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The Coffee Industry
By: Courtney Beauvais, Liz Bell, Brianna
Whitmore, & Victoria Lee-Ngai
Executive Summary
• Our data analysis was able to show that there are definitely price
differences amongst the local coffee shops
• Currently surveying Ithaca population (primarily Cornell students) to
find out shop preferences.
Raw Data Analysis
Pricing Strategies
• Range of pricing methods for products across coffee shops • Many of the local coffee shops give various discounts which vary per
group. (ex. Military, Senior Citizens, Students)
Industry Analysis
• Industry is mature but is still expected to grow over the next five years• Concentration is fragmented but industry is still small business oriented• Very price competitive
Agenda
1. Introduction
2. Industry Analysis
3. Pricing Strategies
4. Recommendations
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Why Coffee?
• We all love coffee
• Second to water as one of the most consumed beverages (over
1.4 Billion cups drank around the world each day)
• Coffee industry in United States in 2015 was $225.2 billion
• Consumers spent $74.2 billion on coffee in 2015.
• Coffee industry is responsible for over one million jobs in the US
economy
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Industry at a Glance (Coffee and Snack Shops)
Revenue
$41.2 billion
Profit
$2.9 billion
Wages
$10.6 billion
# of businesses 57,965
Annual Growth 12-17
4.1%
Annual Growth 17-20
2.0%
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Industry Products
Brewed coffee and tea; espresso drinks (cappuccinos,
café lattes); cold blended beverages; bottled water; soft
drinks; and juices
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Industry Products
Snack food and other food items
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Basic Technology
Grinder Espresso Machine Coffee Brewers Blender
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Supply Chain Harvesting: Farmers in coffee growing countries harvest the beans by hand,
dry them, and then bag them for exporters
Roasting & Packaging: Roasters connect with importers and choose which beans they want. They then
process the beans, roasting them then packaging them or sending them to a
third party for packaging
Distribution: Coffee shops purchase the finished beans from the roasters
and then grind them before brewing them
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Harvesting
Roasting & Packaging
Distribution
Costs of Production
Total Cost of Production
Costs for Retailers
Costs for Farmers
Costs for Roasters
Costs for farmers: labor, fertilizer, inspections, certifications (Organic,
Rainforest Alliance, Fair Trade), transportation, and membership fees
(if the producer is part of a cooperative)
Costs for roasters: agreed upon price/lb plus any additional
import/export or transportation fees
*adjusted then for shrinkage losses
Cost for retailers: Cost per pound from roaster plus operating expenses
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Segments of the Market (by age)
0
10
20
30
40
50
60
70
18 to 24 years 25 to 39 years 40 to 59 years 60 years and older
Share
of
Coff
ee D
rinkin
g C
onsum
ers
(%)
Years of Age
Coffee Drinking U.S. Consumers by Age Group 2016
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Segments of the Market (by income)
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Key Industry Drivers
● Consumer spending
○ When consumer spending is high, they are more likely to spend money at coffee shops
● Healthy Eating Index
○ Expected to increase in the coming years which could be a threat to the industry
● Consumer confidence Index
○ When consumer confidence is low, consumers tend to forgo expensive items and instead stick to lower priced items that still have value
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Competitive Landscape (Porter’s 5 Forces)
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Thre
at
of N
ew
En
tra
nts
Barriers to entry are low
Barriers to success are high
Thre
at
of Su
bst
itu
tes
Many different ways to get caffeine
Low switching costs
Ba
rga
inin
g P
ow
er
of B
uy
ers
Low switching costs mean they can switch brands easily
Ba
rga
inin
g P
ow
er
of Su
pp
lie
rs
There are a large number and variety of
suppliers Ind
ust
ry R
iva
lry
A lot of
competition
coming
from big
chains and
small
companies
alike
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Competitive Landscape (Concentration)
• The Four Firm
Concentration Ratio is
69.4%
• The concentration of the
industry is highly
fragmented & small
business oriented
• We collected data from
13 unique coffee shop
and only 4 major chains
within the Ithaca area0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00%
Marketshare of Major Competitors
Starbucks Corporation
Dunkin' Brands
Other
*mugs not to scale
22.1%
34.6%
43.3%
Competitive Landscape (Regulations)
IntroductionIndustry Analysis
Pricing Strategies
Recs.
