Strategic Management at Cafe Nero - Essay Example

Strategic management at Cafe Nero Table of Contents Organization background 2 Coffee market in the U.K 3 External environment analysis 4 Effects of current downturn 4 Competitive pressure existing in the industry 4 Strategic group mapping 6 Starbucks 6 Costa Coffee 6 Seattle’s Best Coffee 6 Caffe Nero 6 Brand image 6 High 6 High 6 High 6 High 6 Coffee quality 6 Medium 6 High 6 Medium 6 High 6 Consumer base 6 High 6 Medium 6 Medium 6 Medium 6 Product range 6 Diverse coffee chain 6 Not very diverse 6 Not very diverse 6 Specialized coffee chain 6 Locations 6 Strong overseas presence 6 Lacks overseas presence 6 Lacks overseas presence 6 Strong presence in the U.K and U.S 6 Style 6 American 6 Continental 6 American 6 Continental 6 Future changes and their impact 6 Internal environment analysis 7 VRIN framework 7 Value chain analysis 7 SWOT analysis 8 Reference List 10 Organization background Caffe Nero is a renowned coffee shop chain. The headquarters of Caffe Nero is located in London. The coffee shop was founded in the year 1990. At present Caffe Nero has more than 600 outlets across the U.K and is also established in Cyprus, Poland, Ireland, Turkey, the U.S and Middle East. It is the fourth largest retail coffee chain in the U.K. Caffe Nero is considered to be one of the fastest growing coffee chains of Europe. It is privately owned which gives it considerable amount of flexibility to grow. The coffee served at Caffe Nero is widely preferred by many Europeans and is counted amongst the top selling brands in the U.K. The brand also has a number of outlets in major airports of the U.K. Caffe Nero serves both hot and cold coffee variants thereby attracting consumers in all seasons of the year. Apart from coffee products, the brand also serves a variety of snacks such as pasta salads, sandwiches and rolls. Caffe Nero gives special emphasis upon developing good relations with its suppliers who are essentially farmers. The business carries the belief that success depends upon the manner in which firms communicate with their suppliers. The business also ensures that customers are treated warmly and they are provided with a good experience. Caffe Nero has emerged as a strong competition for many existing line of coffee shops chains in Europe and as also the Americas (Clayton, 2003). Coffee market in the U.K In 2012, U.K had for the very first time broken the £ 1 billion barrier. The billion pounds worth industry has had lesser impacts of the recession and the figures of its growth say it all. On the basis of sales revenue, the coffee industry of the U.K is worth £ 831 million. The U.K coffee market is dominated by the instant coffee variant mainly. 72% of the market revenue is from instant coffee sale. Coffee industry mainly targets the working population sector. Starbucks, Costa Coffee, Seattle’s Best Coffee and Caffe Nero are the strongest players in the retail coffee chain industry. The coffee industry however lacks innovation and change in terms of providing healthy coffee. The nutritional value of coffee is seen to decline as they are mixed with ice cream or other ingredients so as to make it more appealing to the younger generation. This has caused some of the older consumers to move away from instant coffee consumption. By focussing on developing a healthier coffee experience, the coffee industry can be expected to bring back many lost consumers (Mintel, 2011) External environment analysis Effects of current downturn Since its development in the year 1998, Caffe Nero has been expanding ever since. Gerry Ford, the chairman and chief executive of Caffe Nero is more than satisfied than the overall performance of the business. The earnings of the business has not remained positive but has surpassed the firm’s forecasts. The economic downturn has had considerable impacts upon the revenue, but the overall profits of the company have remained positive and have shown a rising trend. This is considered as a significant achievement for the coffee chain as the economic downturn had negatively impacted many other brands prominent brands of the industry. One of the crucial aspects which Ford and the administrators of Caffe Nero are concerned about is that the business may lose a significant amount of revenue to the declining rate of tourism of London. However since the other branches of the coffee brand has been thriving well, the overall revenue of Caffe Nero is expected to remain positive. Caffe Nero expects to grow further in the coming years through opening more number of outlets. It also expects to enter the markets of Asia. It is perceived that such strategies of growth can reduce any risk of decline in the coffee market of the western nations. Moreover venturing into emerging nation also facilitates operating in less saturated market conditions. In the western nations the economic downfall, saturated coffee market and continuously rising competition have propelled many firms to expand their activities into other nations (Ryding, 2011). Competitive pressure existing in the industry The competition pressure existing in the external environment for Caffe Nero can be analyzed through Porters Five forces. Bargaining powers of buyers- The power of buyers in the retail coffee chain industry is high. This is due to the aspect that consumers can easily to switch to other brands according to their preferences. Hence in order to manage the bargaining power of buyers, Caffe Nero is required to sell its products at competitive rates. It is also essential that the company promotes itself more through advertisements and differentiate its products from existing brands in the market to achieve competitive advantages. Bargaining power of Suppliers- The bargaining power of suppliers in the coffee industry is low. Caffe Nero is considered to be one of the strongest coffee brands of Europe. Being one of the primary coffee bean buyer and due to the large organizational size, the company can impact