do not remove the oily components of coffee.

In addition to differences in methods of preparation, conflicting data regarding serving size could partially explain differences between beneficial/harmful effects of coffee consumption. Prevention of multiple chronic diseases has been associated with coffee consumption ranging from one to ten cups[.

Overview of the more common effects of caffeine, a main active component of coffee

Coffee consumption has been shown to have minimal or no impact, positive or negative, on cancer development; however, researchers involved in an ongoing 22-year study by the Harvard School of Public Health state that "the overall balance of risks and benefits [of coffee consumption] are on the side of benefits." Other studies suggest coffee consumption reduces the risk of being affected by Alzheimer's disease, Parkinson's disease, heart disease, diabetes mellitus type 2, cirrhosis of the liver, and gout. A longitudinal study in 2009 showed that those who consumed a moderate amount of coffee or tea (3-5 cups per day) at midlife were less likely to develop dementia and Alzheimer's disease in late-life compared to those who drank little coffee or avoided it altogether. It increases the risk of acid reflux and associated diseases. Most of coffee's beneficial effects are likely due to its caffeine content, as the positive effects of consumption are only observed in those who drink caffeinated coffee. Presence of antioxidants in coffee has been shown to prevent free radicals from causing cell damage.

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In a healthy liver, caffeine is mostly broken down by the hepatic microsomal enzymatic system. The resulting metabolites are mostly paraxanthines-theobromine and theophylline-and a small amount of unchanged caffeine is excreted by urine. Therefore, the metabolism of caffeine depends on the state of this enzymatic system of the liver. Elderly individuals with a depleted enzymatic system do not tolerate coffee with caffeine. They are recommended to take decaffeinated coffee, and this only if their stomach is healthy, because both decaffeinated coffee and coffee with caffeine cause heartburn. Moderate amounts of coffee (50-100 mg of caffeine or 5-10 g of coffee powder a day) are well tolerated by a most elderly people. Excessive amounts of coffee, however, can in many individuals cause very unpleasant, exceptionally even life-threatening side effects.

Coffee consumption can lead to iron deficiency anemia in mothers and infants. Coffee also interferes with the absorption of supplemental iron. Interference with iron absorption is due to the polyphenols present in coffee. Although the inhibition of iron absorption can cause an iron deficiency, iron is considered a carcinogen in relation to the liver and can increase risks of hepatocellular carcinoma, more commonly known as liver cancer. Polyphenols contained in coffee are therefore associated with decreasing the risk of liver cancer development.

American scientist Yaser Dorri has suggested that the smell of coffee can restore appetite and refresh olfactory receptors. He suggests that people can regain their appetite after cooking by smelling coffee beans, and that this method can also be used for research animals. Many high end perfume shops now offer coffee beans to refresh the receptors between perfume tests.

Over 1,000 chemicals have been reported in roasted coffee; more than half of those tested (19/28) are rodent carcinogens. Coffee also contains healthful chemicals, including polyphenols (chlorogenic acid and caffeic acid), as well as diterpenes (kahweol and cafestol). Coffee's negative health effects are often blamed on its caffeine content. Research suggests that drinking caffeinated coffee can cause a temporary increase in the stiffening of arterial walls. Caffeinated coffee is not recommended for everybody, it may aggravate preexisting conditions such as gastroesophageal reflux disease, migraines, arrhythmias, and cause sleep disturbances.

Coffeehouses

Most widely known as coffeehouses or cafés, establishments serving prepared coffee or other hot beverages have existed for over five hundred years.

Various legends involving the introduction of coffee to Istanbul at a "Kiva Han" in the late 15th century circulate in culinary tradition, but with no documentation.

Coffeehouses in Mecca soon became a concern as places for political gatherings to the imams who banned them, and the drink, for Muslims between 1512 and 1524. In 1530 the first coffee house was opened in Damascus,[89] and not long after there were many coffee houses in Cairo.

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In the 17th century, coffee appeared for the first time in Europe outside the Ottoman Empire, and coffeehouses were established and quickly became popular. The first coffeehouses in Western Europe appeared in Venice, due to the trafficks between La Serenissima and the Ottomans; the very first one is recorded in 1645. The first coffeehouse in England was set up in Oxford in 1650 by a Jewish man named Jacob in the building now known as "The Grand Cafe". A plaque on the wall still commemorates this and the Cafe is now a trendy cocktail bar.

By 1675, there were more than 3,000 coffeehouses in England. Pasqua Rosée established Paris' first coffeehouse in 1672 and held a city-wide coffee monopoly until Procopio Cutò opened the Café Procope in 1686. This coffeehouse still exists today and was a major meeting place of the French Enlightenment; Voltaire, Rousseau, and Denis Diderot frequented it, and it is arguably the birthplace of the Encyclopédie, the first modern encyclopedia. America had its first coffeehouse in Boston, in 1676.

Coffee shops in the United States arose from the espresso- and pastry-centered Italian coffeehouses of the Italian American immigrant communities in the major U.S. cities, notably New York City's Little Italy and Greenwich Village, Boston's North End, and San Francisco's North Beach. Both Greenwich Village and North Beach were major haunts of the Beats, who became highly identified with these coffeehouses. As the youth culture of the 1960s evolved, non-Italians consciously copied these coffeehouses. Before the rise of the Seattle-based Starbucks chain, Seattle and other parts of the Pacific Northwest had a thriving countercultural coffeehouse scene; Starbucks standardized and mainstreamed this model.

The espresso bar is a type of coffeehouse that specializes in coffee beverages made from espresso. Originating in Italy, the espresso bar has spread throughout the world in various forms. A prime example is the internationally known Starbucks Coffee, based in Seattle, Washington in the U.S., although the espresso bar exists in some form throughout much of the world.

Religious prohibition

Coffee was initially used for spiritual reasons. At least 1,000 years ago, traders brought coffee across the Red Sea into Arabia (modern-day Yemen), where Muslim monks began cultivating the shrub in their gardens. At first, the Arabians made wine from the pulp of the fermented coffee berries. This beverage was known as qishr (kisher in modern usage) and was used during religious ceremonies.

Coffee became the substitute beverage in spiritual practices where wine was forbidden Coffee drinking was briefly prohibited by Muslims as haraam in the early years of the 16th century, but this was quickly overturned. Use in religious rites among the Sufi branch of Islam led to coffee's

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being put on trial in Mecca: it was accused of being a heretical substance, and its production and consumption were briefly repressed. It was later prohibited in Ottoman Turkey under an edict by the Sultan Murad IV. Coffee, regarded as a Muslim drink, was prohibited by Ethiopian Orthodox Christians until as late as 1889; it is now considered a national drink of Ethiopia for people of all faiths. Its early association in Europe with rebellious political activities led to its banning in England, among other places.

A contemporary example of coffee prohibition can be found in The Church of Jesus Christ of Latter-day Saints. The organization claims that it is both physically and spiritually unhealthy to consume coffee. This comes from the Mormon doctrine of health, given in 1833 by Mormon founder Joseph Smith in a revelation called the Word of Wisdom. It does not identify coffee by name, but includes the statement that "hot drinks are not for the belly," which has been interpreted to forbid both coffee and tea.

Quite a number of members of the Seventh-day Adventist Church also avoid caffeinated drinks. In its teachings, the Church requires members to avoid tea and coffee and other stimulants. Studies conducted on Adventists have shown a small but statistically significant association between coffee consumption and mortality from ischemic heart disease, other cardiovascular disease, all cardiovascular diseases combined, and all causes of death.

MARKET SIZE IN US

Snapshot: Coffee Shop

Retail Sales Estimates Year End 2009

Coffee Cafes: (beverage retailers with seating)

1,250 locations averaging $550,000 in annual sales = $ 6.12 billion

or adults who have visited a coffeehouse in the past week:

Average weekly spending $5 or under: 41%

Rarely or never purchase food: 49%

Consume the beverage off-premises: 52%

Demographics

Seventy-seven percent of U.S. adults drink coffee daily, and gourmet coffee consumption has

risen in the past five years. According to Scarborough Research, a market research firm that

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studies media, lifestyle, and shopping patterns in the United States, in October 2008, 12 percent

of adults have been to a coffee shop in the past month. Although popularity of coffee shops has

recently spread across the nation, the West coast has the most coffee shop patrons. The ideal

ratio of coffee shops to residents in a particular area is 1:10,000.

