From the discovery of small, brightly colored red berries on trees in Ethiopia came the largest imported commodity in the world, second only to oil. The coffee bean provides a livelihood for over 20 million people worldwide with an estimated worldwide retail sales expected to grow by a compounded rate of 6. 9% from 2005-2010, reaching $48. 2 billion by 2010, according to The U. S. Market for Coffee and Ready-to-Drink Coffee.  The two main species of coffee beans are Arabica and Robusta.
Arabica is a high-quality coffee typically grown at higher elevations where the optimal climatic conditions necessary to grow this specialty grade of coffee are found.
Arabica coffee is traded in two ways: ? On the highly volatile New York “C” market where the “C” price is affected by the global supply as it rises and falls. The average “C” price for a pound of coffee during fiscal 2005 was $1. 04. ? Higher-quality Arabica beans are used in specialty coffee. Specialty coffee represents 10 percent of the total worldwide coffee market.
Prices for specialty coffee are higher than the “C” offers in order to provide better rates payable to producing farmers for quality.  According to the National Coffee Association in Volume 2005. 4 of Coffee Trax, as of December 2005, forecasts for the world coffee production for 2005-2006 will be 113. 1 million bags. Production is down 5. 5% over the actual 2004-2005 yields of 119. 8 million bags. Domestic consumption in producing countries in 2005-2006 is forecast to increase to 31. 2 million bags, indicating domestic use should be 9. 9% higher in 2005/06 than in 2004/05.
Using the most current data, world coffee consumption for 2003/04 was 96. 5 million bags, up by 1. 8% over 2002/03’s production. “In 1999 there were 108,000,000 coffee consumers in the United States spending an approximated 9. 2 billion dollars in the retail sector and 8. 7 billion dollars in the foodservice sector every year (SCAA 1999 Market Report). It can be inferred, therefore, that coffee drinkers spend on average $164. 71 per year on coffee. The National Coffee Association found in 2000 that 54% of the adult population of the United States drinks coffee daily (NCA Coffee Drinking Trends Survey, 2000).
They also reported that 18. 12% of the coffee drinkers in the United States drink gourmet coffee beverages daily (NCA). In addition to the 54% who drink coffee everyday, 25% of Americans drink coffee occasionally (NCA). The average consumption per capita in the United States is around 4. 4 Kg. Among coffee drinkers (i. e. not per capita) the average consumption in the United States is 3. 1 cups of coffee per day (NCA). Per capita men drink approximately 1. 9 cups per day, whereas women drink an average of 1. 4 cups of coffee a day (NCA).
The USDA’s 2005/2006 December estimate for world exportable production is 82.0 million bags which is 10. 2% lower than 2004/05. Total U. S. imports were down 15% for the second to third quarter of 2005. Estimated roastings for the third quarter of 2005 were up to 4. 7 million bags compared to the second quarter but down by 5. 8% for the year-ago quarter.  Retail prices were up from $3. 33 to $3. 40 for the average quarterly retail price of a pound of roast-and-ground coffee or 2. 1% after comparing the third-quarter 2005 to the second quarter. Compared to the year-ago quarter, average retail prices were up by 18. 1%, moving to $3. 40 from $2. 88.
The average monthly retail price continues to be 20. 8% below its seven-year high of $4. 67 in August 1997.  Fair Trade coffee is beginning to affect the economics of the coffee industry. Coffee retailers to help maintain a sustainable supply of coffee are increasingly adopting the Fair Trade movement. Over the years a coffee crisis has developed as supply has greatly exceeded demand. This paradox of continued growth of retail pricing at the expense of the small coffee farmers has driven retailers like Starbucks to create their own methods of providing higher profits to producing farms so that supply can be maintained.
Under a Fair Trade agreement producers are guaranteed a fair price consisting of a floor price of $1. 26 per pound and $1. 41 for certified organic coffee.  From 2002 to 2004, USAID invested over $57 million on coffee projects in over 18 countries in Latin America, East Africa and Asia in an effort to create sustainable supplies of coffee. Other movements such as Organic and Shade Tree coffee have had similar goals to help with environmental and quality concerns on the producing farms.  Coffee consumers are continuing to show a preference for premium coffees.
While most brands have declined in sales during the past year, premium coffees have managed growth, according to data from Information Resources Inc. , which measures sales through supermarkets; drug stores and mass merchandise outlets. Ground coffees lost 1. 8 percent of sales for a category total of $1. 6 billion, but whole bean coffees were up 2. 2 percent. Starbucks grew in both segments, with a 13. 2 percent increase in ground coffee sales and 6. 4 percent in whole bean sales.  Retailers such as Starbucks in the specialty coffees use the highest-quality Arabica.
