Marketing Business Analysis of Costa Coffee Company - Term Paper Example

COSTA COFFEE ANALYSIS by Executive Summary Costa Coffee is presently the leading coffee chain in the UK in an industry that is highly competitive and rapidly growing. The company beat Starbucks in 2010 for the first time, becoming the biggest coffee chain company in terms of physical stores, although with a lesser market share. The objective of the organization is to become the leading coffee chain in the world, with coffee stores in every major market. Currently, the company is on track to achieve its target, having already established over 2,800 stores in over 30 countries in the world. This report seeks to conduct an external audit analysis using the PESTLE analysis and analyze the market through the Porters Five Forces assessment tool. Table of Contents Contents Executive Summary 2 Contents 3 1.0 Introduction 4 2.0 Current Marketing Situation 4 2.1 External Audit 5 2.1.1 PESTLE Analysis 5 2.1.1.1 Political 5 2.1.1.2 Economic 6 2.1.1.3 Sociocultural 6 2.1.1.4 Technological 7 2.1.1.5 Environmental 7 2.1.1.6 Legal 7 3.0 Porters Five Forces Analysis 8 3.1 Porters Five Forces Analysis of the Coffee Retail Industry 8 3.1.1 Threats of New Entrants: Moderate 8 3.1.2 Threat of Substitutes: High 9 3.1.3 Buyers Bargaining Power: Low 9 3.1.4 Suppliers Bargaining Power: Low 9 3.1.5 Competitive Rivalry Intensity: High 9 4.0 Conclusion 10 5.0 Bibliography 11 1.0 Introduction Costa is currently the leading coffee chain in the UK in an industry that is highly competitive and rapidly growing. In spite of the current contraction forces within the global and UK economies, Costa has been able to expand sufficiently in the emerging economies as well as in its domestic market in the UK (Costa.co.uk 2015). Costas brand focus on its various renowned coffee brands has been equaled with portfolio growth and development into new areas of service. Costa operates from the civil parish and market town of Dunstable as its main headquarters, situated in Bedfordshire England. Although leading its major competitors in terms of physical stores, it comes second to Starbucks regarding market share. Costa is completely owned by Whitbread. Among its major competitors, it has cut out its market niche by being the only coffee chain that offers hand-made coffee products to its clients. Costa Coffee has many brands, among them Miscela, Macinatura, Macchina and Manna. Costa specializes with Italian made coffee as their products suggest. All Costa coffee shops have been installed with Italian made Espresso machines. All these machines have been perfectly tuned to a long period to attain wide volumes of flawless coffee. Their special blend of Arabica and Robusta coffee is slowly roasted to perfection, much to the satisfaction of their clients. Towards the end of the year 2010, Costa acquired a market share of 37.7% to become the biggest coffee franchise within the UK. Bruno Costa and Sergio started the company in the year 1971, which later became part of the Whitbread franchise in 1995. Currently, Costa Coffee has about 2,800 stores in over 30 countries around the world (Costa.co.uk 2015). 2.0 Current Marketing Situation Internal and external market audits can be used to assess the current marketing situation for Costa Coffee. There are numerous methods used to assess the external environment of the company such as PESTLE analysis as well as Porters Five Forces. 2.1 External Audit The external audit is executed through carrying out the PESTLE analysis. A PESTLE analysis empowers the researchers to analyze many external elements such as economic, technological, political, social, and environmental elements that may affect the business. 2.1.1 PESTLE Analysis PESTLE is an acronym that denotes Political, Economic, Social, Technological, Legal and Environmental factors that affect a business. The analysis of these elements provides a "birds eye view" of the complete external environment from numerous perspectives that an individual intends to analyze or keep track of in the process of opening a business establishment. All the named elements of this method of analysis are vital for any sector a business establishment may intend to venture (Moric Milovanovic & Wittine, 2014). Beyond getting a good understanding of the dynamics of the market, this market analysis signifies on of the backbones of the practice of business strategic management that accounts for the different objectives of the company as well as defining what kind of business an organization should engage itself. It might be so, that the significance of every element may vary to different types of sectors and industries, but nonetheless, it is vital to any business strategy an organization intends to develop that they carry out the PESTLE evaluation. 2.1.1.1 Political UK political changes that took place in 2010 because of the formation of the coalition government introduced many changes in fiscal policies that affect business operations. The tax policies introduced by the new regime have additionally had an effect on the party ratings in opinion polls. VAT [Value Added Tax] reduced significantly from 17.5% to 15% and then later in the year 2011, was taken back to its original level of 17.5%. Other changes would soon follow as the government increased the VAT charges on items to 20%, a record high. The increase in VAT has thus increased the price level of coffee products sold at Costa Coffee. A higher VAT rate translates to higher prices for the consumers as the extra tax burden of 2.5% is directly transferred to the consumers of Costa Coffee products (Hansford, Hasseldine & Howorth, 2003). In the UK, high-quality coffee demand has been growing gradually, and Costa Coffee company possesses a certification for coffee beans. High-level coffee differentiation ensures the product gains advantage through fair trade. To concentrate on the sustainable development of their coffee beans, the company procured all the coffee beans from Rainforest Alliance farms. To support production capabilities for its stores, Costa Coffee initiated an organization aimed at assisting firms in Uganda, Kenya, Colombia and a host of other countries to increase production and quality. The local people in all the involved nations benefited greatly from the initiative. 