(COPY TABLE FROM PDF COFFEE SHOP)

Client Profile : Coffee bar patrons are younger, more affluent, and educated and are 22 percent more likely to be aged 18-24. They are also 65 percent more likely to have an annual household income of $100K+. Coffee shop patrons are 28 percent more likely than the average American adult to be single and 70 percent more likely to have a post graduate degree. The average age of specialty coffee drinkers is 43. Occasional latte devotees are in the higher average income of $76,000, and similarly, cappuccino and espresso drinkers reflect an average income of $60,000. (SBDCNET San Antonio 11.30.04 Prepared by H. Holmes)

SIZE OF MARKET IN BRAZIL

Brazil's coffee production increased from 1 million metric tons in 1995-96 to 2.14 million metric tons by 1998-99, more than doubling in 4 years. However, production decreased slightly to 1.85 million metric tons in 1999-2000. The decline in production for 1999-2000 was linked to an agreement of the Association of Coffee Producing Countries (ACPC). ACPC developed a program to reduce the world supply of coffee in order to increase its price. The volume of coffee held back by each country is set at 20 percent of exports. However, Brazil still remains the largest producer and exporter of coffee in the world. (C:\Documents and Settings\abc\Desktop\coffee chain\Brazil - Location and size, Population, Coffee, Soybeans, Oranges, Tobacco, Cocoa, Corn, Beef, Dairybrazil.htm)

Switzerland, a coffee powerhouse despite its nation's size

Switzerland is a beautiful country dotted with lakes, majestic mountain ranges, and quaint picturesque stone homes. Companies appreciate the countryside settings for their offices as well as the many tax advantages a neutralized. (By McCabe, Jane PhillipsPublication: (Tea.&.Coffee.Trade.Journal.Date: Monday, Octo ber 1 2008)

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Switzerland's coffee market is international. No one manufacturer or importer/agent relies solely on the country for business. Either all of Europe or several countries are in contact with the trade, and almost every importer/manufacturer deals on an international basis.

Switzerland is home to the international headquarters of the world's largest coffee manufacturer--Nestle--in beautiful Vevey. Both of Europe's largest roasters--Jacobs Suchard and Douwe Egberts have their commodity purchasing offices in Switzerland. In fact, the two are both situated in Zug, a 30-mile drive down from Zurich. Jacobs Suchard also has its headquarters in Zurich with a Coffee Museum open to the public on weekends. The Museum displays painting, porcelains, and books, all on coffee.

Even though the larger coffee manufacturers are here, none of these companies lead the market share in Switzerland. Migros is the world leader in coffee in Switzerland, followed by Coop. These companies are actually chains of supermarkets which do their own roasting. Migros has 50% of the market and Coop covets 18% of the household market. Jacobs Suchard, while it may be the brand leader in Europe, holds 11% of the Swiss market, and Nestle only has 2%.

The institutional market is covered solely by the local roasters of which there are approximately 100-130 small roasters dotted throughout the country. Two-thirds of coffee is consumed in the home, the remainder in the cafes. Switzerland saw a slight increase in coffee consumption in 1989, and tea consumpton is so low, it is considered nonexistent. Though showing on placards on the cafe tables in June were iced tea promotions, several roasters did tell me there is growth for that product. Iced coffee, some revealed, just cannot even be considered for the Swiss, "it's just not in their palate."

The Swiss are an affluent culture/society. The country has the highest cost-of-living which often makes its products more costly to the rest of the world. Labor is at a premium as the country has many job opportunities but is faced with a shortage of personnel. Coffee is purchased regularly with people searching for the most upscale quality coffee. Espresso machines are now part of the kitchen decor in 40% of the homes. The Swiss are fond of espresso coffee and have little interest in soluble. Soluble coffee has been in a continual decline

Blaser Cafe, a medium-sized roaster, trader and agent since 1922, says it is amongst the top six roasters in Switzerland. The roasting facility, located in historic Bern, is a towering building with their logo on the top, flashing in a blazing neon orange and black sign. Their facilities presently roast 1,500 tons/year of which most goes to Switzerland's institutional and foodservice industries. The company also does private label packing. Their green coffee trading volume is estimated at 320,000 bags which they trade worldwide. The company also has 10 separate warehousing facilities. Every Swiss food manufacturer must have obligatory stocks of which the government informs each company of the quantity to be stored. Due to the country's caution towards war time, all food stocks are checked daily Felix Staub of Centram specializes in estate coffees in Latin America. His company also deals internationally and prefers to trade high quality coffees from specific fincas. "We have more control over the fincas and our clients seek us out." The company began in 1637 and has today many subsidiaries throughout Europe, but in

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other fields. Staub, like Mildenberger, has seen a drastic consolidation in the European coffee market.

Wirth Trading, coffee traders in Geneva, overlooks the Geneva airport and is located in an ultra modern world trade center. The company originally started out as Selecta, but Wirth eventually formed its own venture. Both Marcel Wirth and Jack Trum feel that Switzerland has begun to be truly the international coffee center. The company trades mainly with Europe and North Africa, Turkey, Eastern Europe, the Far East and the U.S. The firm specializes in Brazils, Central Americas, Africa and Indonesia sources. Both gentlemen feel 1992 will allow more trading but not really in coffee. The company claims that, while they're a small firm, they're coffee specialists and are large on coffee.

Bozzo Trading, an Italian-owned company, has trading offices in many consuming countries as well as several origin nation. Speaking with Francisco Ourique in Geneva, he told me Vietnam and Thailand are enjoying a popularity run in Europe. Ourique told the magazine, "All the trading that took place immediately after the quota collapse did not justify the slight global increase in consumption. Much of that coffee is still in storage with the importers footing the bill. Mexico and Costa Rica's coffee exports shot up in that time. Ourique see the fertilizers being cut out of some of the producing countries' coffee programs and feels producers may be in crisis, especially among those nations whose general economic policy hasn't as an important consideration

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MAJOR PLAYERS IN THE MARKET

THE TOP COFFEE SHOP GROUPS 2007-2008(SOURCE:C:\Documents and Settings\abc\Desktop\coffee chain\Industry data Top coffee shop groups 2007-08.htm)

Owner 2008outlets

2007outlets

Selected brands

1  Whitbread  600+  405 Costa Coffee 

2 Starbucks 549 506 Starbucks

3 Caffè Nero 292 261 Caffè Nero

4 Marks & Spencer 213  202  Café Revive

5 SSP 179 135 Caffè Ritazza

6 BB's 140  110  BB's

7  Segafredo Zanetti  91  94  Puccino's

8 Nestlé 75 103 Café Nescafé

9 Tchibo 74 38 Tchibo

10 Welcome Break  64  -  Coffee Primo

11  Druckers  44  33  Druckers

12 Coffee Republic 40 36 Coffee Republic

13 AMT Coffee 34 34 AMT Coffee

14 Morelli's 27  23  Morelli's

15 Esquires 20  14  Esquire

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LIST OF COFFEE COMPANIES WORLDWIDE (Competitors)

This is a list of companies that roast and/or distribute coffee.