Specialty coffee is a broad category of coffee positioned as the highest quality and/or roasted with the ideal techniques or even coffee from particular plantations. “Even though the overall U. S. coffee market has been sluggish lately, the specialty component has seen significant growth, with retail dollar sales approaching $9 billion in 2003. The segment’s sales in 2003 represented growth of 6. 7 percent over 2002’s $8. 4 billion. In 2003, coffee cafes – the approximately 11,240 retail locations including seating, such as most Starbuck’s outlets – generated $6. 1 billion in retail sales, or 68. 3 percent of the segment’s total.
Coffee bean roasters and retailers – the 1,350 sites with on-premise roasting – accounted for 14 percent of sales with $1. 3 billion. Coffee retailers without seating, also known as kiosks, had sales of $810 million, which represented 9. 0 percent of the total. There were approximately 2,700 coffee kiosks operating in 2003. Mobile retailers (i. e. , carts) accounted for an additional 3. 2 percent of sales, with all other channels responsible for the rest. ”  Driving Forces in the Coffee Industry Competitive and industry conditions experience change due to the forces that are pressuring industry participants to alter their actions.
Competitors, customers, or suppliers are enticed to change their ways. Those with the biggest influence on industry structure and the competitive industry environment are driving forces. The coffee industry has four driving forces that originate in the industrial and competitive environment. A change in who buys the product and how they use it is one of the four driving forces in the coffee industry. Shifts in buyer demographics and the way consumers use the product have altered the competition for this industry.
The variation has prompted producers to broaden the product line and try different sales and promotion approaches. Changing societal concerns, attitudes, and lifestyles is the other driving force that ties in with the customer base and usage. Society is changing, with the new generations being a huge influence. Parents, a huge factor in the lifestyle, attitudes, and opinions of their children, drink coffee and are, thus, promoting coffee to the offspring. These young persons are looking for caffeine to keep them going through their increasingly busy days.
At age 13, who knew that coffee was needed to add to their ever-so hyper lives? Coffee is established as a drink older people consume. Young people are always aspiring to be older than they are, so coffee is marketed in a different way to the younger generations as specialty coffee and gourmet beverages. Marketing these drinks as “cool” and “hip” is also a successful method of attraction. Establishing loyalty early while coffee drinkers are young will ensure a prospective future for this industry. In addition, the use of coffee has changed over the years.
Coffee was first marketed as a breakfast drink for the working parent to get a boost of energy for the day. As more women started joining the workforce, the coffee consumption increased. Throughout the years, an increasing amount of people started drinking coffee more frequently throughout the day. Today, it is not uncommon to see a person drinking a gourmet coffee drink at 10:00 p. m. , as well as anytime throughout the day. Whenever you need that caffeine-boosted beverage or just want that coffee bean taste most love, consumers now can look for multiple types of coffee drinks to satisfy the craving.
Growing buyer preferences for differentiated products instead of standardized is the driving force that allows the product innovation to take lead in this industry. Due to consumers demand for something different, companies in this industry needed to expand current products to fit customer needs and wants. The success of product innovation of introducing coffee drinks and coffee flavors, made the choices for consumers grow. Consumers wanted more flavor and excitement, instead of the regular or decaffeinated options.
During the hot summer months, many coffee lovers wanted the taste of coffee but were not fond of drinking a hot drink. Iced coffee drinks helped to solve that problem. Now, people can drink coffee anytime of the year. Many consumers do not just drink coffee in the morning, like the generations before; meetings, study sessions, hanging out, talking amongst old friends and other events are all done through coffee drinking. Due to the buyer influences, the coffee industry has grown in all directions and continues to see a future with innovation and other driving forces helping it along the way.
Lastly, product innovation is a driving force that has allowed the coffee industry to grow. The competitive environment is fierce and product innovation is one of the key driving forces to stay on top of the industry’s market share. Coffee drinks were developed as an anytime coffee drink. Such drinks are Espressos, Cappuccinos, Frappaccinos, Lattes, and Mochas. Whether a consumer likes it hot or cold is no difference now; iced coffee is for those that do not feel like a hot cup. Black, White, Irish, Turkish and Americano are also other types of coffee to choose from.
Flavored coffee is a pillar innovation to this product category allowing different consumers’ taste buds to run wild. Chocolate covered coffee beans are another innovation that expands the use of coffee in a nontraditional way, a snack. This industry growth has also allowed companies the opportunity to promote to different consumer markets. Young and old purchasers, people that like hot or cold coffee, and those that like a coffee drink in the morning or evening are all targeted now that the product lines have broadened the scope of the industry.
