Partnership of espresso shop

A further critical driver, which ties into the industry’s focus on growth and product/service innovation, has been collaboration and partnership. Starbucks was the first to realize the benefits of coffee shop lady partnering when it reached out to powerhouse brands like Pepsi, Barnes and Noble, Nordstrom, Kraft and United Airlines to create new products, reach new customers and enter new channels of distribution like grocery, cruise lines and the airline industry. Caribou has followed suit and partnered with General Mills to produce a breakfast bar, USAToday to provide a news services to its customers, and most recently, Coca-Cola, to directly compete with Starbucks ready-to-drink iced coffees.[18] (See exhibit 2 regarding major competitors and their partners.) These alliances, in short, allow for innovation, channel extension and even geographic extension (in the case of Starbucks’ alliance with Japanese retailer Sazaby.)[19]

4.4 Image/Lifestyle

Additionally this industry is increasingly impacted by consumer’s perception of what a brand stands for. When Starbucks was first created, its CEO’s vision was to create a “third place” for Americans. Americans already spent considerable time at home and work and his vision was to provide a third place for Americans to not only drink coffee but to invest significant personal time. For this reason, industry marketing efforts are closely tied the image/lifestyle projected by the chain.
For example, in an effort to respond to Starbucks’ dominance, several competitors have attempted to differentiate themselves from the “upscale, pseudo-European” store by projecting different lifestyle brands. Caribou Coffee, for example, projects a more rugged image via its stores’ mostly wooden interiors which feel like “an Alaskan lodge.”[20] Further, the corporation promulgated its alternative lifestyle by associating itself with Apple during its 2006 “Wake Up and Smell the Music” promotion. Caribou’s CEO described the partnership as synergistic due to the fact that “We’re both challenger brands.”[21]
Additionally, it is believed that Dunkin’ Donuts recent success has been tied to consumers’ perception of the chain standing for simplicity and value. As Starbucks’ prices continue to climb and many of its coffee processes become automated, one industry expert noted “it’s hard now to know what Starbucks stands for….That isn’t a problem with Dunkin’ Donuts.”[22] Even further, Peet’s Coffee niche has been tied to delivering a super premium brand, via mostly whole bean coffee, and selectively opening stores to ensure that the company is “not another Starbucks.”[23] In close, the image consciousness of this industry will continue to drive marketing efforts as well as other areas such as product and service selection as players differentiate their brand.

4.5 Technology

A further driving force is the role of technology. Line management is a significant issue for coffee houses as often the demand is concentrated in the early mornings. For example, Starbucks has been able to achieve customer service efficiency by introducing automatic espresso machines. According to Michelle Gass, Chief Merchant of Global Product, Starbucks, efficiency is a key driver in customer satisfaction as customers “want their beverage in under three minutes.”[24] Interestingly, however, it appears these efficiencies must be balanced with creating a mystique around the coffee experience and having an awareness of the consumers’ price-value ratio. For example, Starbucks customers, who pay a premium for coffee, seem to miss the elaborate process of brewing and drink creation. Starbucks’ CEO recently expressed a concern that the brand was becoming “watered down” and such gains in efficiency threatened to commoditize the brand.[25]
Dunkin Donuts, however, has seen less resistance to its technological innovations as its products are generally cheaper and its brand is tied to simplicity. For example, rather than relying on baristas to create its new line of espresso-based drinks, Dunkin’ Donuts hired an expert to design an “idiot proof $8,000” machine which makes cappuccinos in less than a minute and at a lower price than competitors. One customer noted that both the Starbucks and Dunkin’ Donuts’ drinks taste good “but Starbucks takes too long.”[26]
Finally technology is impacting this industry in the form of increasingly sophisticated home brewing machines which are able to at least replicate, if not beat, the quality of coffee prepared at many of these stores.[27] Though it is unclear of the impact of these machines on the coffee players, this is an area of increased growth and one for these competitors to monitor.