2.1.1.2 Economic Currently, the UK and other major economies in the world are experiencing economic contraction forces that have seen interest rates go up in a bid to control inflation. The middle class is the most affected group of earners in the UK, and they happen to be the biggest spenders of Costa Coffee products according to various research studies. Bad economic periods in the UK and other locations where the company has stores leads to reduced sales. In a move to correct the economic crunch of 2009 and 2010, the UK government reduced the interest rates to accelerate the economic recovery. Reduced interest rates increased the money supply in the market and increased aggregate spending. There was significant increase in sales for Costa Coffee products. Unfortunately, during this period, many individuals lost their jobs meaning that the purchasing power of those individuals without a job reduced significantly, as now they would have to depend on their family and friends. A similar scenario was witnessed in the year 2014 when the UK economy rescinded for three months between May and August. In tough economic times, the prices of Costa Coffee products are affected significantly. Costa Coffee and other companies trading in a similar line of products are affected significantly when the country experiences hard economic periods. Interest rates, exchange rates, and inflation rates are economic elements that affect the price of products. 2.1.1.3 Sociocultural Demographics (population) numbers directly affect Costa Coffee line of business. Increases in population bring new opportunities for the coffee business, as more people will get to consume the products offered on the market. Improvements in the levels of education and the overall living standards result in direct increase in demand for high-quality products. Therefore, Costa Coffee needs to maintain its high-quality levels of its products to ensure repeated business increases. Social environment attitudinal changes affect the coffee business significantly. Current trends indicate that people prefer meeting in coffee shops and restaurants for business meetings. Therefore, coffee shops have been equipped with social amenities such as free Wifi connectivity for revelers and clients. Others include equipping the coffee shops with big LED screens where people can meet and watch sports while drinking coffee. Others include setting up snooker tables and chessboards just to entertain people while they are drinking their favorite beverages. 2.1.1.4 Technological Technology has made the world transform into a global village. Technological improvements have made businesses run smoothly and efficiently. Efficiency leads to improved time in production and service to customers. Technological implementation by Costa Coffee has enabled the company to achieve a competitive edge over its competitors, especially in brewing coffee. Although the company makes hand-made coffee, the machines used to brew the coffee are Italian made, and uses the most recent technologies that grind and blend the different types into perfection. The company also uses a modernized EPOS (Electronic Point of Sale) system in all its stores all over the world. 2.1.1.5 Environmental The world has become skeptical and concerned with the levels of pollution in the environment and what it means to pollute the environment. A large process of making coffee involves using heat to roast the coffee beans up to the required temperatures. Some countries such as Iceland and Switzerland have very stringent control measures that are aimed at limiting the level of emissions into the environment. These laws affect the company operations significantly. In addition, companies all over the world need to institute measures aimed at limiting the number of pollutants in the environment. The company needs to focus on the most appropriate sustainable practices to avoid suffering from reputational risks. The disposable cups used by the company should also be made of materials that are environmentally friendly such as using materials that can be recycled. 2.1.1.6 Legal All companies must abide by local business laws in different countries and locations. There are different laws that specify the business standards such as employment laws and minimum wage laws. Costa Coffee has ensured that all laws have been obeyed within the UK territory as well as abroad. Employees are adequately remunerated while at the same time ensuring that business ethics has been observed at all times. 3.0 Porters Five Forces Analysis Initially created by Michael E. Porter of Harvard Business School, the Porters Five Forces Model, which was named after its creator assesses five distinct elements that assist in determining if a business establishment can make profits, basing the analysis on other business establishments within the same sector. Comprehending fully the competitive forces and their fundamental causative elements, unmasks the origins of a sectors present levels of profitability and at the same time giving a model for influencing and anticipating profitability and competition over a specified period (Hbr.org 2015). According to the creator of the model, the starting point of making profits is synonymous regardless of the sector. In this regard, the structure of the industry is what in the end influences profitability and competition, and not if a sector or industry produces a service or product, is mature or emerging, low-tech or hi-tech, unregulated or regulated. Porter argues that if the forces are strong, as they are in some industries such as in hospitality, textiles and airlines, nearly no organization earns good ROI (Return on Investment). Porter additionally noted that if the five forces are non-threatening, as they are in sectors such as toiletries, soft drinks, and software development, then many organizations are profitable (Drejer 2006). 