• Current regulation is medium however is increasing
• FDA requires set standards on nutritional values
• If labeled “low fat” or “heart healthy” then owner must be
able to prove that it is
• Industry employs high number of young and low skilled
workers and pays hourly rates (the standard minimum wage)
• Franchising laws have been set up since many companies
have hundreds of individual franchises
• The franchising laws are usually about disclosure, registration,
and relationship laws between the franchisee and the
franchisor
Major Players
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Sta
rbu
ck
s Largest Market share in the industry at 43.3%
Viewed as a premium coffee brand
Profit margin of 13.30%
Du
nk
in’ B
ran
ds
2nd
largest market share at 22.1%
Profit margin of 23.60%
Pe
et’
sC
off
ee
& T
ea Low
switching costs mean they can switch brands easily
Profit margin of 3.80%
Inte
rna
tio
na
l C
off
ee
& T
ea
There are a
large
number and
variety of
suppliers
Mostly
popular on
the West
Coast
Pricing Strategies
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Geographic differences and competitive pricing
● Premium pricing
● Nonlinear pricing and pricing deltas
● Price per ounce
● Gimme! vs. Manndibles
● Price discrimination
● Bundling
● Goldilocks principle and extremeness aversion
Data Collection: Method 1
• Collected primary data on 13 unique coffee
retailers in Ithaca○ Price and size data for
■ Hot coffee
■ Iced coffee
■ Lattes
○ Location
○ Examples of price discrimination or bundling
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Data Collection: Method 2
IntroductionIndustry Analysis
Pricing Strategies
Recs.
• Peer Survey (forthcoming)• Market share of each coffee retailer in Ithaca
• Brand loyalty
• WTP for regular and specialty coffees
• Effects of extremeness aversion and the Goldilocks principle
• Random assignment of subjects to treatments (pick between 2
or 3 coffee sizes)
• Effects of brand name on WTP
• Relative importance of product attributes (including taste, price,
convenience, and more)
Big Picture Pricing
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Geographic Differentiation
IntroductionIndustry Analysis
Pricing Strategies
Recs.
●Competitive pricing ○ Idea: Stores with “captive” audience will be able to set higher prices○ Few competitors nearby greater pricing power
●Walking vs. driving○ Idea: stores who cater to primarily driving customers will have lower
pricing power
●Do we actually find evidence of this?○ We compared the mean price for coffee by the retailer’s distance
from Warren Hall
Location Data
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Campus
○ Manndibles
○ Cafe Jennie
○ Gimme! Coffee (Gates Hall)
● Collegetown
○ Starbucks
○ 7 Eleven
○ CTB
○ Dunkin Donuts
○ Chatty Cathy
● Commons○ Starbucks
○ Ithaca Coffee Company
○ The Shop
● Downtown○ Ithaca Bakery
○ Gimme! Coffee
● Mall○ Cup O’ Joe Café
○ Starbucks
● East Hill Plaza○ CTB
○ Dunkin Donuts
Location Data
• Average price of coffee
for each size based on
location
• The Shop in the Commons
has the highest price for
each size
• Manndibles has fairly high
prices on campus
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Location Data
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Average percentage
increase in price between the
sizes by location
● Collegetown has 7/11 which
has lowest price for small size
and largest delta increase to
a medium○ Large price is still cheaper
than all other small prices
● The Shop in the commons has
consistently high deltas
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Charging more for a differentiated product
○ Hot, iced, and specialty beverages have different prices
● Maximizes profits in areas where consumers are happy to pay more
● Encourages favorable perceptions among buyers
○ Goal is to create a market perception that will bring more revenue
● Price Skimming
○ Charging slightly more than competition, in an effort to establish product as “premium”
Premium Pricing
Premium Pricing at Collegetown Bagels
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Hot coffee
Iced coffee
Latte
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
12 oz 16 oz 20 oz
Premium Pricing at CTB
Premium Pricing at Dunkin Donuts
IntroductionIndustry Analysis
Pricing Strategies
Recs.
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Hot
Iced Coffee
Latte
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
12 oz 16 oz 20 oz
Premium Pricing at Manndibles
Premium Pricing at Manndibles
Premium Pricing at McDonald’s
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Hot coffee
Iced Coffee
Latte
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
12 oz 16 oz 20 oz
Premium Pricing at McDonalds
Premium Pricing at Starbucks
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Hot Coffee
Iced Coffee
Latte
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
12 oz 16 oz 20 oz
Premium Pricing at Starbucks
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Linear strategy utilizes consistent price increases between sizes
○ Ex. The Shop, Dunkin Donuts, CTB, Gimme! Coffee for regular coffee
● Non-linear strategy utilizes price increases that are not consistent between sizes
○ Ex. Manndibles, Starbucks for regular coffee
○ Not always the case, but delta generally trends to decrease given an increase in size
○ Does not hold for more premium drinks (Manndibles)
Linear vs. Non-Linear Pricing
Linear vs. Non-Linear Pricing
IntroductionIndustry Analysis
Pricing Strategies
Recs.