5. Competitive positions & possible strategic moves of key companies

5.1 Starbucks

Starbucks, the world’s number one coffee retailer, has over 13,000 coffee shops in more than 35 countries. The outlets offer coffee drinks, food items, beans, coffee accessories and teas. Starbucks owns about 17,500 of its shops, which are located in about 10 countries (mostly in the U.S.) while licensees and franchisees operate the remaining outlets. Starbucks does 78% of its store volume in beverages, with 12% in food, and 5% in whole beans.[28] The company does not compete on price but rather on the complete experience customers get while visiting the coffee shop. Embracing its value beyond extraordinary coffee, Starbucks tries to make a business out of human connections, and celebration of diversity and culture.[29]
Starbucks focuses its retail selection on the “best places in town” and its outlets can be found in the centre of almost every famous city in the world ranging from Cologne to Los Angeles. As mentioned, the firm focuses on high-traffic, high-visibility locations. While Starbucks selectively locates stores in shopping malls, it tries to focus on places that provide convenient access for pedestrians and drivers.[30]

Starbucks’ strategy

Starbuck’s overall goal is to establish its brand as one of the most recognized and respected ones in the world. Therefore the enterprise plans to continue the rapid expansion of its retail ~ and grow its specialty operations and to selectively pursue other opportunities to leverage the brand through the introduction of new products and the development of new channels of distribution.[31]
In continuance with its history of partnerships, Starbucks and Concord Music Group announced on March 12th of this year the formation of a new record label “Hear Music” which will distribute recordings at Starbucks locations. This partnership is another step in Starbucks’ entertainment strategy that links to the company’s focus on atmosphere and image.[32]
Last fall, addressing McDonald’s attempts to lure customers away, Starbucks announced its plans to offer hot breakfast sandwiches in an appeal to fans of the Egg McMuffin and establish them also in the breakfast and afternoon snack segment.[33].

5.2 McDonald’s

McDonalds (which history began in 1954) is the leading global foodservice retailer with more than 30,000 local restaurants serving nearly 50 million people in more than 119 countries each day.[34] In 2006 the company reached a record high of $21.6 billion in revenues. McDonalds competes on price, ubiquity, convenience, service and through offering quality food products.
Besides hamburgers McDonalds is also proud on its hot coffee and believes that the high temperature (brewed at 195-205°F) is a major reason for the billion cups sold per year for $1.35 each.[35]

McDonald’s’ strategy

Recent strategic changes within McDonald’s are increasing its potential for rivalry with pure coffee house retailers like Caribou and Starbucks. First, McDonald’s improved the quality of its coffee and launched a premium roast version on March 6th 2006.[36] Furthermore McDonalds is looking into “day-parts” penetration as a growth strategy. While currently owning the breakfast segment the company wants to take over the afternoon segment.[37] That is also the reason why, on March 1st 2007, McDonalds has announced that it will serve specialty coffee beverages like vanilla lattes and caramel cappuccinos at outlets across the U.S. It is pricing espresso-based drinks between $2 and $3, undercutting Starbucks offerings. This move is consistent with McDonald’s overall strategic shift away from its traditional burger-and-fries offerings and toward more “upscale” food. The specialty coffee drinks will be served from push-buttons machines, which are faster than Starbucks’ labor intense hand-made approach.[38] Even further threatening to coffee competitors is McDonald’s recent ability to increase its service and improve its stores by slowing down its expansion and reallocating funds.

5.3 Dunkin’ Donuts

Dunkin’ Donuts (founded 1950, headquarter in Canton, Massachusetts) is the world’s largest coffee and baked goods chain, serving over 3 million customers a day. 2006 the enterprise had revenues of $4.7bn ($4.3 bn in the U.S.).[39] There are more than 7,000 shops worldwide (5,300 in the U.S.). The company is opening 700-1000 additional shops every year.
Dunkin’ Donuts has forged a strong identity as a coffee destination with ample seating and a diverse menu that grows incrementally following its slogan: “America runs on Dunkin”. Already, 57% of the chain’s sales, and the most profitable product group, are beverages. The company sells about 500 million cups of coffee a year for $1.65 each.[40] Dunkin’ Donuts is pursuing the following key strategies: multi-branding concept development, Dunkin’ brand vitalization, product innovations, accelerated brand development, improved operational effectiveness and talent acquisition. Dunkin’ Donuts retail outlets are operated in a franchise format either through operating agreement, license agreement or joint venture.[41]

