Opportunities for Caf in the UK Coffee Market

Market Profile submitted as part requirement for the B.A. degree in [International Business.] at the University of Worcester.

By Alexandra Sanchez-Havard 5/17/2012

Abstract
Since the introduction of the first coffee shop chains in the UK British consumers have developed a greater taste for coffee and a coffee culture. Coffee drinking is becoming very popular and consumers are getting more knowledgeable about coffee and more demanding. The Gourmet coffee market in Britain is currently booming as coffee connoisseurs are seeking more for premium coffee. The UK coffee market is split into in-home and out-home coffee (coffee shop) market and more branded coffee shops are starting to enter the in-home coffee market. The UK coffee shop market is likewise on high, with constantly growing sales despite of the economic downturn, it has shown incredible resilience. Visiting coffee shops has become part of British lifestyle. However, it has been identified that there are a number of challenges that the branded coffee shop chains are currently facing in the coffee industry. The biggest challenge is the increasing competition of non-specialist operators (e.g. quick service restaurants, pub chains, department store cafes, supermarket cafes, etc.) who are trying to replicate the coffee shop experience, with the improved quality of their hot drink range. Coffee shops are therefore in danger of losing their Unique Selling Proposition (USP), as it is getting more difficult for them to differentiate themselves from the competition. Although the UK coffee shop market is very mature and
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highly competitive market, there is still more room for newcomers. For example the Colombian coffee chain Juan Valdez is attempting to expand globally through franchising and is looking for new

opportunities within the European Market. The UK bears potential for Juan Valdez to introduce its premium instant coffee in the in-home coffee market. However, due to the intense competition it would be a challenge for any newcomer to built reputation and gain competitive advantage.

Table of Contents
Abstract Table of Contents Acknowledgements Introduction.................................................................................................... 6 The In-home Coffee Market............................................................................8 The Coffee-Shop Market .............................................................................. 17 Competitive Analysis.................................................................................... 26 Analysis of the external environment of coffee shops.................................45 Juan Valdez Colombia................................................................................... 53 Conclusion.................................................................................................... 58 Costa Coffee Club Card (2012) [Online]. Available from: http://www.clubcard.info/loyalty-cards/costa-coffee-club [Accessed 2nd May 2012]............................................................................................................ 62 International Trade Center (2012) Exporters: The Coffee Guide. [Online]. Available from: http://www.intracen.org/coffee-guide/the-markets-forcoffee/Tariffs-and-taxes/ [Accessed 2nd May 2012].....................................64 JD Wetherspoon plc (2010) Annual Report and Accounts 2010. [Online]. Available from: http://www.jdwetherspoon.co.uk/home/investors/financereports/final-annual-report-2010.pdf [Accessed 2nd May 2012]..................64 King, M. (23 September 2011) Store Wars: Caff Nero and Starbucks. The Guardian. [Online]. Available from:

http://www.guardian.co.uk/money/blog/poll/2011/sep/23/store-wars-caffenero-starbucks [Accessed 2nd May 2012]....................................................64 Lowery, A. (2012) UK economy is back in recession', claims global thinktank. [Online]. Available from: http://www.thisismoney.co.uk/money/news/article-2122099/OECD-forecastUK-economy-recession-claims-global-think-tank.html#ixzz1v7P9Lkyj [Accessed 18th April 2012]..........................................................................65 Lucas, L. (Friday 2nd March 2012) Starbucks to revitalise European stores. Financial Times. [Online]. Available from: http://www.ft.com/cms/s/0/87cdc578-63c1-11e1-968600144feabdc0.html#axzz1uECWtPhX [Accessed 2nd May 2012]................65 Manson, E. (23rd May 2007) UK coffee market set to double over the next 10 years. [Online]. Available from: http://www.caterersearch.com/Articles/24/05/2007/313851/UK-coffeemarket-set-to-double-over-the-next-10-years.htm [Accessed 28th April 2012]............................................................................................................ 65 Oxlade, A. (2012) Economy watch: What caused the return to recession and how long will it last? [Online]. Available from: http://www.thisismoney.co.uk/money/news/article-1616085/Economy-watchHow-long-Britains-recession-last.html#ixzz1v7QNzNsN [Accessed 18th April 2012]............................................................................................................ 66 Starbucks (2012) My Starbucks Rewards [Online]. Available from: http://starbucks.co.uk/card/rewards [Accessed 2nd May 2012]...................66 Wood, Z. (Wednesday 2nd March 2011) Whitbread acquires Coffee Nation in 60m deal. The Guardian. [Online] Available from: http://www.guardian.co.uk/business/2011/mar/02/whitbread-fooddrinks [Accessed 30th April 2012]..........................................................................67

Introduction
This is a study of the UK coffee market with focus on the coffee shop market. The aim of this study is to analyse the UK coffee market in order to find out changes and trends of coffee drinking and visiting coffee shops in the UK. Consequently, after analysing the UK coffee market, the question whether there are any opportunities for newcomers to enter a crowded and highly competitive market like the UK market is, can be answered. As an example for a newcomer the Colombian coffee chain Juan Valdez will be used in this connection. The first chapter of this study will give an overview of the in-home coffee market in the UK, which shows the trends in general of coffee drinking and the market size and growth. This chapter is essential as the context for the coffee shop market. Our main chapter will be the coffee shop market, which will be analysed in more detail and will lead to the answer to our question. At first we will have an overview in the market size and growth of the UK coffee shop market, market segmentation and consumer behaviour. Marketing tools like Porters five Forces and the Positioning Map will help us to identify the competition and their position in the coffee shop industry. In order to identify possible opportunities or threats for newcomers in the UK coffee shop market the external environment of coffee shops will be scanned with the help of the PEST-Analysis. The
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last chapter will give an example of a potential newcomer into the UK coffee market. The Colombian coffee chain Juan Valdez has already expanded across Latina America and has a few coffee outlets in the USA. Now the coffee chain is planning to expand across Europe. The question in relation to this study is to find out if there any opportunities for Juan Valdez to enter the UK coffee market and if it can keep up with the increasing competition.

The In-home Coffee Market

1.1 Introduction
Coffee is the second most traded commodity in the world after oil and is worth billions in annual revenue. It is also one of the most popular drinks worldwide with a consumption of about two billion cups daily (Franchise Direct 2012). Its importance to the economy and politics of many developing countries can never be underestimated. The whole business involved with coffee provides employment for millions of people around the world. Coffee exports make up an enormous share of the export earnings for many of the worlds least developed countries. The two most important exchanges in regards to coffee beans are London and New York. (International Coffee Organization 2012) This chapter will give an overview about the current situation and trends of the in-home coffee market, as a basis for understanding the UKs coffee drinking culture. This is essential for the analysis of the UK coffee shop market and for the identification of opportunities for newcomers to enter the market. The information gathered in this chapter is mainly from research carried out by Mintel Intelligence 2010, but also from different new articles and business journals.