Product innovation has helped consumers’ differentiation issues, along with allowing them to drink it anytime of day they need an extra tasty boost of energy. In order to stay on top of the competitive environment in this industry, a company has to accept the driving forces and make each one positive for the company in the long run. The following driving forces are influencing the coffee industry: change in who buys the product and how they use it; changing societal concerns, attitudes, and lifestyles; growing buyer preferences for differentiated products instead of standardized ones; and product innovation.
Each of these driving forces increases the competition in the industry. The increased demand for products, especially the new innovated ones, is an opportunity for profitability as well. Because of the innovation, many people are expecting choices for the long run; the companies that offer the products consumers want will prosper. Competitive Analysis of the Coffee Industry Although there are many substitutes for coffee when it is regarded as nothing more than a liquid to drink, most people would agree that there are relatively few that would be considered viable substitutes to dedicated coffee drinkers.
Historically, teas have been the greatest rival substitute for coffee, and just as there are specialty coffees, there are specialty teas as well. The key to coffee substitutes being successful in luring coffee drinkers over to their products is differentiation. While tea alone may be substantially differentiated from coffee, a dedicated coffee drinker will need some sort of hook, or angle, to get them to try something different. Often this angle comes in the form of a doctor telling them to cut back on caffeine or to stay away from coffee altogether.
According to About. com the top five coffee substitutes are: 1. )Roastaroma ? a tea “blend of roasted barley, roasted chicory root, and roasted carob, with spices cinnamon, allspice, and star anise. ” 2. )Genmaicha ? a “green tea with roasted brown rice. ” 3. )Teechino ? “made from roasted carob, roasted barley, and roasted chicory” containing “figs, almonds, and dates. ” 4. )Cafix ? “a freeze-dried grain drink made from barley and chicory. ” This drink is non-acidic and does not contain caffeine. 5. )Pero ? “made from malted barley, chicory, and rye. ”
Although coffee substitutes are readily available and reasonably priced, traditional coffee drinkers are usually dedicated to coffee in general, if not one particular brand. Therefore, buyers tend to view substitutes as not adequately comparable alternatives. One of the coffee industry’s greatest attributes is the loyalty of their customers. Buyers of coffee can be broken down into two groups; individuals and businesses. An individual coffee drinker will have little or no real power to influence the industry or a particular seller beyond switching brands.
The switching costs of individuals are virtually nothing; therefore they can move between brands whenever they are dissatisfied with quality or price. Business buyers such as restaurant chains, hotel chains, convenience stores, and supermarket chains have considerably more power than an individual buyer. This is simply due to economies of scale where a restaurant chain purchasing several thousand pounds a week will have more influence on a supplier than an individual buying one or two pounds per month. Supermarket chains are in a strong position as well, as they can offer as much or as little shelf space as they want.
They can also switch brands on shelf space, virtually without cost, to replace poor selling brands with other brands, which may have a higher sales rate. Therefore buyer power depends upon the quantity bought, as with many industries. The power of buyers may range from weak to strong or even fierce. The threat of new entrants into the coffee industry is somewhat strong. While entrants into large markets may not be many, the entry of small shops in local markets offering specialty coffees has grown rapidly in the last several years.
Entrants into the specialty coffee arena have been lured in by rising demand of such coffee and attractive profit margins. While these local shops will not be able to compete with large corporations such as Kraft, Proctor & Gamble, or Starbuck’s on an international basis, they can account for some competition in local, concentrated markets by offering a niche; an alternative to corporate retailers with a less personable and hospitable atmosphere. Retailers such as these tend to do well in more rural areas where major corporations may not wish to enter, or in areas where collegiate or more naturalistic atmospheres prevail.
These areas may be less inclined to cater to large corporations. New entrants into the coffee industry are also faced with the obstacle of overcoming name brand loyalties. Although in some small specialty coffee markets a new brand with a unique name or style may do well, in most arenas coffee drinkers are extremely loyal to their brands when they are purchasing for home consumption. These buyers are not likely to switch brands for superficial reasons. The competitive pressure from suppliers is relatively weak in the coffee industry.
The individual coffee bean farmers have little control over the price of the coffee they sell. The worldwide market has little fluctuations and any that may occur have little effect on any one particular farm. Recently world coffee supply has been exceeding demand, which has taken even more power away from the suppliers who must compete with growers from around the world. The futures market provides security to firms purchasing beans from governments. By buying these futures contracts the company is promising to buy a certain amount of coffee at a stated price no matter what the overall market price may be at the time.
