Coffee Industry Analysis Coffee Retailing

Coffee Industry Analysis

Coffee Retailing Industry Analysis

The coffee retailing industry is comprised of individual proprietors or smaller coffee shops, regionalized chains including Dietrich's in Southern California, Peet's Coffee in the Pacific Northwest, and national chains including Dunkin' Donuts. Global chains have dominated this industry due to their ability to finance their own expansion, of which Starbuck's is the most dominant. The U.S. Department of Labor tracks the coffee retailing industry with SIC Code 5499-0201 which has been designated as Coffee Retailing. Despite a global economic downturn, coffee consumption grew 8% through 2008 (Perlik, 43) with 13% of the consumption being in homes and 87% in retail establishments. The industry is in the midst of major transitions in its supply chain practices (Claro, Claro, 413-414), competitive dynamics and new entrants (Fuhrman, 12) including the rapid growth of new substitute products sold through retail stores, including ready-to-drink coffees (Maras, 42-44). Finally there is significant Business Process Management (BPM) and Business Process Re-engineering (BPR) activity going on within the retail coffee industry as retailers look to accomplish more with less (Ogando, 50-53).

Competitive Landscape of the Coffee Retailing Industry

The industry is comprised by a highly fragmented series of competitors throughout the 192 nations of the world that each has some form of coffee retailing industry today. The most globalized of competitors in this industry include Starbuck's, who operate in 44 nations of the world today. The majority of coffee retailers however are regionalized in focus, as the U.S. market illustrates with Caribou Coffee, Diedrich Coffee, Dunkin Donuts, and Gloria Jean's Coffee Shops.

Substitute Products Generating Competitive Pressures on Retail Strategies

Caffeinated beverages that combine nutritional supplements including vitamins are being aggressively launched and marketed by Coca Cola, Sobe, and other U.S.-based beverage companies at greatly reduced prices compared to traditional coffee beverages. The most famous of all these is Red Bull, a drink combining high levels of caffeine and nutrients and is positioned as a drink above coffee given the alertness and kick they deliver. Taken together, these products form a serious substitute to traditional coffees and present a significant competitive force on the traditional retail coffee buying and consumption experience by offering ready-to-drink coffee from retail locations (Maras, 46, 48). One of the greatest strategic weaknesses of the retail coffee industry is the lack of concerted new product development, another area where ready-to-drink competitors are concentrating on (Maras, 48).

The Elusive Loyalty of the Retail Coffee Customer

The more loyal retail coffee customers have increasingly had their expectations raised by regional and global chains' initial success in making the new product development process more efficient through BPM and BPR methods (Ogando, 53). Segmentation of retail coffee houses and outlets by region of a given nation vary significant, as can be seen with the strong brand loyalty to Dunkin' Donuts in the New England Region of the U.S. versus the loyalty to Dietrich's Coffee in Southern California. Differentiating on specific types and flavors of drinks, smaller coffee shops and larger, more globalized chains seek to define their brand and unique value proposition primarily through the use of unique drinks. Despite these efforts however, new product development is a weakness in this industry. The lack of new product development expertise often leads coffee retailers to offer enhanced services including WiFi internet access (Clark, 19-20). In summary the customer for retail coffee is changing to be more discerning regarding service while also being loyal not so much on price but on the total in-store experience.

Strong Dependence on the Supply Chain for Profits