1.2 Facts and Figures

According to Franchise Direct UK (2012), people in the UK drink approximately 70 million cups of coffee a day and it is therefore the nation's third-favourite non-alcoholic beverage, consumed by 70% of adults compared with 83% for tea and 81% for fruit juice (Manson 2007). Furthermore, research from Mintel (2010) have found out that coffee drinking is becoming more sophisticated and consumers are seeking more frequently after posh coffee, such as roast, ground, instant premium and super-premium. The demand for higher quality coffee has consequently boosted sales of coffee in the UK, reported Mintel (2010). The increased demand of premium coffee as well as the hike in raw coffee and production costs has led to a 17% growth in value in the UK market for in-home coffee, over the period between 2005 and 2009. Mintel also adds that the inhome coffee market has benefitted from the economic downturn and the price increase in the UK, as consumers are trying to replicate the coffee shop experience at an in-home price. In 2010, the in-home coffee market in general was worth, as per Mintel (2011a) 55.3 million kg in volume sales and 831 million value sales and it was forecasted to grow by 25%, hitting the 976 million mark, predicted by 2014. With a market share of 71% and sales of 670 million in 2010 instant coffee remains the Britains favourite in-home coffee type
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(Mintel 2011a). In an article from Food Navigator, from 17th May 2004, Chris Jones claims that the British are the biggest consumers of instant coffee in Europe, driven by the desire for speed and convenience. Figure 1 gives an overview of the different types of coffee consumed by adults over 16 years in 2011 in the UK.

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Figure 1

UK consumption of coffee, February 2011 %Instant coffee71Ground coffee36Any branded 24Any supermarket own-label20Instant cappuccinos/latte/mocha coffee17Any fair trade16Any decaffeinated15Coffee pods (e.g. Nespresso, Tassimo, Dolce Gusto, Senseo) 10Coffee beans9Chilled ready-to-drink coffee3Have drunk coffee out of home but not in home 2

However, Mintels research in

Source: Mintel Coffe UK 2011

2010

have more

shown

that

the

traditional

cup

of

coffee

has

become

sophisticated than ever before, as consumers tend to seek more frequently for roast, ground, instant premium and super-premium coffee. Sales of roast or ground coffee (149 million) account for 19%, which is an increase of 49% between 2005 and 2009. Sales of premium (freeze-dried) coffee rose 44% over the same 5 year period,
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valued at 201 million in 2009, accounting for 36% of the total instant value sales. Sales of speciality coffee, like decaffeinated coffee, have witnessed an 8% decline in the past year, accounting for 11% (62 million) of instant sales in 2009. With regard to coffee sales as a whole, it has been observed that the trend of Fairtrade coffee is becoming the norm in the UK coffee market (in-home and coffee shop market) as more of the major coffee retailers and coffee shop brands are switching their supply to Fairtrade sources. Fairtrade Coffee was worth 41 million in 2009, accounting for around 5% of total coffee sales (Mintel 2010). Having discussed the latest trends in coffee consumption in the UK inhome coffee market, which is highlighted by the growth in the sector with particular focus on premium products, despite wider economic uncertainty, we will now focus in the next chapter on the individual segments and their attractiveness within the in-home coffee market.

1.3 Segmentation of the In-home Coffee Market

According to Mintels research 2010, the biggest consumer group of coffee in the UK represent the over 55s, which has been seen as a powerful buying group. However, there is a crucial proportion of drinkers among the young consumers which the coffee market is at
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risk of losing if they dont develop a taste for coffee. Moreover, it has been discovered that the turning point for coffee drinking is at the age of 35, where a considerable coffee consumption increase has been observed, amongst the 35 to 44 years-old and steadily after. As per Mintel 2010, only 39% of the consumers aged 25 to 34 and 17% of the 16 to 24 year olds drink coffee which they make at work, compared to 50% of those aged 35 to 44. Meanwhile, 33% of the 16 to 24 year olds and 57% of those aged 25 to 34 drink coffee at home, this compares to three quarters (75%) of those aged 35 to 44 years old. The problem with the younger generation is that they dont drink instant coffee, which is the largest part of the in-home coffee market. For that reason big coffee brands have to strive more to make coffee more appealing to young people. Another consumer group that the industry is also concerned about, are the over 65s. The coffee consumption of this age group falls from 13.4 cups per week to 11.9 cups as soon as they reach 65, which is worth millions of pounds as they account for a fifth of the adult population. As many older people fear the reputation of coffee increasing health risks, Mintel (2010) suggests that brands could promote the recently discovered health benefits of coffee or develop healthier brand extensions to prevent this consumer group from falling out of the market. Although, for a long time coffee was considered to be unhealthy, new studies have
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surprisingly found out that if consuming in moderation, it would actually have some health benefits. An article from the Harvard Medical School (2006) reports that coffee reduces the likelihood of developing diabetes, which can lead to heart disease, and lowers the rates of certain cancers. As the percentage of instant coffee consumption in the UK remains high, some branded coffee shops have started to offer instant coffee in supermarkets. With its brand Via Instant Starbucks has been

selling coffee in the supermarkets since 2011. Now Costa Coffee is beginning to sell its coffee and other products in supermarkets as well, in a move to take on rival Starbucks on retailer aisles, claims John Reynolds in an article dated 11 th April 2012 on the Brand Republic website. Mintel (2010) claims that by focusing on youthtarget products, Starbucks and Costa could have the opportunity to enter the in-home coffee market much more aggressively than is currently the case. In terms of the quality of in-home coffee, a quarter of 16-24 year old drinkers believe that branded coffee shops make better coffee than the established supermarket brands like Nescafe and Kenco (Mintel 2011a). Another opportunity for coffee brands is to target consumers with busy lifestyles. Mintel (2011a) suggests that coffee brands could do more to promote the energy-giving benefits of coffee, as only less
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than half (47%) of in-home drinkers would agree that coffee provides a welcome energy boost. This fact has been one of the key reasons to the growth of energy/sports drinks into a billion pound market. Sarah Labdar claims in an article from the website Articlebase, in October 2011 that coffee is a natural stimulant, containing caffeine, which would boost the body's metabolism giving the consumer more energy and spirits uplifting. Despite the rising growth and trend in coffee consumption, there are still some issues the coffee market is currently facing. This will be discussed in the following chapter, where some of those issues will be highlighted.

1.4 Issues in the UK Coffee Market

As per Mintel 2010, the rising cost of the coffee beans has been a problem for the UK market since 2005. One of the reasons for the price increase is the fact that wealthy developing countries such as China and Russia are increasing their imports of the higher-quality Arabica beans, which is pushing up the prices as a result. During the recession in 2009, the price of coffee imports rose to their highest level in the UK since 1998, leading automatically to a price increase in the end product, claimed Jonny Forsyth, Senior Drinks
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Analyst of Mintel Report 2011. He also adds that the unfavourable weather conditions during that period, in one of the key countries, Colombia, did not help. Moreover, he forecasts that the price rise of the Arabica bean, as well as the high cost of transport and utilities, would almost certainly lead to another price increase in 2011. In order to maintain their 2010 price points, UK coffee makers used up the majority of their pre-existing coffee stocks. This is a challenging time for coffee producers and coffee brands, as inflation in the UK is still high (reported by Bank of England in an article from The Guardian, appeared on 18 th April 2012) and there is the prospect of interest rates rising, which means that consumer incomes are more stretched this year than has been the case over the past three years.