The government selling the contracts is promising to provide the amount of coffee stated to the buyer at the stated price regardless of the current market price. Governments also have a role in determining supply as they can set regulations governing the number of trees that are planted, provide price subsidizing for farmers, and impose tariffs. Furthermore, the price of coffee beans has not been increasing at the same rate as the price of your average cup at a specialty shop, or as fast as inflation. In January of 1996 the price of coffee beans was $1. 02 per pound .
Ten years later in January of 2006 the price has only increased to $1. 17 per pound, an increase of 14. 12% . In the same period inflation had risen approximately 25. 3% . Rivalry in the coffee industry among competing sellers is vigorous. Although the overall market for coffee grew fast in the late 1990’s, especially regarding the specialty coffee markets, it has leveled off some in the last few years and the overall demand is growing slowly. Another reason for the high level of competitiveness within the industry is due to the relatively low differentiation ability of coffee.
While specialty coffees derive some level of differentiation from region of growth or roasting methods, the overall product is fairly standardized. This leads to increase jockeying for position among existing firms, as they cannot lure customers in with a variety of unique products. Some firms however are attempting to lure customers in with new products such as Folgers’ Home Cafe system, which is a one-cup pressure-brewing system. These devices use “pods,” or individually packaged coffee for single serve applications. Other companies have also been marketing individually packaged coffee so that consumers can make a “perfect cup” every time.
The switching costs of buyers are also very low, if not non-existent. Buyers only have to purchase a different brand in order to switch. While some businesses may have to replace equipment if they switch brands, a business of large purchasing capacity will likely have equipment provided for them by their coffee bean supplier. The recent surge in specialty coffee brands has increased rivalry among existing firms. As companies such as Starbuck’s have grown and acquired market share, companies such as Kraft, Proctor & Gamble, and Nestle have had to increase advertising and create new specialty coffees of their own in order to compete.
“Sales of specialty coffee were $10 Billion in October of 2005 and expected to rise at a rate of 7% annually, while sales of traditional brands have been falling. ”  Over the past two years Maxwell House has seen a decline of $75 Million in supermarket sales alone. ”  Furthermore, companies like Starbuck’s have been acquiring smaller companies and thereby growing in market share and sales. This has been done to such an extent to make them comparable to big firms such as Kraft and Proctor & Gamble who compete in various markets with multiple products.
This has increased rivalry among these firms as they struggle to maintain their market share. Key Success Factors in the Coffee Industry Coffee drinkers are becoming interested in the type of coffee they drink, people who want specialty chocolates and wines want specialty coffee. Specialty coffee is label “gourmet” or “premium” coffee. The specialty coffee bean comes form rare locations and is 100% from that origin; that means no mixing with another bean. People want to know the beans country of origin and if the bean is a blend or a single-origin.
Coffee originates from a variety of places like South America, Africa, Middle and Far East, and Jamaica. The Specialty Coffee Association of America (SCAA) said people want specialty coffee because of its superior coffee, “People want things to taste good and clean and no longer want cheap coffee. ” The SCAA reported that 15% of American adults drink specialty coffee an increase from 6% points over 2000. According to Mintel International Group, saw producers who specialize in coffee rise, Procter and Gamble’s Millstone premium brand increased 37.
5% and Starbucks rose 23% between 2001 and 2003 (Chater, 2005). Along with specialty coffee is flavored coffee, which is increasing popular. Flavored coffee ranges from Cherry Vanilla with Pecans and Cashews, Orange Cappuccino, or even Hazelnut. The SCAA claims flavor coffee will continue to grow in the total market share. The Motley Fool Stock exchange reported that the 7-Eleven saw 5% of sales come from coffee products like the Slurpee with flavors Cherry Creme and Vanilla Nut. The Black Mountain Gold Coffee (BMG) offers its flavor coffee through Amazon.
com and it is their number one flavor; Cinnamon Crumb Cake-flavor coffee became so popular that Albertsons in Texas included the brand inside the store (Friedman, 2004). The United States is the largest base of coffee drinkers and the second largest importer of coffee (Packed Facts, 2003). Therefore, it is evident that coffee is popular drink. Coffee is sold in airplanes, office buildings, hotel rooms, train terminals, schools, and grocery stores. Some grocery stores even offer coffee to drink while shopping. It is good having these locations offer coffee because it stimulates more coffee being drunk and later more purchases.