Kraft Foods , holder of the following trademarks o Jacobs Coffee

o Gevalia

o Kenco

o Maxwell House

o General Foods International

o Sanka

o Tassimo

Bridgehead Coffee , Ottawa, Ontario, Canada

Café Bom Dia , Brazil

Café Britt , Costa Rica

Café Coffee Day , Bengaluru, India

Caribou Coffee

Community Coffee , Louisiana, United States

Costa , Italy

Diedrich Coffee , Southern California, United States

Dunkin Donuts , Quincy, Massachusetts, United States

Eight O'Clock Coffee , Montvale, New Jersey, United States

Equal Exchange , West Bridgewater, Massachusetts, United States

Green Mountain Coffee , Waterbury, Vermont, United States

Illy , Italy

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Juan Valdez Cafe , Colombia

Koa Coffee Plantation , Captain Cook, Hawaii, United States

Massimo Zanetti Beverage USA , owner of the following brands

o Chase & Sanborn

o Chock full o'Nuts

o Hills Bros.

o MJB

Matthew Algie

Molinari , Modena, Italy

Nestlé , holder of the following trademarks

o Nescafé

o Nespresso

o Taster's Choice

Peet's Coffee & Tea , Emeryville, California, United States

Pioneer Coffee Roasting Company , Washington, United States

Procter & Gamble holder of the Folgers and Millstone trademark

PT's Coffee Roasting Co.

Sara Lee , holder of the following trademarks

o Douwe Egberts

o Senseo

Starbucks , holder of the following trademark

o Seattle's Best Coffee

Starr's Market , Missouri, United States

Tim Hortons , Oakville, Ontario, Canada

Tully's , Seattle, Washington, United States

Coffee Holding Co. , holder of the following trademarks

o Cafe Caribe

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o Cafe Supremo

o Don Manuel

o Entenmann's Coffee Shop Blend

o S&W

o Via Roma

(SOURCE:Wikipedia)

CURRENT SCENARIO-POTENTIAL OF COFFEE INDUSTRY (US MARKET)

The US coffee shop industry includes about 20,000 stores with combined annual revenue of about $11 billion. Major companies include Starbucks, Caribou, Coffee Bean and Tea Leaf, and Diedrich (Gloria Jean’s). The industry is highly concentrated: the top 50 companies generate more than 70 percent of industry sales.

Competitive Landscape

Consumer taste and personal income drive demand. The profitability of individual companies depends on the ability to secure prime locations, drive store traffic, and deliver high-quality products. Large companies have advantages in purchasing, finance, and marketing. Small companies can compete effectively by offering specialized products, serving a local market, or providing superior customer service. The industry is labor-intensive: average annual revenue per worker is about $40,000.

Coffee shops compete with businesses such as convenience stores, gas stations, quick service and fast food restaurants, gourmet food shops, and donut shops.

Products, Operations & Technology

Major products include beverages and food. Beverages include brewed coffee and tea; espresso drinks (cappuccinos, café lattes); cold blended beverages; bottled water; soft drinks; and juices. Food includes pastries, bakery items, desserts, sandwiches, and candy. Many coffee shops sell whole or ground coffee beans for home consumption. Some coffee shops sell coffee or espresso-making equipment, grinders, mugs, and other accessories. Most coffee shops serve high-quality, premium coffee known as specialty coffee.

Companies may blend and roast green coffee to produce unique flavors, though some coffee shops use pre-roasted coffee. Grinders reduce roasted coffee beans to particles, and most coffee shops grind roasted beans immediately prior to brewing to ensure freshness. Grind level is matched to brewing time. Brewing equipment controls water temperature and brewing and

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mixing time. Companies may use water filtration systems to screen out minerals that affect taste. High-quality coffee filters are also important to extract the right amount of flavor from ground coffee. Baristas (or trained coffeemakers) operate espresso machines, which use pressurized hot water and specially ground coffee to produce espresso. Combining espresso with other beverages (like milk) produces specialty beverages like cappuccinos. Companies typically limit how long ground coffee can sit before being served.

Starbucks is the only national chain. Other companies include regional chains, franchises, licensed stores, and independent stores. Franchises allow third parties to leverage a recognizable store name and benefit from economies and efficiencies of the franchiser. Companies may issue licenses to other businesses to gain access to highly desirable retail locations with tenant restrictions, like airports. Some large companies are expanding internationally through licensing agreements.

Coffee shops depend greatly on customer traffic and are most often located in areas with convenient access for pedestrians or drivers. Typical locations include downtown or suburban retail centers, shopping malls, office buildings, and university campuses. Store format and size vary by site, as some locations offer more space than others. Caribou Coffeehouses range from 200 to 3,000 square feet, with an average store 1,200 to 1,600. Some chains offer a kiosk format, without seating, for small spaces like airports and grocery stores. A drive-thru window offers customers convenience and increases off-premise consumption. A comfortable environment is important to provide a positive customer experience and increase store traffic, since many customers consume beverages on premise.

Starbucks and Peet’s generate about $1 million annually per store, while other regional chain stores generate about $500,000. Independent coffee shops generate about $200,000 in coffee beverage and bean sales, according to the 2005 Specialty Coffee Association/Gourmet Retailer Specialty Coffee Survey. Companies may use contracts to buy green coffee (unroasted coffee) from brokers, farms, estates, exporters, or cooperative groups. Coffee shops may also purchase roasted coffee from independent roasters. The vast majority of green coffee is imported from countries with tropical climates. Most companies use high-grade arabica beans, which trade for a premium above commodity prices. Pricing and supply can be volatile due to changing weather conditions, the political and economic climate of grower countries, and the actions of trade organizations. Coffee shops also buy significant amounts of dairy products from regional suppliers. The price of dairy products is also volatile, and most companies use contracts to lock in pricing.

Companies tend to keep higher levels of inventory for green coffee, because roasted coffee is more perishable. Since coffee quality starts to deteriorate after roasting, shops may discard old beans. Coffee shops must also monitor supplies of dairy products due to limited shelf life. Chains often vary their product mix, depending on store size and location.

Computer systems manage point-of-sale (POS) transactions; credit card processing; and customer loyalty card purchases. Information systems also record employee hours and generate sales reports. Computerized warehouse management systems track inventory of coffee and other products. Some companies use Internet-based systems to link stores and warehouses to

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ensure rapid replenishment of roasted coffee.( SOURCE:C:\Documents and Settings\abc\Desktop\coffee chain\Coffee Shops Industry, Coffee Shops Industry Research, Coffee Shops Industry Report.htm)

Coffee consumption in the US continues to grow, with consumersbecoming more educated about different coffee varieties and demandingquality. The market has wrestled with increasing fuel prices as well asraw material prices. With consumers increasingly affected by the creditcrunch, and rising prices in foodservice, 2008 will witness a true test ofcoffee’s elasticity and consumers’ willingness to spend as much onpremium coffee. 2007 saw Starbucks revising company growth, Dunkin’ Donuts enteringthe retail coffee market and McDonalds strengthening its focus on coffee,introducing coffee baristas and new premium coffee varieties.

Key findings and highlights:

• Quality prepared coffee became more widely available than ever before in 2007, driving strong growth in the sector. Major Quick Service Restaurants launching new premium coffees.• 2007 saw coffee prices, affected by the rising price of gas and raw materials, and driving, as a result, at home coffee consumption.• While the larger corporations have successfully launched single origin coffees, the quantity and scale of their purchases means that truly unique coffee is often purchased by micro roasters who do not have the same pressures for scale. The growing demand for authenticity in coffee has been a key driver in the micro lot movement.• Increased time pressures, stresses and work-life balance, as well as the growing consumer education in coffee, have driven equally high interest and appreciation of coffee functionality as a response to consumers’ complex needs.

Reasons to buy:

• Obtain exclusive analysis of packaged and prepared coffee in the US, with data and highly detailed segmentations for 2002-2007 and 2007-2012 • Understand the trends driving the market for coffee • Improve your competitive strategy with profiles on 11 leading coffee players (SOURCE:US Coffee Market Overview 2008 Published: Mar-08 Product Code: MCCM0030A)

INDUSTRY GLOBAL POTENTIAL

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Competitive Driver

Barista vs Cafe Coffee Day

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Interesting facts about Coffee & Cafés: • Coffee was first known in Europe as Arabian Wine. • Coffee is presently the second most traded commodity in the world. It is second only to oil. • Nescafe was invented by Nestle because it had to assist the Brazilian government to solve its coffee surplus problem.