1.5 Conclusion
It is surprising that despite the economic downturn and the price increase in coffee, the demand for coffee is still growing, in particular the demand for premium coffee. This shows that British consumers have developed a taste for coffee and are more knowledgeable about the product. Coffee is seen as an affordable treat, what makes consumers less price sensitive. As a result branded coffee shops are
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now entering the in-home coffee market with premium instant coffee and other products, in order to target those consumers who are trying to replicate the coffee shop experience at home. This could be an opportunity for branded coffee shops to make more effort in targeting those younger consumers, who dont drink instant coffee, as they believe that branded coffee shops offer better quality products. This chapter gave us an insight of the coffee drinking behaviour of UK consumers, which is important to understand in order to analyse the coffee shop market, which will be done in more detail in the next chapter.

The Coffee-Shop Market

1.6 Introduction
There has been an explosion of coffee shops on the UK High Streets over the last few years. According to a research released by Costa Coffee in the Eat Out Magazine, on 14 th November 2008, coffee shops have officially overtaken pubs as the UKs favourite social hang outs, with 72% of the population preferring coffee shops for catch ups. John Derkach, managing director of Costa Coffee commented on the research findings:
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"It is quite clear that UK coffee shops have become an integral part of everyday life. With their warm and welcoming environments, they are quite simply the perfect place to meet friends and enjoy an affordable luxury whilst taking a break from our hectic lifestyles." Given this fact, we will analyze in this chapter at first the current situation of the coffee shop market in the UK, under consideration of the current economic downturn and based on secondary data gathered from Mintel, Allegra and other sources. Next we will carry out a competitive analysis of the UK coffee shop market, using the following tools: Porters five forces, Brand Positioning Map and SWOTAnalysis (Opportunities & Threats).

1.7 Facts and Figures

Allegra (2010a), a strategic research consultancy, found out in a research released on the 17th December 2010 that the recession in the UK has not materially affected the visiting frequency of UK coffeeshops. With a 5.0 billion annual turnover and 14,022 outlets in 2010, including branded chains, independents and non-specialist operators, the coffee shop market in the UK is still in the boom. Many people in the UK see visiting coffee shops as an affordable regular treat that would not stretch their budget too much.
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Anya Gascoine Marco (head of food and beverage insight at Allegra) was cited in the Independent on 18th December 2010: Coffee has become an Integral part of the fabric of the British way of life. Coffee is almost like lipstick. You want something in your life that is a treat and makes you feel better. In another consumer research carried out by Allegra (2010b), in December 2009 consumers admitted that going to coffee shops is either habitual or an important treat, that they would not give up. As per Mintel (2011b) only 9% of the coffee consumers had drunk more coffee at home since the start of the recession in order to save money. Furthermore, Mintel (2011b) reports that around 57% of consumers now use coffee shops, with amongst them 47% sitting in and only 8% buy take-away coffee. Usage has only minimally increased in recent years, with a rate of sit-in growing faster than takeaway. Costa Coffee is the largest and most popular coffee shop in the UK with 1,069 outlets in 2010 and 27% visits of the population aged 15+, compared to Starbucks with 23% and 700 outlets and Caff Nero with 12% and 400 outlets.

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The Independent (2010), a British Newspaper, refers to Allegras report Project Caf10 UK, a definitive annual study of the UK coffee shop market where impressive sales growth of 12.9% in 2010 by the branded coffee shop segment (including Costa, Starbucks, Caff Nero and Pret A Manger) have been exposed, exceeding 1.94 billion in revenue. Jeffrey Young the Managing Director of Allegra Strategies was cited in the Independent on December 18th 2010: I have never seen such exciting developments in the UK coffee shop market. This year the market grew by more than 12% compared to 2.5% for the UK retail sector, adding more than 800 outlets in 2010 in challenging economic times. With increasing quality of coffee, better environments from both chains and independents and greater consumer appreciation of coffee and coffee houses, the market is poised for significant further growth over the next 3-5 years. In 2010 the branded coffee shop segment in the UK was estimated at 4,650 outlets with growth stable at 6.1%. Further on, Allegra (2010) adds that branded coffee chains, including coffee-focused and foodfocused operators would account for 33% of outlets and 39% of total market revenue. However, with the increasing number of value-driven non-specialists
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like McDonalds and JD Wetherspoon, department store cafes and motorway forecourt operators and high quality artisanal

independents, the established coffee chains are now facing pressure on quality and price. Together these have added 468 outlets, accounting for 54% of overall outlet growth in 2010 (Allegra 2010a).

1.8 Market Segmentation

According to a research carried out by Mintel in December 2010 with adults aged over 15, coffee shop users in general tend to be more women (62.8%) and they are also those who most likely would sit in, compared to men (54.5%), who tend to take away. Age is also an important factor that affects the usage of coffee shops. For example those who sit in (predominantly women) tend to be older consumers and third age/retired or part-time worker, whilst takeaway drinkers (predominantly men) tend to be aged 15-34, single in full-time work (Mintel 2011b). Segmentation by Age however, depends on the age group a coffee shop retailer (specially the branded ones) is trying to target. In general, the biggest usage of coffee shops in the UK is in Greater London and consumers tend to be split between younger pre-/no family consumers and older retired consumers.
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However, Mintel (2011b) also reports that coffee shops are arguably failing to engage with older consumers. These consumers tend to be over-55s, socio-economic group D, Moderate Means, third age single/retired single and those are the 7% of the consumers who do drink hot drinks, but havent had in the last three months, when the research was carried out in December 2010. In this connection it is also reported that there is a small percentage (17%) of consumers who do not drink tea/coffee/other hot drinks out of home at all. These consumers are more likely to be men, over-75s, socio-economic group E, Hard Pressed, however, this has been also observed amongst families, particularly with children aged 10-15. The reason why this older consumer group is overlooked, as per Mintel (2011b) is that the older generation may struggle to engage with the selection of fancy coffees and may prefer a simpler product range. There is a small percentage of another consumer group that is also causing concern to the coffee shop market, this is the younger generation, aged 15-34, pre/no family/family, socio-economic group E. Those consumers (around 7%) do not drink tea/coffee/other hot drinks at all. They would choose to go to alternate venues such as Pret A Manger and Eat, where they will be offered a wider range of cold drinks than in coffee shops. The challenge here is to create a USP to
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attract these consumers into coffee shops instead. In order to be able to find out how to attract consumers to visit a coffee shop, it is essential to investigate the reasons why consumers visit coffee shops and what persuades them to choose one venue over the other, which will be discussed in the next chapter.