It is also a good way to get non-coffee drinkers to try coffee and turn them into coffee drinkers. Coffee is sold in most stores, and even on the Internet. Having coffee sold in a variety of places ensures the consumers have easy access to purchase the product. Locations benefit by selling coffee because usually when coffee is being bought customers have a tendency to buy other products such as, milk, cream, sugar, or a mug. Numerous studies are indicting coffee can offer health benefits. It would be beneficial for the coffee industry to further these studies and use as a selling tool.
The coffee bean is a plant base food, therefore offers rich antioxidants more so than broccoli and blueberries. These antioxidants can help prevent cancers, Parkinson disease, gallstones, and used for an antidepressant. Other nutrients inside coffee like potassium, niacin, magnesium, and chlorogenic acids can possibility help reduce diabetes (McAuliffe, 2005). Cautious coffee drinkers are concerned with how coffee effects the environment and farmers. Sun-grown coffee, uses fertilizers and pesticides, and contributes to deforestation; shade-grown is grown beneath a canopy of trees while preserving the forest.
Organic coffee has increased 54% in 2005 through Nov 6, while non-organic coffee increased 8. 5%. Coffee drinkers want to be reassured that producers of coffee are treated fairly. Are farmers compensated fairly, no abuse, or child labor? Companies should be very weary of this issue because, if the source of coffee is not on good terms, if the farms are not healthy or unhappy employees than it could affect the industry in a negative way. Starbucks is a perfect example showing support to farmers by offering decent wages, and ways to help protect their asset (farms).
Starbucks as teamed with the Fair Trade Certified Coffee by offering “Coffee of the Week” to bring awareness for the Fair Trade Certified Coffee. Other companies should take notice of the Fair Trade Certified Coffee, the Fair Trade Certified Coffee ensures farmers are properly compensated, health care, and economic stability of farms (Gimbl, 2005 & Chater, 2005). Overall Industry Attractiveness In order to decide if the coffee industry presents an attractive opportunity for earning good profits, it is important to base a conclusion on several factors.
By drawing upon previous analysis of the intensity of competition, whether the impacts of the driving forces are positive or negative, the market positions of industry members as shown on the strategic group map, and also close examination of the industry’s key success factors an educated answer can be deduced. First, by examining the market size and growth potential the coffee industry presents a livelihood for over 20 million people worldwide with an estimated worldwide retail sales expected to grow by a compounded rate of 6.
9% from 2005-2010, reaching $48. 2 billion by 2010, according to The U. S. Market for Coffee and Ready-to-Drink Coffee . Competitive forces in the industry point to growth through the development of product innovation and specializing in gourmet coffee and specialty drinks. “Sales of specialty coffee were $10 Billion in October of 2005 and expected to rise at a rate of 7% annually, while sales of traditional brands have been falling. ”  This has increased rivalry among these firms as they struggle to maintain their market share.
Competitive forces are conducive to rising industry profitability as long as companies continue to offer product innovation and stay ahead of the curve when it comes to the driving forces in the industry Degree of risk and uncertainty in industry’s future encompasses many issues. Coffee drinkers are many and are seemingly very loyal to their drink. Proof being that recently the coffee supply has been exceeding its demand, which has taken even more power away from the suppliers who must compete with growers from around the world. In addition several tentative studies show positive health benefits to coffee drinkers.
With a trend in the United States to be more health conscious, the coffee industry has opportunity to capitalize on these finds. In contrast when examining the severity of problems facing the industry it is evident that although demand is growing the trend is that it is steadying off. Due to little differentiation and small increase in the price of coffee since 1996, companies have been forced to focus on increased product differentiation in areas such as specialty coffees; however, that too is steadying off in growth over the past couple of years.
Possible strategic issues include customers increasingly loyal to certain brands, which possibly make it more difficult for smaller coffee companies to edge into large consumer base. Also coffee companies need to consider the growing demand of consumers in the ethical treatment of coffee workers and focus their attention to a coffee drinker who looks to drink it for its benefits and special offering in taste. Ultimately when drawing conclusions about the attractiveness of an industry, the perspective is important. It depends on the scope and breadth of a particular company.
The attractiveness of the opportunities an industry presents depends heavily on whether a company has the resources and the competitive capabilities to secure them. A standard judgment of if an industry is profitable is if the industry’s overall profit prospects are above average, the industry environment is basically attractive; if industry profit prospects are below average, conditions are unattractive (Strickland III et al, 2004). However this analysis of the industry shows that the coffee industry has a strong future and to the right players offers an attractive business opportunity.
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