Barista

Pricing: Barista has a ‘Skim Pricing Policy’. They began with a higher price, and skimmed the cream for the market. With the sudden spurt of growth in number of outlets, came the benefits of economies of scale. Because of this, they have been able to gradually lower their prices, and appeal to different segments of their target market. Currently, their prices are the lowest they have ever been, and they can competitively match their prices against Café Coffee Day’s prices. The prices are constantly changing though, and the last 1-year has seen 3 changes (mostly reductions) in prices. This gradual price reduction meant that Barista could maintain its profit- maximization policy until it could earn large cost savings because of the benefits of high volume. The main factors that affect their pricing are their cost of goods sold. The costs are quite high because imports a majority of its products and product- sources.

Considering that Barista is trying to target a market whose age range is between 18 and 60 years, a pricing policy appealing to this segment is difficult. Extremely low prices act as a deterrent to some customers who might regard it as an indicator or quality, while very high prices cannot be afforded by most of the youth. But since Barista’s current consumer profile is quite young, their prices are mostly inexpensive, and at par with their competitors.

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Promotions: Barista currently carries out mass promotion campaigns. This is mainly in the form of promotions in the Press, TV and Radio Medias. At present, they do not rely heavily on advertising, but rely more on sponsorships and strategic alliances with other corporations. Barista also takes part in various sales promotion activities to help increase sales at their outlets.

a) Sponsorships: Barista sponsors various events and festivals, which provides them valuable promotion directed at strategic markets. The sponsorships are mainly in kind, although major events are sponsored in cash also. b) Collaborations: Barista has entered into special collaborations and alliances with various partners for co- marketing brands. For example, Barista entered into a deal with Leo Mattel toys to provide the popular board game Scrabble at every Barista outlet across the country.This is an ideal alliance for both the organizations, because it provides Leo Mattel with an important avenue for promoting their product, and it provides Barista’s customers an added attraction for spending more time at Barista outlets. Barista has also entered into partnerships with various movies, for promotions through Barista, and recently, they tied up with Star World for its “Absolutely Everybody Campaign”

c) Sales Promotion: Barista uses a special “Barista Coffee Card” for its sales promotion activities. The Barista Coffee Card entitles you to one complimentary hot beverage when you are done sipping seven. It is available to all Barista coffee regulars. No membership fees,no references required. Fill out the card and you are a member. As a Coffee Card holder, you earn one stamp on the card every time you purchase a beverage. Simply

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present the card to the cashier when you place your order at any of their outlets. Onceyou have collected seven stamps, you can hand over the card to receive your complimentary hot beverage. Barista hopes this card can help drive sales growth, andincrease customer retention. Distribution:

Distribution: Distribution of outlets Every Barista outlet is owned by the company, and not franchised out to anyone. Barista can thus control and make quick changes to its entire retail chain. Barista currently operates in over 120 outlets all over the country, and at their current rate, they are opening a new outlet approximately every 10 days. They have a market presence in over 20 cities. Mumbai alone has over 30 outlets, and the number of outlets in the city is increasing at a phenomenal pace. Barista has a thumb rule for selecting cities and locations for the distribution of outlets.

Cafe Coffee Day

Coffee Day has a wide and professional network in the major coffee growing areas of the country comprising over 48 agents and 50 collecting depots. Coffee Day's two curing works at Chikmagalur and Hassan cure over 70,000 tonnes of coffee per annum, the largest in the country. Coffee Day has a well-equipped roasting unit catering to the specific requirement of the consumers. The process is carried out under the control of experienced personnel to meet highest quality standards. The most modern technology available is used to maintain consistency and roast the coffee beans to the demanding specifications of the discerning coffee consumers.

Coffee Day Comprises of the following Sub Brands

Coffee Day - Fresh & Ground Café Coffee Day

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Coffee Day – Vending Coffee Day - Xpress Coffee Day – Exports Coffee Day - Perfect Café Coffee Day currently owns and operates 213 cafes in all major cities in India. It is a part of India's largest coffee conglomerate named Coffee Day, Rs. 200 crore ISO 9002 certified company. Coffee Day's most unique aspect is that it grows the coffee it serves.

Key Features

• Pioneers of the Café Concept in India with the its first Café at Brigade Road, Bangalore in 1996. This Café was opened as a Cyber Café (first of its kind) but later, with the burst of cyber cafes it reverted to its core competency…. Coffee. • Essentially a youth oriented brand with majority of its customers falling in the 15-29 year age bracket • Each café, depending upon its size attracts between 400 and 800 customers daily. • It is a place where customers come to rejuvenate themselves and be themselves. • USP of the Brand: ¾ Affordable Price ¾ Coffee – Winner of Platinum, Gold, Silver and Bronze medals at the India Barista Championship 2002

Product Sources: Coffee Day's most unique aspect is that it grows the coffee it serves in its cafes. Coffee Day has a well-equipped roasting unit catering to the specific requirement of the consumers. The process is carried out under the control of experienced personnel to meet highest quality standards. The most modern technology available is used to maintain consistency and roast the coffee beans to the demanding specifications of the discerning coffee consumers. The coffee beans are supplied to all the cafés from Chikmagalur. The eatables at Café Coffee Day are catered by different vendors: example: ice creams are catered by Cream Bell, Milk by Amul and samosa’s by Patsiers Gallery. Café Coffee Day also sells merchandise through its stores. 5 per cent of the revenue comes from sale of merchandise.

Consumer Profile: Research shows that 37% of the customers are between 20 and 24years. 27% of the customers are between the age group of 25-29 years. 60% of the customers who visit the

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café are male and 40% are female. 52% of customers who visit the cafes are students. 18% of the customers visit the cafes daily while another 44% visit weekly. Each café, depending upon its size attracts between 500 and 800 customers daily, mainly between 4pm and 7 pm. Customers describe Café Coffee Day as the place they frequent most after “home and workplace/college”. It is a place where they meet friends and colleagues, in groups of 3 or more. The prices here are perceived to be reasonable and it is a place where customers come to rejuvenate themselves and be themselves rather than a place to be “seen at” vis a vis other cafes.

Prices:

Considering that Café Coffee Day knows its major customer lies in the bracket of 15- 29, it has tried to derive a policy whereby it can satisfy all its customers. The price for a cup of coffee ranges from Rs.17 to Rs.54. From the time it first started its operations, there has been only minor changes in the pricing policy of Café Coffee Day. The changes have been more due to the government taxes than any thing else.

Promotion:

Café Coffee Day does not believe in mass media promotions. But they are involved in all the areas of serious consumer passion.

Through television:

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Café Coffee Day held a contest around a very popular programme on Zee English called Friends. All the six lead characters are shown often visiting a coffee shop and a lot of youth like watching the programme. That is why they had a contest running where customers could win Friends' merchandise. The linkage was that it is a youth based programme and it had a coffee house. They have tied up with Channel [V]'s Get Gorgeous contest. The reason being that a lot of their young consumers are interested in careers. Modeling is a career that a lot of youngsters are interested in and this was an excellent platform. They have also done promotion for History Channel, where they have run promotion for Hollywood Heroes. They had asked a few question and a lucky winner won a trip to Hollywood.

Ticket sales:

Café Coffee Day is involved in ticket sales in quite a few events, Enrique being one of them. They were involved in WWE, Elton John, and Bryan Adams ticket sales. These acts are very much appreciated by their consumers. It helps both the organizers as well as Café Coffee Day. Organizers need to tell people where the tickets are available and single Café Coffee Day logo says it all. From Café Coffee Day’s point of view, they always ask for a certain amount of tickets around which they have a contest. Couples can win ticket for free. This in turn raises the awareness level as cafe staff approaches the consumers to inform them about the contest. There isnot a better publicity mechanism then the person who is serving you telling you about the same.

