Caribou Coffee- External Environment

Anh T. Nguyen Professor Lois Shelton BUS-497 Strategic Management Exam One September 27th, 2010 CARIBOU COFFEE: EXTERNAL ENVIRONMENT Industry Structure: Caribou Coffee’s business is in the industry of specialty coffee, where high quality of coffee is a main characteristic.

Hence, Arabica coffee bean is mainly roasted to produce specialty coffee as it is considered superior to its counterpart, the Robusta, which is usually low-quality bean used in production of non-specialty coffee. High-quality Arabica bean provides a mild aroma and a pleasing flavor which are suitable for specialty coffee.The specialty coffee industry comprises of two business segments: coffee beverage sales and whole bean coffee sales for home, office, and restaurant consumption. Dominant economic factors that attribute to the structure of the specialty coffee industry include market size and growth, product differentiation, scope of competitive rivalry, number of rivals, and price of coffee bean. Specialty coffee is a strong and growing industry as its sales continued to grow in both the U. S. and abroad. Specialty consumption increased by more than 48% in the U.

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S. from 2001 to 2006 and is estimated to be worth $11 billion annually.The increase of specialty coffeehouses from only 500 units in 1991 to 24,000 units in 2006 is a major thrust to this rapid growth.

Underlying factors contributing to this increase are credited to development of new quality beverage, an expanding coffee menu, and coffeehouses becoming “the third place” for social consumption. Besides, consumers’ growing interests in specialty and traditional products such as micro-brewed beer, single malt liquor, and organic foods trigger the growth in the industry of specialty coffee, which promises to deliver more authentic, more traditional, flavor, and healthful products.The industry is in a rapid growth stage and expected not to peak until 2015. Product differentiation is the second most important economic factor as it helps firms to retain consumers’ loyalty and compete for market share. Specialty coffees are moderately differentiated products, due to only few big players in the industry, based on features such as brand loyalty and quality level of customer services. For instance, by providing “an experience that will make the day better” Caribou coffee has created competitive advantages in their store operations to differentiate their products.Scope of competitive rivalry and number of rivals or competitors are two other dominant economic factors characterizing the industry structure. The specialty coffee industry is highly fragmented, with exception of market leader Starbucks Corporation, and contains only few strong brands such as Caribou Coffee, Dunkin’s Donuts, Green Mountain Coffee Roasters (GMCR), and etc.

Competition in the industry is not only on the national level but also in regional and local markets as there are about 500 smaller and regional brands.Many regional companies are looking to expand. In addition, specialty coffee companies compete with commercial coffee roasters to attract customers to the gourmet coffee segment. Last factor, also a unique dominant economic trait, is price of coffee beans. High-quality materials are used to make differentiated products in the industry, and coffee beans are essentially commodity. Price volatility of coffee beans is a major concern for specialty coffee companies as suppliers, typically farmers, are unable to exert control over prices.

Competitiveness of the IndustryTo examine whether or not an industry is highly competitive, a five forces analysis and net value analysis are conducted. Five forces analysis was first introduced by Michael Porter as an important tool in assessing the potential for profitability in an industry. Five forces include the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products and services, and the intensity of rivalry among competitors in an industry. The most influential force is from direct rivals as it’s apparent that there’s an enormous rivalry competition in the industry.Starbucks as the industry’s leader announced in October 2006 to re-raises its long-term store opening goal from prior target of 30,000 to 40,000. This action of Starbucks put more pressure on other competitors to adjust their strategy in competing with the industry leader in an already competitive environment. The specialty coffeehouse industry is characterized by intense competition not only from the industry leader, but also from great threats of new entrants and a considerable number of substitutes attracted by huge growth.These aspects will be discussed later in the substitutes and new entrants section.

Walk-away power of buyers due to low switching-costs of going from one coffeehouse to another creates fiercer competition. The second strongest force is the threat of new entrants as profitability of the industry in rapid growth stage attracts new firms. Product differentiation is medium because few large brands are selling almost identical products and a customer experience opposed to simply specialty coffee.Therefore, new entrepreneurs can freely start up their own coffee business with similarly-tasted coffee or unique recipes. Also, small capital requirement for entrepreneurs to open new coffee business as low-cost coffee carts and coffee drive-thru kiosks are alternatives to high-cost traditional coffeehouses.

The Specialty Coffee Association of America predicts that approximately 5,000 coffee bars will open every year. The third most influential of these five forces is the threat of substitute products.There is tremendous number of substitutes to specialty coffees, including soft-drinks, bottled water, tea, and sport drinks, liquor, and beer. These substitutes can serve the same purpose of quenching a thirst. Also, many type of foods and nutritional drinks also satisfy one’s hunger, so does coffee.

Even though recent studies shows benefits of drinking coffee in preventing getting a stroke and reducing diabetes, specialty coffees still have to compete with tea, bottled water, and sport drinks which consumers consciously see their health benefits. The next one is buyers’ walk-away power.The buyer power here is very strong because there are many choices out there and the switching costs of going from one coffeehouse to another is low. Nevertheless, specialty coffee companies can reduce this power of buyers by promoting their products and creating brand loyalty among customers. Also, specialty coffee companies are selling an experience rather than specialty coffee, therefore brand loyalty plays a large role in retain existing customers.

The least influential one of these five forces is the bargaining power of coffee bean suppliers.Coffee is a commodity product, and therefore suppliers’ products are not highly differentiated. There are many exporters or suppliers competing for limited number of coffee buyers, particularly specialty coffee companies in this case, and coffee bean products are not differentiated. Also, there is no high switching-costs, and therefore specialty coffee companies are free to choose to diversify their buying from different suppliers. Although the five forces analysis is very powerful, it is still missing the power of cooperation brought in by complements to specialty coffee.Value Net analysis is needed here for justification.