1.9 Consumer Behaviour

Based on a nationally representative survey amongst 1,962 adults aged 15+ in December 2010, Mintel (2011b) has analysed consumer behaviour in the UK coffee shops, as follows: What do consumers order in coffee shops? Drinks

50% of those consumers who have visited a coffee shop in the last 3 months (from the date, when the research was carried out) have ordered cappuccinos, lattes and mochas; those products are the most popular hot drinks of UK coffee shops, followed by 26% choosing hot chocolate, 25% filter coffee and 24% traditional tea (e.g. English breakfast tea). Espresso, Espresso Machiatto and Americano are less popular, chosen by only 16% of coffee drinkers. Only 4-6% of consumers tend to choose drinks such as herbal tea, decaf tea/coffee,
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speciality tea (eg Earl Grey, Chai) or iced coffee/tea. Whilst, cold drinks are slightly more popular they still represent only a small section of sales: 12% of diners have chosen soft drinks such as water or juice, whilst 9% have chosen pure fruit juice/smoothies. Food

Sandwiches, baguettes and paninis are most popular amongst younger consumers. Around a quarter have ordered one of those products in a coffee shop in the last three months, whilst 22% who have ordered a cake/pastry/biscuit are aged 35-44. However, according to Allegra (2011a), consumers have reduced their food purchases in coffee shops from 71% in 2010 to 69% in 2011, in order to save money. Enticements for visiting coffee shops

One of the consumers main reasons for choosing one venue over another is the number of comfortable seats available in a coffee shop. This is one of the most important enticements that will attract and persuade a customer to stay, over other coffee shops. Consumers preoccupation seems also to be more with Interiors and design, rather than suggesting menus as they are already extensive enough, although more hot food options do seem to appeal. Other popular enticements which in particular branded coffee shops
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are now focusing more on, in order to increase customer loyalty are, free newspapers, magazines, books, free Wi-Fi and loyalty/reward schemes. Overall, the biggest drive of the consumers decision to chose one coffee shop over another is the experience. Furthermore, Mintels consumer research shows that younger

consumers are potentially easier to target with pre-/no families interested in hot food options, free Wi-Fi, loyalty cards, speciality teas, in-house entertainment, low-calorie products, smoothies and flavoured syrups. While on the other side, the older and retired are the least easy to influence and families are the ones demanding more comfortable seating and free magazines/newspapers. From these investigations we conclude that in a growing market, like the coffee shop market it is important for coffee shops to focus on a specific target group, as it is very difficult to please everyone. However, as the competition is growing with non-specialists trying to copy the success of coffee shops, more branded coffee shop retailers are attempting to expand into other segments in order to keep their USP. In this context it is crucial to identify the competition in order to achieve the optimal brand positioning, which will be analysed in the next chapter.

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Competitive Analysis
1.10 Introduction
In order to determine the long-term attractiveness of a market or market segment it is essential to identify the competition. As markets have become too competitive it is not enough anymore to focus on the consumer alone (Kotler et al. 2009). Competition within the coffee shop industry grows more intense every year and players are seeking for new strategies to secure their competitive advantage. In order to create and implement effective brand-positioning strategies

companies must pay high attention to the competition (Kotler et al. 2009). The following marketing tools will help to analyze the competition and to identify their position within the coffee shop market.

1.11 Porters 5 Forces for the UK Coffee Market

The competitive structure of the coffee shop industry can be analysed using Porters five forces, which will give a complete picture of what is

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influencing profitability in the coffee shop market and identify its attractiveness.

1. Bargaining power of buyers The force of the buyers bargaining power corresponds to the ability of buyers to force down prices, bargain for higher-quality products or more services and pit competitors against each other (Hunger and Wheelen 2000). In the coffee-shop industry a single buyer usually purchases coffee for its personal consumption and not in large volumes. Besides, the cost of buying a cup of specialty coffee does not necessarily represent a significant fraction of the buyers living costs, which makes buyers less sensitive to price fluctuation and gives players within the coffee-shop industry more control over pricing (Kotler et al. 2009). Moreover, buyers are less sensitive to price fluctuations, once customers loyalty has been built up. Therefore, it is important for the coffee retailer to build its brand around quality and service, in order to increase its customer base and customer loyalty. Individual consumers are willing to pay extra cents for good quality coffee. All

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of these factors reduce the relative bargaining power of buyers in the coffee shop industry. As more and more non-specialists are expanding their hot drink range and improving their quality, it is harder for coffee shops to differentiate themselves through quality, which leads in turn to an increase in the bargaining power of buyers (Kotler et al. 2009). Therefore it is important for the players of the coffee shop industry to stay innovative and find new Marketing Strategies to maintain their USP. Moreover, consumers are getting more knowledgeable about coffee. Through the Internet and other media they are able to access more easily information about the taste and the quality of the different coffee types on offer. In addition, customers can freely switch from one coffee brand to another, as there are no or low switching costs and there is a very large selection of retailers in the coffee-shop industry. This also increases the bargaining power of buyers (Kotler et al. 2009). Overall it can be said that the accessibility of information to the buyers has lead to an increase in the bargaining power of buyers, resulting in medium to high threat to the coffee shop market.

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2. Bargaining bower of suppliers Suppliers bargaining power can affect the industry, through the suppliers ability to raise prices or reduce quantity of the purchased goods (Kotler et al. 2009). As consumers are showing an increasing interest in sustainability of the coffee production, more and more branded coffee chains are marketing their coffee under certified schemes (Fairtrade Certified, Organic certification, Rain Alliance Forest Certified), which can be powerful tools for value addition and access to a fast-growing market segment (International Coffee Organisation). Many of the coffee producers who sell premium coffee to coffee chains are united by the various sustainability initiatives and through those initiatives they are able in unity to exert bargaining power over their buyers. The substitution for Arabica beans are the cheaper Robusta beans which are coming to a close and demand for Arabicas should start to increase, said Michael Haigh, New York-based global head of commodities research at a bank, cited in a report from Isis Almeida on the 20th March 2012, in the Blomberg Business Week. Hence, it is unlikely, that a big premium coffee retailer (e.g. Starbucks) would adopt this substitution, as the Arabica beans are the favoured ones for specialty beverages (Almeida 2002). This means that the Robusta

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coffee bean is an indirect substitute and therefore it would not decrease their bargaining power. Originally, the majority of sales made by the premium coffee farmers comprised predominantly specialty coffee retailers. As the industry is growing, more independent coffee shops and non-specialists are now also offering specialty coffee and buying it from the premium coffee farmer, which has made the relative size and importance of the organisations within the coffee-shop industry less significant to the farmers (Larson 2008). Now that there are other customers to supply, the coffee farmers are less dependent on the specialty coffee industry and its specific demand. This leads to an increase in the power of bargaining of the coffee suppliers. Coffee beans are the most important input to the brewing process of a specialty coffee retailer. As competition increases within the coffeeshop industry, the focus on differentiating products through superior quality becomes more important. For many specialty coffee

companies their success lies on their ability to produce higher quality coffee than competitors, which acts to further increase supplier bargaining power (Larson 2008). Currently, many coffee-shops are locking their coffee suppliers into long-term contracts to decrease potential price volatility. These contracts have specific terms and conditions, which place a financial burden on the coffee suppliers in
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case they would choose to supply a different company (Larson 2008). With these switching costs, resulting from the contract, the premium coffee suppliers do not have many possibilities to play buyers against each other, which decreases their bargaining power. A last component to the analysis of supplier bargaining power within the current specialty coffee industry environment is the threat of forward integration (Hunger and Wheelen 2000). In this case Colombian farmers were able to integrate forward by creating the coffee chain Juan Valdez and competing with their customers, which increases their bargaining power. Overall, the increased unity among the suppliers has led to a high threat of suppliers bargaining power.

