the coffee industry - cornell university presentations... · executive summary • our data...

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


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%


Pricing Strategies

Recs.

Industry Products

Brewed coffee and tea; espresso drinks (cappuccinos,

café lattes); cold blended beverages; bottled water; soft

drinks; and juices


Pricing Strategies

Recs.

Industry Products

Snack food and other food items


Pricing Strategies

Recs.

Basic Technology

Grinder Espresso Machine Coffee Brewers Blender


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


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


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


Pricing Strategies

Recs.

Segments of the Market (by income)


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


Pricing Strategies

Recs.

Competitive Landscape (Porter’s 5 Forces)


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


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)


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


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%


Pe

et’

sC

off

ee

& T

ea Low

switching costs mean they can switch brands easily


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


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


Pricing Strategies

Recs.

Data Collection: Method 2


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


Pricing Strategies

Recs.

Geographic Differentiation


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


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


Pricing Strategies

Recs.

Location Data


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


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


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


Pricing Strategies

Recs.


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


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


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


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


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


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


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


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


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


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


● 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


Pricing Strategies

Recs.

Gimme! Coffee vs. Manndibles


Pricing Strategies

Recs.

● Manndibles appears more

expensive, but larger cup size

● Gimme! Coffee price/oz is higher

Regular Coffee:


● Gimme! Coffee price/oz

of lattes also higher


Pricing Strategies

Recs.

Latte:


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


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


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


Pricing Strategies

Recs.

Bundling

• Survey question addresses consumer preference for buying

bundled products

Goldilocks Principle


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


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


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


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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