Tie-ups:

Besides that Café Coffee Day also tie up lot of the youth brands. Their promise to the customer is that a lot can happen over a coffee. So every time they try to ensure something good happens to their customer. So they have a contest going on with Levis, another one with Scooty, Liril, latest one with Airtel Friends. Another placement area they have is with HDFC. HDFC wanted to promote their debit card and they choose Café Coffee Day. So 21 cafes have debit card machines.

Association with movies:

Café Coffee Day also decided to stick with the next big thing i.e. Bollywood. Earlier a

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few movies, whose target audience matched that of the consumers at Cafe Coffee Day, started shooting a few scenes in the cafe. So they had a Hindi movie Bas Yun Hi and a couple of Telugu and Tamil films with prominent Cafe Coffee Day brand placement. Later they took a conscious decision of being seen in certain movies like Khakee and Main Hoon Na. As part of this effort, the brand was placed smartly in two Bollywood ventures, the Amitabh Bachchan, Aishwarya Rai, Vivek Oberoi starrer Kyun Ho Gaya Na, Sajid Nadiadwala's Salman Khan, Priyanka Chopra starrer Mujhse Shaadi Karoge, forthcoming movies like Salman Khan starrer Lucky and Socha Na Tha.

Sales Promotion:

Café Coffee Day uses special ‘Café Citizen Card’ for rewarding Café Coffee Day’s customers. It is a loyalty program to gain new customers and retain the existing ones. The Café Citizens Card entitles members to a 10% discount on all food and beverage bills. The members also receive surprise gifts, along with special offers and invitations from Café Coffee Day from time- to- time.

Distribution:

Distribution of outlets:

Every Café Coffee Day outlet is a part of India’s largest coffee conglomerate named Coffee Day. Since all the cafes are owned by the company, it becomes easier for them conduct feedback surveys like dipsticks etc. Coffee day’s most unique aspect is that it grows the coffee it serves in its cafes. Pioneers of the Café Concept in India with the its first Café at Brigade Road, Bangalore in 1996. This Café was opened as a Cyber Café (first of its kind) but later, with the burst of cyber cafes it reverted to its core competency…. Coffee. Café Coffee Day currently operates 213 outlets all over the country. They have a market

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presence in over 49 cities. Delhi, NCR alone has 24 outlets, and the number of outlets in the area is increasing at a phenomenal pace. Each café, depending upon its size attracts between 400 and 800 customers daily.

The distribution of coffee beans start from their roasting plant at chikmagalur. The coffee beans are sent to the main offices of north and south India on monthly basis. The outlets contact the Head Distributors on weekly basis. As far as other eatables are concerned, the inventory is checked on daily basis and orders are placed according to the requirement. Café Coffee Day uses its own store vehicle (small van) for transportation needs.

Comparison through Graphs

PREFERENCE OF COFFEE SHOPS

The Graph – 1 shows which coffee shop the respondents usually preferred to visit. Although this is not a true indicator of market share, it gives us some idea or the closeness in which both companies operate. They both received an equal preference in the survey, with 50% of the respondents choosing Barista and the remaining 50% choosing Café Coffee Day, indicating there is no clear winner in terms of actual visits to the outlets.

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The values of Graph - 3 illustrate how much money the respondents usually spend at coffee shops. While the majority of respondents spent between Rs. 25 & Rs. 75 on a single visit to an outlet, a high percentage also spent between Rs. 75 & Rs. 125. An important point to note here however is that a majority of the people who were in the Rs. 75 & Rs. 125 bracket were Barista customers.

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The survey also asked the respondents how much time they would usually spend on a single visit to a coffee shop. The Graph - 4 shows that half of them would spend between 1 hour and 2 hours, and 40% would spend between ½ hour to 1 hour.

Another important factor to consider is the size of the groups that go to these cafés. This would help us identify consumer patterns, and enable us to create customer- specific policies. The Graph - 5 shows that 60% of the respondents visit café in groups of 3-5 people. This would indicate that they are usually accompanied with common friends, who have similar tastes, and buying patterns. The remaining 40% either went with only 1 person, or in a group of more than 5 people.

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When asked about the most important factor that contributed to their choice of coffee café, an equal number (40%) of respondents selected the taste of coffee/ food and the ambience/ experience. Only 20% of them choose value for money as their most importantfactor. This would indicate a clear shift of consumer focus from price factors to service factors.

Excelsior Versus Starbucks

- A Strategic Analysis/Market Driver

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Life-Cycle Portfolio

The product life cycle concept (PLC) uses the age of a product category as a basis to assess three issues. First, PLC helps predict future sales growth, as well as customer and competitor behaviour. Second, PLC is used to prescribe appropriate marketing and other strategies. Finally, the product life cycle suggests how resources should be allocated among categories. Basically, the curve is derived from the fact that a product’s and industry’s sales volume follows a typical pattern that can be readily charted as a four-phase cycle known as embryonic, growth, maturity and ageing. Interestingly enough, the retail coffee market provides an example of an industry that experienced a shift of the product life cycle.

While Doutor Coffee was still expanding when Starbucks entered the market in 1996, nothing much had happened in the market since the first Doutor Coffee Shop opened in 1980. Starbucks, however, helped redefine the retail coffee industry and brought the situation back to the embryonic stage. Related to the product-lice cycle, the life-cycle portfolio matrix provides a pictorial presentation of all businesses of the firm in two dimensions. One dimension represents the impact of the external forces, which usually are not controllable by the firm. The second dimension, however, represents the strengths the firm has in the industry in which each of its businesses compete. Originally developed by Arthur D. Little Inc., the life-cycle portfolio matrix uses six categories of competitive positioning, namely dominant, favourable, tenable, weak, and nonviable.

The following chart displays the life-cycle position of the high-brand coffee market according to eight different descriptors, and the industry does as a whole appear to be in the growth stage. This means that the industry is still growing rapidly, but that customers, shares, and what there is of know-how is better known. Therefore, entry into the market is more difficult than in the embryonic state, in which the market is much less stable.

As earlier discussed, Starbucks increased the number of stores in Japan by almost 100% last year, but the company will unlikely be able to keep up this speed during this next few years. Good locations are becoming increasingly difficult to locate, but Starbucks still plans to double its current size by 2006. Excelsior is expanding at a similarly high speed, and is unlikely willing to let Starbucks remain the market leader. Tully’s, another American company, hopes to operate around 400 stores by 2006. This will be a major expansion from its current almost unnoticeable presence in Japan. Although perhaps a better description of supply than of demand, the speed at which the different chains expand is also a good indication of the current growth rate and the

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industry potential. Earlier figures concerning the consumption of coffee should support this optimistic forecast.

In terms of the product line, it consists of various types of coffee and snacks, and this is unlikely to change dramatically. Although Starbucks has introduced caffé latte and similar Italian drinks, it is not likely that anything dramatically new will be introduced in the foreseeable future. The number of competitors increased even last year, but it is currently possible to foresee what companies that will be the major players during the next few years. This evidently includes the foreign companies that were discussed earlier, but evidently also Doutor represented through Excelsior Coffee. Market share stability, however, is yet to be determined. Starbucks evidently has a head start on the other competitors, but the latter started entering the market in a serious manner only last year. In March 2001, Excelsior Coffee operated 30 stores, Tully’s had 23, Seattle’s Best had 15, while Italian chain Segafredo Zanetti operated 11. Compared to Starbucks, which at the time had 227 stores, these are minuscule numbers. Other companies have entered the market since then, and it thus remains to be seen who will end up as Starbucks’ main competitors.

With regards to purchasing patterns, this evidently is a difficult issue to address. As the high-brand coffee market is selling different experiences, the various chains evidently all hope to build up loyal customer bases. Still, as Starbucks is the only chain to have built up a somewhat stable presence in Japan, it is still difficult to say what impact the purchasing patterns of consumers will have on the industry. In terms of the ease of entry, the industry probably changed from embryonic to growth during 2001. Several strong American companies started a rapid expansion to catch up with Starbucks, for not to mention the effort made by Doutor through its chain of Excelsior stores. As much energy is put into finding the right locations for new stores, it has probably become much harder to enter the high-brand coffee market than what was the case only twelve months ago. The issue of branding is also difficult to determine, although Starbucks probably already has become relatively famous throughout Japan. Excelsior Coffee and similar brands are building up a presence in a very aggressive manner, and if it is not the case already, it is only a question of time before the competing brands become known.