3. Threat of substitute products Caffeinated drinks are primarily coffee, tea, soft drinks and energy drinks. The main substitute products posing a potential threat to the specialty coffee industry are soft drinks and energy drinks offered by companies such as Pepsi and Coca-Cola. However, coffee has gradually gained preference by the consumers over soft drinks because of health concerns associated with carbonated soft drinks and new evidence (from the Havard Medical School in 2006) showing
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that coffee is a relative healthy alternative.

Besides, to protect

themselves from the higher demand for cold drinks in the hot seasons, many coffee shop companies have now added a variety of cold drinks (including cold coffees) to their product range. Therefore, these substitute products pose little threat to the premium coffee industry which decreases the force created by substitute products. The threat of substitutes is therefore low. A substitute for drinking coffee in coffee shops can be drinking coffee at home. Many consumers are trying to replicate the coffee shop espresso-based beverages at home and as there are more, cheaper and better quality espresso machines offered on the market, many coffee shops have been under pressure (Allegra 2010a). However, presently this substitute does not feature a high threat, as according to Mintel (2011b) only 9% of the coffee consumers had drunk more coffee at home since the start of the recession in order to save money. Therefore it can be said that the threat of substitute products remains low.

4. Threat of new entrants

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Newcomers are threats to an established corporation, because they bring new capacity, a desire to gain market share, and substantial resources (Hunger and Wheelen 2000). The main obstructions to newcomers into any industry are the various barriers to entry. The higher the barriers to enter an existing industry are, the smaller the threat of new entrants to that industry will be (Kotler et al. 2009). One of the possible barriers to entry, are the economies of scales within the branded coffee shop industry (Hunger and Wheelen 2000). The larger coffee retailers, like Costa Coffee, Starbucks and Cafe Nero are able to acquire high economies of scale through their purchasing by negotiating long term contracts with coffee farmers and purchasing coffee beans in bulk quantities at discount prices (Larson 2008). Another possible barrier within the branded coffee shop industry is product differentiation (Hunger and Wheeler 2000), which is not any more defined by the coffee taste, store convenience and prices but rather by the store ambience, the companies social responsibility and the brand identification. Many of the leading coffee retailers have developed a very loyal customer base resulting from previous advertisements, customer services, product differentiation and early entry into the industry, which makes it more difficult for newcomers to gain a solid customer base (Larson 2008). Moreover, as there is no large capital requirement for the coffee shop industry, it makes it easier for new coffee shops to enter the market, which has caused a
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radical increase in the number of independent coffee shops in the last few years (Allegra 2010a). However, independent coffee shops dont possess a major threat to the big branded coffee shop chains, as it is very unlikely that they would expand greatly and the effects they have singly on the overall demand in the coffee shop market are less relevant (Larson 2008). Nevertheless, there is high capital

requirement involved for big branded coffee shop chains attempting to enter the UK coffee shop market as they will have to invest a lot in marketing in order to create brand awareness and brand recognition. Lastly, as the industry matures, some branded coffee chains (e.g. Starbucks) are selling premium coffee and other products in supermarkets and online. Newcomers using this distribution strategy, though could face difficulties in obtaining supermarket shelf space for their products, because according to Wheeler (2000:p.39) larger

retailers charge for space on their shelves and give priority to the established firms, who can pay for the advertising needed to generate high customer demand. This analysis shows that there are many barriers for new companies wanting to enter the branded coffee shop market, which on the other hand it decreases the potential threat of new entrants. Since small independent coffee shops dont have a significant effect on the overall demand in the consumer market, they are not a real threat for
34

the branded coffee shops. Overall it can be said that as there are more demanding barriers to enter the coffee industry, the threat of potential new entrants is low.

5. Threat of intense segment rivalry Increasing competition is one of the coffee shop industrys greatest threats. The coffee shop market in the UK is a very mature and high competitive market. The UK is the most developed branded coffee shop market with 4,871 outlets and represents 41% of the total European market (Allegra 2011b). In the last few years the number of non-specialists, who are trying to copy the success of the specialty coffee shop market, has intensively increased. According to Allegra (2010a) these non-specialists,

together with department store cafs and motorway and forecourt operators, accounted 54% of overall outlet growth in 2010 and are the main driver of total outlet growth in the UK coffee industry. Amongst the non-specialist operators are in-store restaurants in shops and supermarkets, sandwich shops, fast food outlets and pubs. For example in September 2010 the McDonalds fast food chain launched a full bean espresso for 79p (Mintel 2011b). In the same month the
35

company had seen a rise in the number of coffee cups sold by 39% over a period of two years, since the reintroduction of the coffee range in 2007 (Mintel 2011b). Some of its growth was attributed to a focus on sustainability and fair trade sourcing. It was also reported that McDonalds is now the biggest seller of coffee in Britain, selling 84 million cups of coffee in 2010 (with Costa, Tesco, Caffee Nero and Starbucks following in consecutive order). In 2010 Pret A Manger, a British sandwich chain, launched the flat white and in October of the same year an article in the Guardian confirmed that coffee accounted for 20% of the companys sales (compared to 20-25% of sandwiches, baguettes and bloomers sales) (Mintel 2011b). The pub and

restaurant JD Wetherspoon is another non-specialist operator that increased its coffee sells up to 40% with 600,000 coffees sold each week in 2010 (JD Wetherspoon 2010). The company also claims to be worldwide the number one seller of Tierra, Lavazzas Rainforest Alliance Certified sustainable coffee and recently it became the only pub company to be made an honorary lifetime member by the Rainforest Alliance (JD Wetherspoon 2010). However, the three leading players within the UK coffee-shop industry are Costa Coffee, Starbucks Coffee Company and Cafe Neros. These three top branded chains compete directly against each other and have a combined market share of 52% (Allegra 2011a).