3.1 Porters Five Forces Analysis of the Coffee Retail Industry 3.1.1 Threats of New Entrants: Moderate Within the coffee industry, there is a moderate threat of fresh industry entrants as the factors that bar new entrants are not strict enough to dampen the spirits of new companies that intend to enter the market. The coffee industry in the UK and most parts of the world has a monopolistic competition structure, and the saturation is abstemiously high. For the companies entering the market for the first time, the initial capital is not high as some business requirements such as physical stores and machines used in brewing can be leased at a fee. On the domestic level, small stores that sell coffee can compete with Costa Coffee and other brands such as Starbucks since the consumers incur no significant switching costs (Henson 2008). 3.1.2 Threat of Substitutes: High In essence, this business is faced with the threat of encountering many substitutes. They include tea, cocoa, chocolate, water, juices, etc. Pubs and Bars that trade in non-alcoholic drinks might additionally substitute for social experiences of Costa Coffee. In addition, people who consume coffee have an option of making it in the comfort of their homes, at a lower cost that the amount they spend in the coffee stores. 3.1.3 Buyers Bargaining Power: Low The coffee and beverage industry is structured in a manner that disallows buyers to demand concessions from companies such as Costa Coffee. The industry additionally provides products that are differentiated with a very wide consumer base that generate low volume purchases. This erodes the power of the buyer. Although the industry does not have switching expenses, organizations such as Costa Coffee and appropriates its prices in line with industry prices at existing market rates while also ensuring they remain competitive within the premium pricing levels. 3.1.4 Suppliers Bargaining Power: Low The major factor inputs into the value chain of Costa Coffee is premium Robusta and Arabica coffee grown in different parts of the world and coffee beans, which are typical elements, therefore making a switch between different suppliers low. With its scale and size, Costa Coffee can maximize on its suppliers but retain a "fair trade certified coffee bean" as well as farmer equity undertaking that provides the suppliers with a good partnership position. 3.1.5 Competitive Rivalry Intensity: High As noted earlier, the industry has a monopolistic competition structure, with Costa Coffee having the second highest market share behind Starbucks. Costa Coffee, therefore, continues to apply significant pressure on its closest rival Starbucks in almost all the departments, having already established more stores than them. The intensity in the rivalry is created by the fact that customers do not have to incur any costs for switching their brands of choice. Although not as old as its major competitor, Costa Coffee has a competitive edge over its closest rival as it has managed to price its products slightly lower than Starbucks, owing to the fact that they own the process right from the time the coffee has been planted on the farms. They have additionally managed to create premium brands and differentiated their products by creating coffee in a separate, distinct method – roasting and hand making coffee. 4.0 Conclusion Currently, Costa Coffee biggest market development is in the international division. The emerging markets of Mexico, South Africa, China, India, and Brazil continue to provide good opportunities, with significant growth in the middle-class segment, which form the biggest clientele segment for Costa Coffee products. The company has additionally made notable market gains in China, with an estimated 300 plus stores already in operation as at June 2015. Costa Coffee needs to win in these emerging markets, as most are largely untapped. To have a competitive advantage over smaller local coffee shops, Costa Coffee must remain relevant to consumer’s tastes and preferences and at the same time maintaining their identity of handmade Italian flavored coffee. The management of the company additionally needs to operate freely to develop store formats while additionally introducing locally available product mixes that will satisfy the needs of the clients. 5.0 Bibliography Costa.co.uk, (2015). Costa Coffee - #BeautifullyPredictable. [online] Available at: http://www.costa.co.uk/ [Accessed 30 Oct. 2015]. Drejer, A. (2006). Strategic innovation: a new perspective on strategic management. Handbook of Business Strategy, 7(1), pp.143-147. Hansford, A., Hasseldine, J. and Howorth, C. (2003). Factors affecting the costs of UK VAT compliance for small and medium-sized enterprises. Environment and Planning C: Government and Policy, 21(4), pp.479-492. Hbr.org, (2015). The Explainer: Porters Five Forces. [online] Available at: https://hbr.org/video/3590615226001/the-explainer-porters-five-forces [Accessed 30 Oct. 2015]. Henson, C. (2008). An Analysis of the Coffee Service Industry in Metro Manila and the Buying Behavior of its Consumers. Loyola Schools Review, 6(0). Moric Milovanovic, B. and Wittine, Z. (2014). Analysis of External Environment’s Moderating Role on the Entrepreneurial Orientation and Business Performance Relationship among Italian Small Enterprises. International Journal of Trade, Economics and Finance, 5(3), pp.224-229. Read More