As it has thus been determined that the high-brand coffee market has just entered the growth stage of the product life cycle, the earlier discussed market strength of Starbucks compared to its competitors should explain the above chart. At the end of 2001, Starbucks was at least twice as big as all its competitors combined. Excelsior, however, was struggling to catch

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up. The former company can thus be said to be dominating the market, while Excelsior on the other hand has a favourable position. The latter is due to the fact that the company has a similar level of stores to that of other late-entry competitors, but an expansion is probably also made easier due to the Doutor Coffee Group’s extensive know-how concerning the Japanese coffee market. According to the company’s investment guide for 2001, the average Doutor Coffee customer spends an average of 300 yen per store visit, while the average Excelsior customer spends around 470. With more experience, the company should be able to increase the latter figure, and could then perhaps consider transforming Doutor Coffee stores into the Excelsior brand. Obviously, this bears the risk of cannibalising sales, but it can be an option in cases where the total profit can be increased as a result. Related to this discussion is evidently the strategic positioning in terms of investment requirements.

Evidently, the position for Starbucks is dominant in this aspect as well. The company should thus invest to sustain growth rate and thereby pre-empt new competitors. Excelsior, however, should invest selectively to improve position. As resources are limited, the Doutor Coffee Group should be careful not to make investments that will not offer a positive return on capital. Diversification can be discussed, but caution is necessary in order to make wise investment decisions that can capture market share. Little is gained from opening a store for then to find it not to be viable and close it down. The Doutor Coffee Group should, however, have sufficient knowledge of the Japanese market to surpass the ability of its competitors to make decisions in this respect.

The strategic positioning in terms of profitability and cash flow is equal to the chart picturing investment requirements, and Starbucks Coffee Japan is already profitable. Still, the net cash flow is still likely to be negative for quite some time, this due to large investments in new stores. Taking the company public on October 11th last year, Starbucks raised enough capital to finance stores expansions for the near future. After the IPO, Sazaby Inc. and Starbucks International each own 40% of Starbucks Coffee Japan. Regarding Excelsior Coffee, the situation is a bit more difficult to analyse due to the recent establishment of the coffee chain, but it is very unlikely that the company has become a net cash producer for the Doutor Coffee Group. Probably, large investments are still needed for expansion and various other costs, and with the number of stores numbering somewhere around fifty, scale has yet to be achieved.

In terms of the life-cycle portfolio, this is only of interest with regard to the Doutor Coffee Company, as Starbucks Coffee Japan only is represented through one product. The following

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chart depicts how the Doutor Coffee Group is represented in several different industries, but they are all related to food, coffee, or tea. Although the chain of Doutor Coffee shops is the company’s major asset, it originally started out with the Café Colorado. The latter first opened in 1972, and the current number of stores is 177. It is a franchise chain with an average per customer sales of 520 yen. Café Colorado is not self-service, however, and thus appears more similar to traditional mom-and-pop stores than to the other coffee chains mentioned in this paper. The rest of the Doutor Coffee Group’s portfolio is latter insignificant in terms of the number of stores, but includes two other coffee chains, one chain of Italian restaurants and also a self-service tea chain targeting women.

Although much could be said about this portfolio, it should be commented that the company has introduced two coffee chains into the market since Starbucks’ entry in 1996. One is Le Café Doutor, introduced in 1998, which represents an odd attempt at creating a premium-coffee chain based on the Doutor trademark. The fact that the latter is associated with rather cheap coffee obviously did not trouble the company’s marketing staff. Two years earlier, the company introduced Mauka Meadows to the market, a coffee shop specialising in the sale of Doutor’s self-produced Hawaiian coffee. While Le Café Doutor features a French atmosphere, Mauka Meadows is Hawaiian-style. Evidently, this shows that the Doutor Coffee Group tried different alternatives to counter Starbucks’ entry into the market, and perhaps the two earlier mentioned chains represented vague attempts at creating a new experience curve. However, the company did not succeed, and thus ended up creating Excelsior Coffee in the year 2000. Salon de thé Madeleine, a tea chain, may be an attempt to create an alternative to Starbucks, but it is too early to say if the company will succeed. The same can be said about the company’s other coffee chains, and though they are still embryonic, it can be doubted if they will ever experience rapid growth. As far as the Doutor Group’s Italian restaurants are concerned, they have been around since 1985 and make up around 34 stores. As Italian food is relatively well known in Japan, the market is either mature or ageing. Perhaps the management at the Doutor Coffee Group should study another useful business model to help them decide what businesses to keep, and which ones to abandon.

The Growth-Share

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The growth-share matrix presents the firm in terms of a portfolio of businesses, each one offering a unique contribution with regard to growth and profitability. Instead of being considered a single monolithic entity, a given firm is rather viewed as many largely independent units whose strategic directions are to be distinctively addressed. Due to the complexity of such an approach with regards to Doutor’s rather diverse business portfolio, this model will be touched upon rather briefly. The growth-share matrix plots each business on a four-quadrant grid. While the horizontal axis corresponds to the relative market share enjoyed by a business, the vertical axis indicates market growth. The former does, in other words, characterise the strength of the firm in that business, while the latter represents the attractiveness of the market in which the business is positioned.

The following matrix presents the business portfolio of Starbucks Coffee Japan, and is of course very limited in nature. As earlier discussed in great length, the coffee chain is experiencing rapid growth and relatively high profit margins in Japan. The company’s position in the market is very strong, and the combined value of the company’s recent IPO and its current net profit is believed to constitute enough capital to finance the company’s expansion in the near future.

Doutor Coffee Group’s business portfolio is evidently much more complex, and includes the various chains that were presented in connection with the lifecycle portfolio matrix. The following chart is brief presentation of the company’s major businesses.

While some comments have been given in the matrix, more information is needed to make an appropriate placement of the Café Colorado chain. It is difficult to tell if the chain is profitable, and since its main competitors are primarily mom-and-pop stores, market share is difficult to determine. Very likely, however, the chain is a dog, but Doutor Coffee Group should anyway consider transforming some of the stores into the Excelsior brand. This could increase both market share and profitability, and would give the company a substantial boost in its quest to challenge Starbucks. Regarding the company’s other coffee chains and the recently opened tea store, it is too early to say anything certain about the future of these stores. Potentially, they could take focus away from the Excelsior Coffee chain, but if successful the Doutor Coffee Group might be able to pioneer a largely unexplored market. Additionally, a few comments should be made on the company’s various subsidiaries. These include Manga International, which specialises in the marketing of tableware and kitchen equipment, and Madeleine

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Confectionery, which produces and markets confectionery. As these are fully owned subsidiaries, it is unclear how the Doutor Coffee Group plans to create value for shareholders with these seemingly unrelated businesses. Additionally, the company runs coffee plantations on Hawaii and Jamaica, an issue that will later be discussed in some detail. The above chart, however, comments upon differences between Excelsior and Starbucks in terms of relative market share and market growth. Evidently, since the market is rapidly growing and few numbers are available, some subjective judgement was needed to make the chart. The relative market share is determined by dividing a company’s total business sales by that of its leading competitors, but Starbucks did not experience much serious competition before 2000/2001. Thus, while the chart evidently shows Starbucks’ leading position in the market, the reality is probably even more positive as far as Starbucks is concerned.