36

Costa Coffee

With 1,342 outlets and an estimated 531 million annual turnover in 2011, Costa Coffee continues being the coffee shop leader and the largest coffee chain in the UK branded coffee shop market (Allegra 2011a). With 27% visits it is also the most popular coffee shop in the UK, followed by Starbucks (23%) and then Caff Nero (12%). The company was found in London in 1971 and now is a subsidiary of the leisure group, Whitbread PLC (Whitbread 2010). Costa Coffees image of social responsibility has been promoted by using only coffee beans from certified farms by the Rainforest Alliance, the use of recyclable coffee cups and energy-efficient coffee machines (Mintel 2011b). Furthermore, the company helps with the improvement of coffee-growing communities in developing nations through its Costa Foundation. Costa Coffee claims to differentiate itself from its competitors through its coffee beans blend called Mocha Italia (Mintel 2011b). Due to the rising number of non-specialists, the pressure to compete in the market is increasing and like many other coffee brands Costa Coffee is now focusing more on marketing and advertising. In October 2010 the company launched its first TV advert with the campaign Monkeys and Typewriters which aimed to demonstrate the brands skill in coffee making (Mintel 2011b). Starbucks
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The Starbucks Corporation is the largest coffee shop chain in the world. The international coffeehouse company, based in Seattle, entered the UK market for the first time in 1998, 27 years after Costa Coffee was founded (Mintel 2011b). With regard of brand awareness Starbucks (93%) is the most recognised coffee shop brand in the UK, followed by Costa Coffee (92%) and Cafe Nero (84%), according to Allegras Report, published at the close of 2009 (Allegra 2010b). However, with 742 shops in 2011 in the UK the coffee giant is way behind Costas 1,342. The Guardian News and Media Ltd reported that Starbucks losses in Britain in the year 2010 had grown to almost 10 million, closing 45 stores in October 2010 in order to save margins. The company accounts the loss to the economic downturn, unfavourable media coverage and increased market competition. The Guardian also adds that Starbucks has been losing ground to its rival and strongly performing Costa Coffee. In order to acquire more market share in the UK the Independent reported in an article appeared on the 18th June 2011 that Starbucks was planning to spend 24 million pounds to refurbish 100 stores a year to adapt them to the needs of their neighbourhoods. Over the next five years the coffee retailer is opening 300 new outlets in the UK, and Starbucks lattes could soon be available on planes and trains across the UK, and through vending machines (Lucas 2012). Another newspaper reported that out of the 300 new outlets Starbucks 200 will be drive-thrus
38

(Channel 4 News 2012). Caff Nero Group Ltd. was founded by Gerry Ford in London in 1997 (Caff Nero 2012). Gerry wanted to bring an authentically Italian-style Cafe to Great Britain; serving premium espresso based coffee, fresh high quality food and to become a neighbourhood gathering spot. By the end of 2001, Caff Nero joined the London Stock Exchange and with 80 outlets in 24 different cities, it became the largest publicly listed coffee house in the UK. In 2008, the company began to expand internationally, entering new markets in Turkey and the Middle East. With 50 new stores opened in 2011, the company now operates a total of 490 outlets in the UK and has achieved 57 consecutive quarters of like-for-like sales growth in 2011 (Allegra 2011a). Besides, in 2009 Allegra reported that it was Caffe Nero who were ranked highest overall by Key Performance Indicators. In seven out of 10 KPIs (coffee quality, atmosphere, value for money, speed of service, friendly service, food quality and cleanliness) the coffee chain achieved the first place, whereas Starbucks was ranked first in three out of 10 KPIs (ethical, practices, convenient location and food choice). Caff Nero claims to use a special blend of seven coffee bean varieties for its espresso-based coffee, a portion of which is obtained from sustainable farms (Mintel 2011b). In addition, the coffee shop
39

chain also offers iced coffee drinks and a food selection. To appeal to health-conscious individuals, the company states that it uses natural ingredients with minimum additives and colorants (Mintel 2011b). In order to keep regular customers interested, Caff Nero offers seasonal and monthly specials. According to Mintels researches (2011b), another trend and at the same time another threat that the coffee shop market is facing, are the home coffee-making systems and coffee vending machines which also creates competition to coffee shops. Coffee Nation is the leading provider of self-serve gourmet coffee bars to garage forecourts and motorway service areas (Mintel 2011b). The company operates 65% of its business through its partners, selling over 1.8 million cups of coffee a month. (Coffee Nation 2010). According to the Guardian (2nd March 2011), Coffee Nation has been acquired by the Hotel and restaurant group Whitbread, who owns the Costa Coffee chain, in a 60 million deal. In this highly competitive environment the importance of customer loyalty is crucial (Kotler et al. 2009). This has urged coffee companies to be more innovative and to invest more money in implementing reward programmes. For example, Costa has introduced a Costa Club card that allows customers to collect points for every pound spent and then exchange them for free food or drink in store (clubcard.info
40

2012). Starbucks operates a Starbucks Card which can be charged with money. Customers will receive one star every time they pay with their Starbucks Card. Rewards vary from a free drink to free extra shots, free select syrups and many other benefits. (Starbucks 2012). Caff Neros loyalty card is a simple stamp card (King 2012). For every cup of coffee purchased customers get a stamp. Nine stamps entitle loyalty-card holders to a free coffee. In summary it can be said that due its intense rivalry, the segment for out-home coffee is becoming less attractive, as it is getting more difficult for coffee shops to differentiate themselves from the growing competition, offering specialty coffee and the fact that many coffee shops are therefore risking to lose their USP (Unique Selling Proposition). From this force can be concluded that as the intensity created by industry rivalry is high, branded players within the coffee shop sector are urged to continue to proactively respond to consumer demands in order to retain leadership.

1.12 Positioning Map

An important marketing tool that can be used to plot the position of a brand against the competition is the positioning map (Kotler et al.
41

2009). In order to maximise the potential benefit to a company it is highly recommended to establish a distinctive place for their brand in the minds of consumers. In this connection the company has to identify characteristics that are important to the potential/ actual customer (Bournemouth University 2012). Two of those

characteristics can be selected and based on two dimensions the brands can be plotted as the examples in Figure 2. The aim of this tool is to find out spot gaps in the marketplace and identify if the coffee retailer is launching into a crowded marketplace. It also helps to identify the closest competitors and to find out, which are the most important criteria customers' use when 'positioning' different brands in their mind. The following brand map will illustrate how the three leading branded coffee shops Starbucks, Costa Coffee and Nero are positioned against the two biggest non-specialists McDonalds and Whetherspoons and the independent coffee shops.
High price

Figure 2

Low quality

Independent Coffee shops

High quality

Whetherspoo n

42

Low price

In figure 2 the positioning map is suggesting that two of the important characteristics used by consumers, when making judgements in this marketplace are based on the coffee quality and the coffee price. Starbucks and Costa Coffee are revealed as high quality and high price. Cafe Nero is revealed as high quality, but relatively cheaper than Starbucks and Costa. Independent coffee shops and Nonspecialists, such as McDonalds and JD Whetherspoons are offering good value for money coffee, but lower quality. This map shows that there is still space for new entrants to offer specialty coffee for a lower price than the big leaders.