Bakeries preparing fresh pastries and other baked goods also serve specialty coffee as a complement. Specialty coffee is also served with meals in both fast-food and luxurious restaurants and on airplanes. Coffee is served at many events at many places in different situations as a complement because it has become a daily consumption by 52% of the American adult population.

The specialty coffee industry is still growing, and hence many complements reduce the intensity of competition within the industry.Despite considerable positive effects of mentioned complements, the industry of specialty coffee is still highly competitive because of a great number of substitutes, a big threat of new entrants, and most importantly intense competition. Driving Forces of New Trends for Changes American consumers are becoming more concerned about their health and healthy products are preferred. Its positive effect triggers the growth of specialty coffee sales as many recent studies show the health benefits of drinking coffee in preventing strokes and reducing diabetes among both men and women.

Also, the gourmet coffeehouses have become a new public place for coffee’s social consumption, where people can gather to work and/or relax with friends and families. This social movement also has a positive effect on the industry. Another positive trend in consumers is that they have a strong interest in purchasing whole bean products of specialty coffee for home consumption.

Sales of whole bean coffee segment has become popular as many sophisticated consumers like to grind the beans and brew the freshly made coffee at home.Consumers favor to purchase whole bean coffee at supermarket or grocery store. Becoming a complement product for other goods sold at these distribution venues is also a benefit to sales growth of specialty coffee.

Development of new quality beverage, such as both hot and cold coffee beverage, will bring competitive advantages to firms against substitute drinks on the market. Strategic partnerships to produce new products also help increase sales. Also globalization through licensing and franchising will bring more profits to firms operating in the industry.A trend is many coffee business openings with small start-up capital in the future. Here is the only negative force that intensify the competitiveness of the specialty coffee industry.

Overall, all driving forces look favorable except the negative effective on competition of new coffee business openings. Key Rivals and Their Next Moves 1. Starbucks Starbucks is for sure a big rival as they are the industry leader. History: The first Starbucks was opened in 1971 in Seattle, Washington by Jerry Baldwin, Zev Siegl, and Gordon Bowker.

In April 2003, Starbucks completed purchases of Seattle’s Best Coffee and Torrefazione Italia from AFC Enterprises. Performance: Leader in the industry of specialty coffee as only high-quality coffee brand with a national presence as of April 2007. Starbucks operates 12,000 retail locations across North America, Latin America, Europe, Middle East, and the Pacific Rim. Net revenues of the year 2006 was up 22% to $7. 8 billion from the previous year. Same store-sales increased by 7%, marking its 15th consecutive year of 5% or greater same-store sales growth.Goals: Starbucks raised its long-term opening goal to 40,000 from its prior target of 30,000.

Starbucks’ retail goal is to become the leading retailer and brand of coffee in each market segment by offering the finest quality of coffee products and providing unique Starbucks Experience to customers. Next moves: Starbucks may plan to grow its specialty operations and seek for new opportunities to leverage the brand by introducing new products and using new distribution channels. Also, Starbucks may develop new hot coffee vending market segment with high-quality ready-to-drink hot latte and cocoa beverages.With a strongest position in the industry and a strong brand-loyalty, Starbucks may consider to enter new markets of soft-drinks if possible. 2. Caribou Coffee: Caribou Coffee was the second largest company-owned gourmet coffeehouse operator in the U. S.

based on the number of coffeehouses operated, As of April 1. 2007, it had 475 coffeehouses, comprising of 8 franchised houses in the U. S. and 25 international franchised coffeehouses. History: Caribou Coffee was found in 1992 by John and Kim Puckett. Performance: Caribou was the second largest company-owned gourmet coffeehouse operator.However, CEO also the president of the company, Michael Coles, faced serious issue in 2007 about the company’s net loss in four consecutive years from 2003 to 2006 and store managers filed suit seeking for overpay time.

Goals: Caribou Coffee first wanted to raise positive net income and settle lawsuits, Also it wanted to take on Starbucks as the industry’s leader. Next moves: Caribou coffee may consider a balanced and diversified growth strategy by improving store level comparable sales and margins, and also leveraging the franchise options for store growth.Both moves will help the firm to raise its positive net income. 3. Local and Regional Firms There are about 500 smaller and regional firms competing for market share in the specialty coffee industry and many regional specialty coffee companies are trying to become the second largest firm only behind Starbucks.

Their next moves may involve giving big promotions and differentiating their products based on both quality of coffee products and customer experience to attract more customers. They also might consider opening more stores as demand for specialty coffee is still growing and not eak until the year of 2015. [pic] The blank space is for firms with medium and high number of customers at local and regional level. It’s easy to understand that local and regional firms may not have a lot of customers as they choose to go to firms with strong brand name such as Starbucks and Caribou.

Attractiveness of the Specialty Coffee Industry Overall, competing in the specialty coffee industry is favorable considering its overall growth, but intense competition and buyer power may limit that potential. |New Entrant |Established Firms | |Regional/Local |Yes |Yes | |National/Global |No (only yes to with strong brand name, |Yes | | |distribution, etc,) | |New entrants can enter into local/regional markets easily because of small required start-up capital. Also, the industry is in its rapid growth stage, and therefore it will attract a wide range of business entrepreneurs to enter to make profit. New entrants find difficulty to enter national/global market as they hasn’t had a strong brand name that people know.However, an exception is for new entrants with strong brand name and distribution system such as well-known companies like Heineken. Established firms in the beverage industry can enter the specialty coffee market easily because they already own strong brand names and distribution systems.

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