Industry Attractiveness/ Business Strength

Originally developed by McKinsey, the matrix displays graphically, on a 3-by-3 matrix, the position of each business in a company’s portfolio. It rates the relative attractiveness of the industry in which the business operates, as well as the strength of the business versus that of its competitors. The two variables are assessed on a low-medium-high scale. The matrix is generally used to suggest the kind of investment strategy that should be followed for each business, as well as to develop the overall strategies. To determine the placement of a specific business, a weighted approach can be used to rate the external and internal factors influencing the business. The following chart presents the industry attractiveness for the industry as a whole, which is followed by the internal ratings for Excelsior and Starbucks.

In terms of the external factors, these are the same for both companies. The question of currency parity may become a factor if the yen should weaken substantially, yet the import cost of coffee constitutes only a minor cost in the high-brand coffee market. The market growth is, however, very positive. In terms of seasonability, it may be a problem for the companies to maintain the same sales ratio all year. Particularly the Japanese summer may prove a challenge, although Japanese customers are known for their liking of ice coffee.

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The number of new entrants into the market is very high, and the competitive environment is thus likely get tougher. It is, on the other hand, difficult to predict what influence the recession will have on the purchasing patterns of consumers. As the average customer at Starbucks and Excelsior will spend somewhere in the proximity of 500 yen, one can argue that people still will be able to afford high-premium coffee once the recession deepens. Finally, the barriers to entry are still very low, as Starbucks is the only company to have solidified its presence in the market. This is likely to change soon, however, as many new entrants are aggressively opening new stores in a wide range of geographic locations. Overall, the industry is very lucrative, this mostly due to the high growth ratio. Still, a yet to be determined number of new entrants are likely to make the industry less stable, and the current situation is thus likely to change in the near future.

As far as the internal factors are concerned, Starbucks does not surprisingly rate higher than Excelsior. This is first of all due to the former company’s high market share, which again is translated into high brand awareness. Second, the company does in addition have high managerial competency in terms of marketing and operating high-brand coffee stores, and can also draw on knowledge from the various locations in which Starbucks operates. Excelsior Coffee, however, has yet to build up a substantial presence and still has a rather minuscule market share in the high-brand coffee market. In terms of financing, Starbucks improved its position dramatically through the initial public offering of last year, while Excelsior Coffee can draw on capital from the Doutor Coffee Shops. Other foreign entrants as for example Tully’s, rely primarily on franchising to enter the Japanese market, and the company’s investment requirements will therefore be relatively minor compared to Excelsior and Starbucks. On the other hand, Tully’s entry into Japan will thereby also have a smaller profit potential, but it is still too early to predict what approach will be the most lucrative in terms of entering the Japanese high-brand coffee market. In conclusion, it can thus be said that both Starbucks and Excelsior operate in a very attractive market, but that Starbucks has an advantage due to stronger internal factors.

The above chart depicts a strategy technique developed by Michael E. Porter to analyse the five basic competitive forces that determine the ultimate profit potential in an industry. In the middle box are the current industry competitors, and thus describes the rivalry that exists among rival firms. The market and its main players have been commented upon earlier, and will therefore not be touched upon here in further detail. In terms of suppliers, it is here interesting to note that the Doutor Coffee Group owns two large plantations in Hawaii. Totalling 660,000 m², the Mauka Meadows plantations are the largest on the island, and do according to the company produce the world’s highest quality coffee. Using the latest technology available, the coffee is then roasted at a company-owned plant in Funabashi, for then to be sold through wholesale and

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retail. Symbolising the Japanese tradition of improving on already known foreign, Doutor Coffee Company President Toriba comments on the company’s backward integration:

“Most of the coffee industry processes beans by roasting, a method that can be adapted to mass production. Doutor’s direct-heating method of roasting coffee beans means that we sometimes suffer slightly in terms of productivity. However, the trade-off is more than acceptable, considering the difference in taste. This kind of large-capacity, direct-heating equipment was not used anywhere in the world, so we had to invent the method on our own”.

Evidently, the Doutor Coffee Group can only benefit from this presumed superiority in taste if customers actually acknowledge a difference, otherwise the reduced efficiency due to the backward integration is an unnecessary cost. Starbucks does, on the other hand, buy its coffee beans on the world markets. The company has, as a consequence, been much criticised by human rights organisations, which pressure has forced Starbucks to make at least subtle changes to its purchasing system. There are thus evidently both benefits and disadvantages to both supply approaches, but a throughout financial analysis is likely necessary to make a formal conclusion.

As far as the threat of new entrants is concerned, McDonalds has already made attempts to incorporate seemingly high-brand coffee into its menu. It is not clear, however, that this will represent a potential threat to Starbucks and Excelsior. As the indoor environment, profile, and customer segment of McDonalds differ greatly from that of the high-brand coffee shops, it is unlikely that McDonalds will pose a viable threat. The likes of Mr. Donut could, on the other hand, revitalise its operations to become an alternative to Starbucks and Excelsior. This could evidently also be done through an independent venture, but donut stores and high-brand coffee stores are seemingly alike in many ways. An upgrade of Mr. Donut’s image along with the introduction of high-brand coffee could help this transformation process; perhaps even a joint venture with for instance Seattle’s Best could be an option. Mr Donut could thereby combine the attributes of a donut store and a high-brand coffee store, and as a result increase sales and target new customer segments. Other potential Japanese and foreign entrants are evidently too numerous to mention, but entry has already been made more difficult due to the intensifying competition in the market.

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Potential substitute products may initially not appear great in quantity, and beer, wine, and tea constitute perhaps the main alternatives. Still, as it has been commented upon earlier, Starbucks and Excelsior are selling experiences, and thus not simply coffee. Any establishment that can offer the same kind of service and atmosphere may therefore become a potential competitor, particularly when considering that the product sold does not appear to influence customers in a noticeable manner. Still, while Doutor Coffee Group has made attempts at creating successful chains through its Hawaiian and French high-brand coffee stores, they have at least not been able to succeed yet. The same can be said about the company’s attempt to create a chain of high-brand tea stores, so finding the right strategy to satisfy customer demands and aspirations is not an easy task. With regards to the earlier discussed experience curve, however, it is evident that a new entrant should attempt a different strategy rather than to attack Starbucks and the numerous other high-brand coffee chains head-on.

Finally, the premium coffee stores appeal to a very wide customer base, but perhaps not to segments below high school age, who might prefer less expensive options. Evidently, there are alternatives available for non-coffee drinkers, and the high-brand coffee stores do therefore not exclude customers who might prefer tea or juice. As far as the powers of the different competitive forces are concerned, it is at least clear that the power of suppliers is very weak. The world’s many coffee plantations are in deep competition, and in years of regular harvest there tends to be an oversupply of coffee. Evidently, Excelsior is in a different situation due to the backward integration of the Doutor Coffee Group, but at least Starbucks should not have problems using a wide range of suppliers. Similarly weak is the power of customers, particularly as the demand for high-brand coffee until now has seemed to be higher than the available supply. Customers visiting Starbucks often face a long line, and finding a seat is a game of luck. As long as this situation continues, customers will hold relatively little power, but this may soon change as supply increases and competition between the rival companies intensifies. The threat of potential entrants was until recently very high, but most American and foreign companies that considered the Japanese market have already made up their minds in terms of entering or not. Still, there may be the potential of other companies entering the market of high-brand coffee, but as discussed with concern to the product lifecycle, there is now a better awareness of who these competitors are. In terms of substitute products, Doutor’s launch of a tea-room was probably an attempt at challenging Starbucks with something new, but it has yet so far not appeared to be a success. Beer and wine have long been alternatives to coffee in Europe, but it is questionable if a similar pub or wine culture could develop in Japan. It should be remembered, however, that few analysts believed Starbucks would become successful in Japan. Still, the company has beaten even the most optimistic forecasts, and a new fresh approach to the market is probably necessary if Starbucks is to be surprised in the same manner as the latter once caught Doutor off-guard.