1.13 Conclusion
The analysis of porters five competitive forces gives us a complete picture of what influences profitability in the coffee shop industry. Porter et al. (2008) suggests, to build defences against the competitive forces. In this case branded coffee shops can come against the force of buyers bargaining power by developing new
43

distribution strategies that will enable them to offer better value specialty coffee, for example like Starbucks is planning to do by selling its coffees through vending machines. In order to come against the increased threat of suppliers bargaining power, many branded coffee shops are trying to lock their coffee suppliers into long-term contracts, to ensure a fixed coffee price. The force of substitute products has decreased as consumers are unlikely to directly substitute coffee for caffeinated soft drinks. As the number of entry barriers in the branded coffee shop segment has increased, it has lowered the threat of new entrants. Finally, in order to come against the force of high/intense rivalry within the coffee shop industry branded players have to focus more on marketing and advertising, reward programs and stay innovative. The positioning map in connection with the competitor analysis shows that coffee quality is not anymore sufficient for branded coffee shops to differentiate themselves from the increasing competition. They now have to focus more in providing a better store ambience, with more comfortable seats and a relaxed atmosphere. Starbucks for example has planned to refurbish 100 of its coffee shops. Having analysed the competitive environment of the coffee shop industry we will now focus on its external environment.

44

Analysis of the external environment of coffee shops

1.14 Introduction
Changes in the external environment of a company can influence decisions taken by marketing management (Kotler et al. 2009). An organization needs to be in tune with its external environment in order to be successful over the time. As a changing environment creates uncertainty, this in turn will present new opportunities or threats to a company (Hunger & Wheeler 2000). According to Hunger & Wheeler (2000) the external environment is defined by four forces (political-legal, economic, sociocultural and technological) which cannot be controlled by the company, but can influence its long-run decisions. In this chapter, we will analyze the coffee shops environment, with the help of the PEST-Analysis and subsequent we will be able to identify opportunities and threats for the coffee shop market.

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1.15 PEST-Analysis
The PEST-Analysis is according to Hunger & Wheelen (2000) a marketing tool that helps marketers to monitor, evaluate and disseminate information from an organisations external environment in order to identify possible opportunities and threats. This tool can be used by organisations to avoid strategic surprises and to ensure longterm health. The variables of a societal environment according to Hunger & Wheelen (2000) include forces, such as political, economic, socio-cultural and technological forces. Those forces do not directly touch on the short-run activities of a company, but influence its longrun decisions (Hunger & Wheelen 2000). Therefore knowledge of the global marketing environment is from great importance to the survival of the coffee shop market, as this knowledge could be a crucial source of competitive advantage. Political-legal Factor A political factor that influences coffee shops is the taxation imposed on coffee exports and imports. This means that coffee shops would pay a higher price for the coffee they purchase and in turn pass it on the end consumers. Any fluctuations in taxation levels within the coffee industry will also lead to a price rise or decline in the coffee offered to the consumers. Tariffs and taxes are considered to be part of a broader group of legal, political and administrative barriers to
46

coffee consumption and it has been recognized that they influence coffee consumption (International Trade Centre). According to the International Coffee Agreement 2007, members of the International Coffee Organisation (ICO) have committed themselves to recognize the exceptional importance of coffee to the economies of many countries and the sustainable development of the coffee sector. Many countries where coffee is produced are mainly dependent upon this commodity, for their export earnings and for the achievement of their social and economic development goals. With this new Agreement, exporting and importing countries of coffee have agreed to undertake the removal of obstacles (such as export, import and domestic taxes (VAT)) which may hinder trade and consumption. Consequently there are no taxes on exports and imports of green caffeinated coffee by importing members, such as EU (International Coffee Council 2011). As consumers are demonstrating an increasing interest in economic, social and environmental aspects of coffee production, various sustainability initiatives, such as Fair-trade, Organic, Rainforest Alliance, have emerged and are becoming relevant to the coffee shop market.

Economic Factor

47

Britains economy is recovering from the recession that started in 2008 very slowly. In fact, as reported by Andrew Oxlade in the financial website This is Money, it looks like the UK economy is back in recession. According to Oxlade, GDP dropped 0.3% in the last quarter of 2011, resulting in a total economy growth of paltry 0.8% for the full year, worse than the below-par 2.1% expansion in 2010. Oxlade also adds that if the economy shrinks again in the first three months of 2012, Britain will experience the first double-dip recession since 1975. According to Oxlade, the official definition of a double-dip recession is when recession returns before the economys even grown back to the size it was before the downturn began. However, Allegra Strategies declares in its press release Project Cafe11 UK that despite the recession the UK branded coffee shop market had shown incredible resilience, with growing sales by 10% to an estimated turnover of 2.1 billion with the market doubling since 2005. The recession has not affected the visiting frequency of consumers, with 1 in 10 UK adults now visiting coffee shops daily. As the coffee culture is becoming more and more engrained through the UK, coffee shops can expect to outperform the retail sector. Nevertheless, the fact that a number of weaker operators (BBs Coffee & Muffins, Coffee Republic, OBriens and Tchibo) failed during 2009, should not be left disregarded. This highlights the importance of strong brands and operational excellence (Allegra 2009). Moreover,
48

as the branded coffee shop market is expanding with a total of 1,342 new outlets, it is creating new jobs and boosting the economy (Allegra 2011a).

Sociocultural Factor Consumer lifestyle in the UK is moving more and more towards a hectic lifestyle, which is creating a positive influence on the coffee shop market. The need for coffee as stimulant and visiting coffee shops as convenience, but also as an affordable treat, where consumers can relax, boosts coffeehouse market among skilled workers, young and professional with no family. As visiting coffee shops has become a well established habit amongst consumers, many people are seeing it now as an affordable regular treat, which is also driven by consumers continuing demand for convenience products (Mintel 2011b).

49

Technological Factor As more high quality espresso machines are being offered on the market, more branded coffee shops are coming under increasing pressure to provide an authentic experience that cannot be replicated in the home (Allegra 2010). As the trends in global application development and social

networking, is exceptionally increasing, Allegra (2010) predicts that many outlets will launch and use those marketing tools over the next 1-2 years.

1.16 Opportunities and Threats in the UK Coffee Shop Market

Opportunities

As British lifestyle is becoming more busy and hectic, consumers are seeking more and more for convenience products and products that increase alertness or give an energy boost.

As it is getting harder for coffee shops to differentiate themselves from the increasing competition, they are required to stay innovative. Tea brands are marketing speciality and herbal teas based on functionality and matching consumer moods. This could
50

be taken as an inspiration by coffee shops.

As the trend in global application development and social networking is exceptionally increasing coffee shops will have more opportunities to use those channels as marketing communication tools.

Positive

health

messages

around

coffee

are

encouraging

consumers to drink coffee without worrying about negative health effects.

The ageing population poses the opportunity to gain access to a consumer group that has been disregarded, in particular by branded coffee shops.

Growing online shopping activity provides opportunities for coffee shops to widen their product range.

Threats The unstable economy in the UK is still challenging the coffee shop market. Coffee shops are in danger of losing their USP as more and more non-specialists are focusing on expanding their hot drinks ranges and improving their product quality.
51

The desire to replicate the coffee shop experience at home is increasing the demand for high quality espresso machines and consequently threatening the coffee shop market of losing customers to the in-home coffee market.