Dunkin’ Donuts’ strategy

The company’s current plans are to widen its specialty coffee offerings and offer them on a broader basis nationally. Therefore Procter & Gamble signed an agreement with Dunkin’ Brands on March 1st 2007, to launch Dunkin’ Donuts coffee at U.S. retailers (e.g. grocery stores, mass merchandisers, club stores).[42]
Additionally Dunkin’ Brands CEO Jon Luther emphasizes the company’s strategy to be a faster, cheaper, user-friendlier alternative to Starbucks. He is convinced that there is a market opportunity especially among a younger audience that is enamored with Starbucks frothy beverage menu but daunted by its prices. Addressing this issue Dunkin’ Donuts installed espresso machines in prime locations, capable of delivering inexpensive coffee in 44 seconds. The company purposely leaves the fancy CD burning stations, mood lighting and comfortable chairs to the competition and focuses, instead, on speed. The company tries to reach a rate of one shop to every 15,000 – 20,000 people in their target markets. According to the CEO Dunkin’ Donuts coffee business industry is basically a “game” that relies on ubiquity. However, that is an important, but not the most critical, issue because high margins in the coffee business will allow the company to buy key sites.[43]
Additionally the enterprise aims at improving its level of service and cross shop consistency in service; a goal that is especially challenging because of the franchising structure. CEO Luther in 2003 to his 2700 franchisees: “We’re changing this game, we’re raising the stakes, if you don’t like it, get out.”[44]

5.4 Caribou Coffee

Caribou Coffee was founded in 1993 and its headquarters is located in Minneapolis (Minnesota). Today it is the second largest specialty coffee company in the U.S. with 416 outlets (2005) in 18 states and the District of Columbia. The revenue in 2005 totaled $198 million. Caribou’s cafes feature mountain-lodge-style decor with exposed beam ceilings, leather chairs, and roaring fireplaces. The company’s motto is “Life is short. Stay awake for it.” Caribou Coffee successfully competed against the omnipresent Starbucks in a number of U.S. states.

Caribou’s strategy

The company emphasizes the quality and freshness of their products (Coffee is packaged immediately after roasting, and it is not sold more than 21 days after roasting or more than seven days after the opening of the package). Caribou competes by offering a slightly different roast of coffee and a warmer, more relaxing in-store environment compared to the Starbucks shops with a rather sleek, urban atmosphere.
The Middle East is the first region Caribou Coffee is seeking to expand internationally. The company believes that there is a small but growing market for American branded coffee houses.[45] Another strategic approach has been to develop partnerships with other retailers, such as Eatzi’s, or building stores next to Bruegger’s Bagels, Blockbuster Video and Border’s Books. The company also sells its coffee in upscale grocery stores, such as Lund’s and Byerly’s in the Twin Cities and Heinin’s in Cleveland.[46] Furthermore, Frontier and Maxjet airlines serve Caribou coffee, and the company recently inked a deal with Life Time Fitness.[47]

5.5 Coffee Bean & Tea Leaf

Coffee Bean & Tea Leaf was founded in 1963, with its headquarter is located in Los Angeles. In 2005 the company had 400 outlets and revenues of $150 million. The strategy of Coffee Bean is “Keep Innovating”. The company is known for its extensive selection of coffees and teas, as well as its reputation for innovation, e.g. the ice-blended coffee drink and the chai latte. Coffee Bean has also made a push overseas, finding niches in Starbucks-free markets such as Israel. With nearly all of its drinks certified as kosher, the company has opened several locations in that area.

5.5 Peet’s Coffee

Peet’s Coffee, whose headquarter is situated in Emeryville, California, was founded in 1996. In 2005 the company had 120 outlets and revenue of $175 million. Peet’s strength is the taste of its coffee, which appeals to java connoisseurs. The company roasts its beans in small batches, replaces brewed coffee every 30 minutes, and never re-steams milk. “Peetniks” often drink Peet’s at home too, and about half the company’s sales come from whole beans, which carry higher margins. Peet’s beans are also sold in more than 4,000 grocery stores.[49]
Though no chain has approached Starbucks global scale, the coffee shop lady industry is increasingly competitive. While many consumers still favor Starbucks coffee, it’s rather the in-store experience than the product portfolio that makes the company stand out. With the coffee selection improving elsewhere it is unclear how many customers will continue to pay premium prices if that experience is no longer unique.
Experts expect the price-value equation of the competitors to change in the future.[5

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