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While a thorough presentation has been given of the Japanese coffee market, and also of the coffee chains run under the brand names Starbucks and Excelsior, some additional comments need to be made about the future strategy of the chains. The following chart uses the logic of the product lifecycle to suggest a future strategy for both Starbucks and Excelsior. According to the product life cycle, there are four families that cover the entire spectrum of business positioning within the portfolio matrix. These are natural development, selective development, prove viability, and withdrawal. As the chart shows, both Excelsior and Starbucks are part of the natural development family, which implies that the competitive strength of the business demands strong support to secure further growth. This is evidently true for Starbucks due to the company’s strong position in the market, but also to Excelsior due to the potential of the chain becoming one of Starbucks’ major challengers.

Although the two chains belong to the same family in terms of strategy, Starbucks should attempt to defend its position while Excelsior should focus on gaining position gradually. Starbucks evidently possesses a dominant position in the market, hence the company’s main aspiration should be to maintain this position. Excelsior, on the other hand, enjoys a favourable position in a growing industry, and should therefore attempt to solidify its position in the market. Furthermore, while some comments have been made on this earlier in the paper, a major challenge for all the companies in the high-brand coffee market is to find the right locations for new stores. As the Porter model showed, there is no shortage of either suppliers or customers. As a result, the main challenge is securing the proper locations to secure further growth. Evidently, the ultimate locations should be busy with people, but evidently also relatively trendy unless a company wants to avoid cheapening its brand. This might be particularly important to Starbucks, which certainly should not lower the value of its brand image or compete on pricing. Its premium pricing explains much of the reason for the company’s success, and Starbucks should thus not be worried if other late entrants begin exploring the market between high- and low-end coffee.

The challenge for Excelsior is obviously to copy Starbucks, but also to become better than the original in the eyes of customers. If the Doutor Coffee Company should prove itself successful at just this task, it will not be the first time a Japanese company has made improvements to Western product. Starbucks, for instance, has a non-smoking policy, which perhaps loses the company some sales due to the relatively lax Japanese regulation of tobacco. In contrast, Excelsior Coffee divides its stores into smoking- and non-smoking sections, thereby attracting customers who prefer to smoke while drinking coffee. Additionally, Excelsior Coffee certainly has more freedom that Starbucks in terms of making changes to its menu. The chain

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sells both beer and wine, and since the company is fully Japanese owned it might prove better able to meet the country’s domestic needs.

The real battle, however, is not likely to take place before the industry matures and an inevitable shakeout begins. Boston Consulting Group founder Bruce Henderson argued there would only be room for three significant competitors in a stable competitive market, and the challenge for both Excelsior and Starbucks is to be among the market leaders once growth starts slowing. Only then will the market reach a potential equilibrium, and only then can the winners be declared.

GLOBAL STRATEGY LEVERS

Barista vs Café Coffee Day

Barista

1.Marketing:Strong Brand Image

Barista has a strong and clear brand image. Their customers can easily identifyand relate to the Barista brand. This helps increase and maintain brand loyalty

2.Excellent Human Resource:Competitive Moves

According to the survey, Barista received an excellent rating for the service and behavior of their staff. This is a huge advantage, especially in a service

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organization. Barista must strive to keep this advantage.

3.Ambience & Décor:Activity Location

Another significant area of excellence is the kind of ambience and décor Barista cafés have. Respondents to the survey, including whose who chose Café Coffee Day as their choice of café, gave Barista a near perfect rating for their Ambience & Décor..

4.Strong Base for Expansion and Growth:Competitve Move:

Barista have worked hard on heir brand image and human resources, and have a strong base for future expansion and growth- whether nationally or internationally.

Café Coffee Day

1. Highly rated Taste & Quality of products: Products and Services

Café Coffee Day got a high rating in the market survey, for the Taste & Quality of their products. If they work on this aspect, there is huge potential for them to attract customers, just based on the taste and quality of products. This is also helped by the fact that they grow their own coffee beans, and this provides an important base for future expansion and growth. Café Coffee Day even won the “Barista Coffee- Making Championship” for the Best Coffee.

2. Value for money proposition: Marketing

Café Coffee Day is projected as an “affordable” brand. This strategy has worked extremely well so far, and Café Coffee Day got a high rating, both for their prices and for their value for money, in the market survey.

3. Strong youth orientation: Activity Location

The Café Coffee Day brand is, and always has been, extremely youth- oriented. In

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a country where over 40% of the population is under the age of 20, there is huge potential for Café Coffee Day to become one of the country’s largest youth brands. The untapped market share and potential for growth is enormous.

Drawbacks of Levers

Barista

1. Average taste & quality of products:

According to the market survey, other than their Dessert, Barista got only an average rating for the taste & quality of their products. Considering their strong brand image of being the coffee- lover’s traditional café, they have not performed up to expectations in this area.

2. Perceived as an expensive brand:

Customer perceptions of Barista’s prices and value for money are quite negative. Even though the prices of Barista and Café Coffee Day are almost identical, Barista is still perceived as the more expensive brand.

3. Inconvenient delivery process:

On a smaller note, Barista’s self- service delivery process received almost unanimous complaints from respondents of the market survey. They found it inconvenient to go back to the counter just to receive their order.

Café Coffee Day

1.Weak brand image:

The Café Coffee Day brand, although clearly a youth- oriented brand, lacks the power and strength expected to maintain brand loyalty. The brand doesn’t project a clear image to customers about what Café Coffee Day is all about. This could prove as a deterrent during future national and international expansion.

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2. Inefficient human resources:

According to the market survey, Café Coffee Day’s staff received only an average rating for their behavior and service. Café Coffee Day needs to work hard at this aspect, especially considering they are a service sector organization that is looking at large expansion.

3. Ambience & Décor:

The Ambience & Décor of Café Coffee Day outlets received a below- average rating from respondents of the market survey. A lot of respondents did not like the fact that Café Coffee Day outlets and literature served as prime space for alot of advertising and promotions. They felt as if the café’s had been hijackedjust for advertising.

Changes needed in Direction and Nature of Drivers and Levers

Barista

Barista has an extremely strong brand image, but they need to work hard on improving their customer perception of being and expensive brand. Barista and Café Coffee Day have almost identical pricing, but Barista is still perceived as themore expensive brand.

That’s why my first recommendation for Barista is, to carry out a promotion campaign to ensure that their target market is well aware of their current low prices. This would help change customer perception and turn Barista into an affordable brand.

Another backlash of having such a strong traditional café brand image is that customers have very high expectations of the taste & quality of products. Barista needs to work hard at this aspect, especially for coffee and eatables products.

My second recommendation is for Barista to look at its coffee beans suppliers and

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coffee brewing process to ensure that it is the best it can be:

This is especially important considering the international expansion Barista is undertaking. Barista should also look at the Taj, their national suppliers for eatables and desserts, and either improve the taste & quality of eatable, or look at another supplier- because as of now, they are not living up to expectations, and losing customers to Café Coffee Day.

On a smaller note: the Barista delivery process should change, so that a café attendant delivers the coffee to the table. This may seem insignificant, but it can go a long way in improving customer satisfaction.

Café Coffee Day

Café Coffee Day has done extremely well so far to project itself as an affordable youth- oriented brand. But there are still certain areas where their brand needs to be much stronger.

With regard to the physical evidence associated with the brand, Café Coffee Day needs to do a lot of work if they hope to catch up with Barista. My first recommendation for Café Coffee Day is to clean up the décor at every outlet, wherever unnecessary advertising is taking place.

Although it might be an important source of revenue, long-term customer perception of the brand isn’t very positive.

Café Coffee Day would do better to provide promotional space for its partners with the use of clever collaborations, and not printed advertisements and posters everywhere.

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Global Potential of Industry

Growing the global coffee industry requires ...... commitment and contribution from all participants investment and leadership from brands a willingness to embrace change

Three companies account for over 45% of global volume ...

Kraft Nestlé Sara Lee

When the equation is optimised the: successful Coffee brand can------

build a loyal bond with consumers grow share within a market reinvest in technology/marketing to further increase consumer value grow markets through new users and purchase rate increased

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For Succeeding GLOBALLY………………

The Coffee industry should be considered as an integrated unit and all parts must work in concert.