The growing awareness of sustainability by consumers are pushing branded coffee chains to work harder to prove they are doing more social and environmental efforts than just signing up to accreditation schemes.

1.17 Conclusion
The resulted opportunities and threats from the PEST-Analysis create a new playing field in which creativity and innovation can play a major part in strategic decisions (Hunger & Wheelen 2000). Coffee shops have to keep focusing on trends in each area of their external environment. For example, although the branded coffee shop market has been resilient and is showing growth sales, players have to keep monitoring the changes in the economy, as they still influence consumers behaviour.

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Juan Valdez Colombia

1.18 Company Profile
At first Juan Valdez was just a fictional character, created by the National Federation of Coffee Growers of Colombia, who represent more than 500,000 Colombian coffee-growers. The image of the coffee grower Juan Valdez with his mule Conchita, carrying coffee beans in sacks has been used as a marketing campaign. Since 1959 this character has been promoting Colombian coffee globally, particularly in the U.S., with the goal to distinguish its 100% pure Colombian coffee beans from the coffee blend from other countries. (Juan Valdez Company Profile) With this campaign, not only a coffee brand was created, but also a country brand that represented a tranquil countryside, in a time of violence and fear (Gracia 2011). The Juan Valdez image has been extremely popular since and so successful (especially among U.S. consumers) that it was elected the Advertising Icon of the Year, by Advertising Week 2005 (USA TODAY 2006). In 2002, the National Federation of Coffee Growers created the company Procafecol SA, which was designed to create expansion opportunities for the Juan Valdez brand. One opportunity was to market coffee under the Juan Valdez name. Another brand marketing
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idea was the introduction of the Juan Valdez Cafe chain that started in Colombia and expanded across the USA. By the end of 2007, there were 100 Juan Valdez Cafes in Colombia, ten in the USA and two in Europe (Brandchannel 2011). Meanwhile, the coffee retailer has 147 coffee shops in Colombia and abroad. It has 120 locations in Colombia, 10 in Ecuador, 10 in Chile, one in Spain and six in the United States, which are mainly, located at major airports (Reuters 2011).

1.19 Companys Strategies

1.19.1 Expansion Strategy

In an article appeared in the newspaper Caribbean Busniess, on the 22nd December 2011, Procafecol S.A., parent company of the Juan Valdez Caf announced, that in order to accelerate the introduction of Colombian coffee to global consumers, it would be basing its international strategic development on a franchise model. Another article in the Website Brandchanel, stated that Juan Valdez Cafe was positioned to arise some challenge to the American coffee house giant Starbucks and to other coffee house chains, but after the global recession in 2008, international expansion of the Colombian coffeehouse company seemed to decline.
54

However, within the Colombian market Juan Valdez seems to be omnipresent, especially in Bogota with over 60 coffee shops, reported Daniel Gross in the Website Brandchanel. Moreover, while in 2010 Procafecol was announcing on its website that they were defining their new strategy of international expansion, with priority on the USA, Canada, Central and South America, they were closing few Juan Valdez Cafes in New York City, Seattle and Washington D.C. According to Luis Genaro Munoz head of the Federation, the reason why they had to close those stores was because the model of the stores in the streets didnt work in the USA. Nevertheless, Juan Valdez continues selling its coffee in the American supermarkets. They also had planned to open 4 new shops in Ecuador, 6 shops in Spain and 5 in Colombia. The Caribbean Businness reported that Procafecol is seeking to develop the coffee franchise in Puerto Rico, which could help Juan Valdez to expand its shops to more mainstream retail area in top U.S. Hispanic markets.

1.19.2

Other Marketing Strategies

The tourism industry is an important brand-engagement vehicle for Juan Valdez. Just recently the coffee house company placed a
55

multiyear contract with American Airlines to use plastic form cups with both, the American Airline and the Juan Valdez logo, on all Latin American and Caribbean flights. A result from the in-flight beverage service was the Juan Valdez Cafe at the brand new terminal at JFK International. (Caribbean Business 2011)

1.19.3

Distribution Strategy

In order to offset the businesses decline at U.S. shops Juan Valdez is planning to increase sales at American supermarkets. It is expecting to double sales at supermarkets from $2 million in 2009 to $4 million in 2010, Catalina Crane, president of Procafecol, reported at Brandchanel. Currently Juan Valdez coffee is sold mainly at Wal-Mart Stores and other U.S. chains. It was also reported that Juan Valdez had begun selling coffee in 65 supermarkets in South Korea.

1.19.4

Competition

In the UK the Juan Valdez coffee shop model will have to compete with a range of branded coffee shops, independent artisanal coffee shops, as well as with an increasing number of non-specialists (e.g. quick food restaurants, pubs) that are trying to imitate the coffee
56

shop experience. As analysed through Porters five forces model the UK coffee shop market is a highly competitive market and this force is the biggest threat Juan Valdez would have to face if they would enter the UK market.

1.19.5
Strengths

Strengths and weaknesses

Juan Valdez is the only coffee shop chain from a coffee producing country that was created and is owned by its coffee farmers.

New distribution strategies for coffee sales: Juan Valdez is expanding its sales into more supermarkets and through Internet.

Colombian coffee is known as high quality Arabica coffee.

Strong brand identity through very popular and successful brand logo.

Environmental sustainability

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Weaknesses Closing down of US coffee shops due to insufficient market research. Not enough experience in the European coffee shop market (only one store in Spain). Restricted Budget to grow significantly.

Conclusion
From the analysis of the coffee shop market it can be concluded that due to the high demand for coffee and visiting coffee shops, the UK coffee market is not saturated yet. Although the UK coffee market has matured and has become very competitive there is still enough room to grow. According to Allegras (2011b) forecast, the coffee shop market will continue to grow, with branded players increasing the numbers of their locations over the next five years and more non-specialists entering the market, as consumers are making coffee drinking as part of their lifestyle.

58

However, generally speaking it can be said that although there are opportunities for branded coffee shops to grow, they have to continuously monitor changes and trends in the coffee market, in order to stay competitive in an increasingly uncertain and challenging environment. The analysis of the UK coffee market reveals that a newcomer like the Colombian coffee chain Juan Valdez, would have more opportunities in entering the in-home coffee market instead of entering the highly competitive branded coffee shop market, as they would need a highup front investment in order to grow significantly (for distribution system: shops, equipment, premium locations and for marketing: creation of brand awareness/recognition and customer retention). Juan Valdez profits from the strong reputation of Colombias high quality Arabica coffee and as the UK is Europes largest consumer of instant coffee and there are no many branded coffee shops offering premium instant coffee, this could be an opportunity for the Colombian coffee chain to enter the UK coffee market. The company could target specifically younger consumer s with advert campaigns and other marketing strategies that would attract this consumer group. Once the company has gained brand awareness and customer retention it wont need to invest as much in marketing. Also, as consumers are more conscious of the importance of sustainability, Juan Valdez can focus more on this in its marketing strategies.
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