• The Shop has largest and
consistent deltas for regular
coffee
• McDonald’s has been
offering same prices across
the board for regular coffee
• Deltas for specialty drink
generally seem to be larger
• CTB is only linear pricing for
specialty (latte)
Hot Coffee Linear vs. Non-Linear Pricing
IntroductionIndustry Analysis
Pricing Strategies
Recs.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Small Medium Large
Hot Coffee Pricing
The Shop Manndibles Starbucks Dunkin Donuts
CTB Gimme! McDonalds
● Manndibles and
Starbucks delta
differences so small they
almost appear linear
Iced Coffee Linear vs. Non-Linear Pricing
IntroductionIndustry Analysis
Pricing Strategies
Recs.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
Small Medium Large
Iced Coffee Pricing
Manndibles Starbucks Dunkin Donuts CTB
$2.25
$2.45
$2.65
$2.85
$3.05
$3.25
$3.45
$3.65
Small Medium Large
Iced Coffee Pricing
Manndibles Starbucks Dunkin Donuts CTBNormal View
Zoomed In View
Latte Linear vs. Non-Linear Pricing
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Manndibles stands out
as the latte price leader
and is consistently
around $.50 higher than
competitors
● McDonald’s can appeal
to those looking for a
specialty drink without
the upcharge $0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
Small Medium Large
Latte Pricing
Manndibles Starbucks Dunkin Donuts CTB McDonalds
Delta by Coffee Type
IntroductionIndustry Analysis
Pricing Strategies
Recs.
• Calculated the average percent
increase by size for each coffee type
• The largest percentage increase is the
small to medium increase for lattes
○ Many drivers such as McDonalds, Starbucks and Dunkin
• General trend holds that delta for the
medium to large increase tends to be
smaller than the small to medium
increase
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Hot Coffee Iced Coffee Latte
Avg. Price Delta % by Coffee Type
S-M Delta M-L Delta
Price per Ounce Comparison
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● 7/11 and McDonalds
data corresponds to
their low pricing and a
low price/oz
● The Shop stands out with
their premium pricing
strategy and high
price/oz
Price per Ounce Comparison
● Gimme! Coffee and The
Shop don’t offer size
small
● McDonald’s stands out
with a low price/oz
● The Shop’s premium
strategy not as apparent
● Manndibles, Dunkin
Donuts, Ithaca Coffee
Company have high
price/oz
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Gimme! Coffee vs. Manndibles
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Manndibles appears more
expensive, but larger cup size
● Gimme! Coffee price/oz is higher
Regular Coffee:
Price per Ounce Comparison
● Gimme! Coffee price/oz
of lattes also higher
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Latte:
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Charging different prices to different customers for same product○ Sellers lack information about buyers
○ Price so that buyers will sort themselves by preferences
○ E.g. versioning, quantity/bulk discounts
● Examples of second degree price discrimination in the Ithaca market○ Consumers will self-sort based on size of drink (small, medium, or large)
○ Substitutions (including almond or soy milk)
○ Rewards for frequent purchases
■ CTB, Starbucks
○ Discounts for bringing your own mug
■ Cafe Jennie, CTB, Manndibles
○ Different prices for cash or card
■ Manndibles
Second Degree Price Discrimination
Third Degree Price Discrimination
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Third degree price discrimination
○ Buyers can be easily segmented into groups with different WTP
○ Different prices are charged to different groups
● Examples of third degree price discrimination in Ithaca market
○ Senior, military, and student discounts
■ Gimme! Coffee, Ithaca Bakery, Dunkin Donuts, Cup O’ Joe
Cafe, McDonalds
Bundling
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Bundling is a strategy utilized by many companies to extract
maximum consumer surplus
● Grouping items to be sold together generally at a cheaper price than
buying each separately
● Mixed bundling is usually the most profitable
● Dunkin Donuts:○ $.99 medium hot coffee with any bakery item
○ $1.99 medium hot coffee and donut
○ $.99 bagel and spread with any hot coffee
● McDonalds:○ $3.33 sausage egg and cheese with any size coffee
IntroductionIndustry Analysis
Pricing Strategies
Recs.
Bundling
• Survey question addresses consumer preference for buying
bundled products
Goldilocks Principle
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Extremeness Aversion
● Consumers have the tendency to pick the
middle of three choices
○ Potential for higher markup on middle
size
● On a scale from one extreme to another,
the moderate range in between is the more
appealing option
Goldilocks Principle
IntroductionIndustry Analysis
Pricing Strategies
Recs.
● Survey question testing this principle and will assess whether a consumer
will avoid the extremes
1:
2:
Recommendations for Ithaca Coffee Industry
IntroductionIndustry Analysis
Pricing Strategies
Recs.
• Location is key: want to be in a high reach area, potential focus on
walking consumer
• Take advantage of extremeness aversion: consider having the
medium size option because consumers tend to avoid the extremes
• Offering high-quality items can allow for premium pricing
• Bundling can encourage sales
• Companies should cater to current trends and local population
tastes
Recommendations for Coffee Shop Industry
IntroductionIndustry Analysis
Pricing Strategies
Recs.
• Investment Opportunities:
• Growing industry as a whole
• Increasing trends such as cold brew coffee, specialty roasts
and specialty drinks
• Loyalty programs which can use mobile/online ordering
• Customer Service and creating an atmosphere that the
customer would enjoy to sit in for a while to order more
• Consider health conscious consumers• Catering to the local community: social responsibility
Any Questions?
Thanks… a latte!
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