suppliers considerably. Moreover Caffe Nero is seen to operate on a contract basis with buyers. This further reduces the bargaining power of suppliers as they are bund in contracts for considerably long periods (Bitzer, Francken and Glasbergen, 2008). Threat of substitution- The threat of substitution in the coffee market is high. Consumers can substitute coffee and other products which are manufactured by Caffe Nero by other products such as tea and soft drinks. Brand-wise also it can be seen that if the products of Caffe Nero are up to the market standards, consumers may shift to other brands. Also an increasing level of caffeine consciousness may cause consumers to shift to other beverages such as fruit juice. Threat of new entrants- Entry barriers to the coffee chain retail industry is low. This is due to the aspect that developing coffee chains is relatively a cost intensive procedure. Caffe Nero tries to subdue other smaller brands by innovating new products and achieving higher benchmarks of quality. Competitive rivalry- The major competitors of Caffe Nero includes Starbucks, Costa Coffee and Seattle’s Best Coffee. Secondary coffee providers are also important competitors of Caffe Nero which includes McDonalds, Dunkin Donuts and Burger King. However the major share of the market of the coffee chain retail industry is held by Starbucks. Starbucks has been able to capture a distinctive position in the coffee industry due to its high quality products, continuous innovative measures, personalized approach with consumers and a global presence. The strong presence of Starbucks impacts other coffee brands in a highly negative manner (Davis, et al., 2013). Strategic group mapping Starbucks Costa Coffee Seattle’s Best Coffee Caffe Nero Brand image High High High High Coffee quality Medium High Medium High Consumer base High Medium Medium Medium Product range Diverse coffee chain Not very diverse Not very diverse Specialized coffee chain Locations Strong overseas presence Lacks overseas presence Lacks overseas presence Strong presence in the U.K and U.S Style American Continental American Continental Future changes and their impact The coffee shop industry is expected to continue growing in the future. The continuously rising demand for coffee and related products provides the industry with considerable options for growth. The fading effect of the economic crisis is also set to impact the coffee industry positively. However existing coffee providers require becoming more innovative and capturing consumer attention in diverse ways. Caffe Nero will therefore be required to work harder to maintain the interest of their customers. In the future Caffe Nero is expected to operate in a number of markets across the globe thereby widening the scope of revenue earning. Caffe Nero can launch diversified products which match the tastes and preferences of consumers of different nations. Caffe Nero’s success also depends upon the development of tourism. The tourism sector is also set to improve in the coming times in both in Europe and the Americas. This is expected to provide greater revenues for firms like Caffe Nero (Murthy and Madhava, 2012). Internal environment analysis VRIN framework Valuable- Valuable resources facilitate the development of existing oppurtunities and protect the firms against threats. The valuable resources of Caffe Nero are seen to be the cordial ambience of the store and its high quality products. The business generates increased customer value through its differentiated products and its comparatively low prices as compared with competitors. The business also values its skilled workforce who ensures that the objectives of the business are met. Rare- Rare resources are those which all firms do not possess and provides temporary or sustain tined competitive advantages to an organization. The unique selling point of Caffe Nero is that it sells high quality Italian coffee, which other famous brands do not. Caffe Nero is viewed upon as more specialized brand. Moreover the high goodwill of the brand helps it to gain competitive advantage against other smaller coffee chains. Imitable- The resources which are costly to imitate differentiates one firm from others in the industry. In general the resources of Caffe Nero are imitable. However, the patented coffee products and processes of manufacturing of Caffe Nero provide the business with unique power in the market (Elenkov, 1997). Organized to capture value- Caffe Nero recognizes the aspect that it must remain committed towards attracting consumer interests on a continuous basis. The brand caters to focus upon the needs of a smaller section of the market that prefer high quality coffee. The business is adequately aware of its position in the industry and therefore understands that it is essential to meet the growing expectations of consumers. High quality and a good coffee experience is what the firm strives to deliver consistently (Pearce and Robinson, 2000). Value chain analysis Caffe Nero’s efficient management system ensures that high quality materials are used in coffee making. The business has developed a highly strategic logistic system which integrates all the activities of the firm with its main objectives and goals. The business manages its supply chain in a manner such that it facilitates adding value to the products as well as reducing the overall costs of production. During production of coffee, the brand ensures that they remain differentiated from existing brands. The inbound logistics of the company involves procurement of high quality coffee beans from Italy and other parts of the globe. Caffe Nero also emphasizes on developing good relations with suppliers. The inbound and outbound logistics operations are carried out in different nations by Caffe Nero through the development of strategic supply chain divisions. The outbound logistics of the brand involves selling coffee directly through its outlets. No intermediaries are involved by the company to sell its products. Value chain also includes the manner in which Caffe Nero markets and promotes itself. The brand does not indulge in much advertising and relies much upon the word of mouth promotional methods which get achieved through its high quality products. The important support elements of a value chain process are human resource, infrastructure, technology development and procurement processes. Caffe Nero values its employees highly and considers that there contribution and dedicated hard work plays a distinctive in the businesses success. The business also relies upon sophisticated technology for reducing costs without compromising on the quality of the products (Utting, 2009). SWOT analysis Strengths- Caffe Nero’s primary advantage arises out of its strong brand name in the industry. Although there are a number of coffee shop chains existing in the market of the U.K, very few serve high quality and fresh coffee as Caffe Nero does. This is one reason why the brand has been successful in achieving a strong position in the market. It has also been seen that the amount of investments made in the overall market of the firm is seen to be low. Caffe Nero’s products are highly differentiated from that of Starbucks and Costa Coffee. Caffe Nero emphasizes on serving high quality Italian coffee giving great attention to the flavour and aroma of the coffee. Caffe Nero is also financially quite stable. This further increases the business’s scope for developing innovative products through research and development (Hitt, Ireland and Hoskisson, 2012). Weaknesses- One of the significant drawbacks of Caffe Nero is that the brand only sells Italian coffee products. This provides the brand with less competitive advantages. Caffe Nero must therefore consider developing its market position by diversifying its products further. If the brand aims to concentrate only on a single variety of coffee it may cause difficulties to innovate and develop new coffee variants. It has also been observed that the brand name of Caffe Nero is less known in the market. This is due to the predominance of Starbucks in the coffee market and the brands strong customer relations. Caffe Nero is seen to put less effort towards developing relationships with consumers. Therefore the brand must consider improving this aspect considerably (Dess, Lumpkin and Eisner, 2006). Opportunities in the external environment- Caffe Nero has emerged as the third largest coffee brand of Britain. The business is currently developing a number of strategies for growing into other nations and diversifying its existing number of products. Since Caffe Nero is one of the best coffee brands of Europe, recognition and acceptance of the brand is high in the market. The high goodwill facilitates the brand to influence consumers easily when new products are launched. Also the business can utilize its strong brand position to penetrate into the markets of Middle East and Asia. The brand can also consider investing in production of coffee beans. Modern lifestyle and globalization has positively impacted the demand of coffee worldwide. The continuous rise in the demand for coffee and the scope for developing innovative products provides huge scope for Caffe Nero to grow in the industry (Thompson and Martin, 2005). Threats in the external environment- The weak economic conditions in the U.K market have had a considerable impact on the business of Caffe Nero. Although the revenues were not negative, it has reduced significantly in comparison to earlier periods. Moreover the rate of growth of the business of the cafe in the U.K has also slowed. Moreover the existence of other coffee giants such as Starbucks and Costa Coffee further hampers the revenue earning capacity of the business. Price and quality wars amongst competitors are commonly seen to exist in the industry. It is essential for Caffe Nero to diversify its products and expand into other nations so as to reduce such negative impacts from the external environment and to maintain the brands competitive position (Courville, 2003). Reference List Bitzer, V., Francken, M. and Glasbergen, P., 2008. Intersectoral partnerships for a sustainable coffee chain: really addressing sustainability or just picking (coffee) cherries?. Global Environmental Change, 18(2), pp. 271-284. Clayton, A., 2003. London's coffee houses: a stimulating story. London: Phillimore & Company. Courville, S., 2003. Use of indicators to compare supply chains in the coffee industry. Greener Management International, 2003(43), pp. 93-105. Davis, B., Lockwood, A., Pantelidis, I. and Alcott, P., 2013. Food and beverage management. London: Routledge. Dess, G. G., Lumpkin, G. T. and Eisner, A. B., 2006. Strategic management: text and cases. New York: Richard d Irwin. Elenkov, D. S., 1997. Strategic uncertainty and environmental scanning: the case for institutional influences on scanning behavior. Strategic Management Journal, 18(4), pp. 287-302. Hitt, M., Ireland, R. D. and Hoskisson, R., 2012. Strategic management cases: competitiveness and globalization. Connecticut: Cengage Learning. Mintel, 2011. Coffee - UK - April 2011. [online] Retrieved from: [Accessed 16 November 2014]. Murthy, P. S. and Madhava, M., 2012. Sustainable management of coffee industry by-products and value addition—A review. Resources, Conservation and Recycling, 66(1), pp. 45-58. Pearce, J. A. and Robinson, R. B., 2000. Strategic management: Formulation, implementation, and control. New York: Irwin/McGraw-Hill. Ryding, D., 2011. The speciality coffee shop market–are today's consumers demanding more than store ambience and good coffee from their consumption experience?. International Journal of Business and Globalisation, 6(3), pp. 399-409. Thompson, J. L. and Martin, F., 2005. Strategic Management: Awareness, Analysis and Change. Connecticut: Cengage Learning. Utting, K., 2009. Assessing the impact of fair trade coffee: towards an integrative framework. Journal of Business Ethics, 86(1), pp. 127-149. Read More