Industry and Market Analysis: A Coffee Shop in Smithfield - Essay Example

ID Number & Industry and Market Analysis: A Coffee Shop in Smithfield Introduction Dublin is the capital city of Ireland. Specifically Smithfield is located in the Northern side of Dublin. Between 2008 to 2010, commercial and residential developments in Smithfield have been rampant. Because of the continuously increasing number of local and international investors in Dublin, rentals of prime offices and retail properties is expected to stabilize in this area (Hollis 8). In response to the continuous economic development in Smithfield, this study will purposely conduct an industry and market analysis for a coffee shop in Smithfield, Dublin. Basically, the proposed coffee shop is totally different from a typical coffee shop. On top of the high quality service, this particular coffee shop will offer added services such as the use different types of IT and communication facilities like printers, fax machine, free access to the internet, and so on. As part of examining the coffee industry in Dublin market, a Porter’s five forces analysis will be conducted in this study. After discussing the coffee shop’s target market, its expected revenue will be estimated based on some assumptions that are related to the company’s target market. After analyzing the market trends, strategic ways on how the company will increase its competitive advantage over its close competitors will be tackled in details. Industry Analysis In general, the Michael Porter’s Five Forces Analysis can be use to analyze the market competition within the coffee shop industry in Smithfield, Dublin. Through the use of the five forces framework, the business owner can easily identify internal and external factors that could directly or indirectly affect the bargaining power of its accredited suppliers and prospective buyers. Aside from discussing the risks for product substitution, the use of this particular industry analysis framework will make the business owner easily track down not only the presence of potential rivalry within the coffee shop industry but also signs of potential threats of new entrants or new businesses that wish to enter the coffee shop industry in this area (Porter 17). Rivalry among Existing Firms There is a high concentration of market competitors within the coffee shop industry in Smithfield, Dublin. Aside from the presence of Starbucks, there are also hundreds and thousands of coffee retailing companies that are currently operational in this area. Because of the presence of numerous competitors that aims to compete for the same group of customers, product differentiation and offering a unique store ambiance is necessary to make coffee shop retailers win the long-term loyalty of their customers. For example, Starbucks managed to take advantage of product differentiation by offering coffee with different flavors such as amaretto, hazelnut, mint, and raspberry into its specialty coffee. This gives people some reason to become a loyal customer (Schrage). Other local-based coffee shops have publicly introduced specialty coffee like Mocha Cookie Crumble Frappuccino (Newenham) whereas Kopi Luwak is known for its caramel and cinnamon flavored Arabica coffee that offers smooth flavor with tastes of cacao and a hint of berries (Irishtimes.com). Other than product differentiation, most of the existing coffee retailers are also competing with one another in terms of the quality of its customer service, convenience, and the ambience or atmosphere offered within the coffee retailing outlet (Newenham). The coffee retailing industry in Smithfield, Dublin is perfectly competitive (Grant 69). On top of the local coffee shops that are being managed by Quails (McKay), the Coffee Kiosk Ballsbridge, the Greenbean Coffee Roasters, Starbucks, Java Republic Coffee Company, and Kopi Luwak are among the newly opened coffee retailing shops in Dublin (Boyd; Newenham; Irishtimes.com). One of the main reasons why the number of coffee shop retailing company is excessively high in this area is because of the low capital cost requirement needed in putting up a coffee shop. This explains why newly established coffee shops such as the case of Coffee Angel are slowly expanding its store outlets (Digby). Due to the tight market competition within the coffee retailing industry, a lot of existing coffee shop retailers are aggressively fighting to increase their market shares within the coffee retailing industry in Smithfield, Dublin. Because of the limited numbers of prime business locations in this area, a lot of coffee retailing companies is willing to pay a high rental cost of its store outlets. By doing so, the coffee retailers can prevent its rivals from saturating its target market. Potential Threats of New Entrants To be able to earn good profit, coffee shop retailing companies should focus on establishing a strong chain of coffee shops. Even though it the capital needed to put up a single coffee retailing store outlet is quite low, the capital requirements for establishing a chain of coffee shops is quite high. Although there are some business owners who have sufficient monetary fund to put up a chain of coffee shop, most of the favorable locations in Smithfield, Dublin is already occupied (Grant 9). For this reason, the threat for new entrants is medium-high. Porter explained that the threat of new entrants is relatively low in case the barriers to entry is high (Porter 7). Within the coffee industry, the threat of a new entrant is medium-high. It means that the barrier to entry within the coffee retailing business in Dublin is low. Even though a potential new player could easily enter the coffee retailing industry, there are quite a lot of factors that could discourage young entrepreneurs from entering the business. First of all, economies-of-scale is needed to make the business owners able to drive down the unit cost of each cup of coffee. Since it would be very difficult on the part of a new entrant to immediately win the trust of suppliers, economies-of-scale will not be that easy for new players to achieve. Furthermore, brand and product differentiation is necessary before a coffee shop retailing company is able to compete with other more established brands. To be able to establish a strong brand, the company should invest in advertisements. Threats for Product Substitution There is absolutely no switching cost in coffee business. On top of the coffee offered by other coffee shops, other low-cost caffeinated and non-caffeinated beverage products that are readily available in grocery chains (i.e. instant coffee, fruit juices, colas, energy drinks, tea, and milk) are among the possible substitutes for coffee (Koehn; Vishwanahth and Harding; Moon and Quelch). For this reason, the threat for product substitution is quite high. Since the product substitute for coffee is quite high, it is important on the part of coffee retailing businesses to make their coffee products readily available in the market. This explains why the business success of coffee shop owners is highly dependent on its ability to dominate the market. Bargaining Power of Suppliers A coffee shop company can easily search for highly qualified suppliers who could readily supply them the raw ingredients needed in making coffee. On top of having a low switching cost, coffee shop companies can readily choose from a large number of suppliers within and outside Smithfield, Dublin. For this reason, the bargaining power of suppliers is relatively low. Bargaining Power of Buyers According to Porter (24), the bargaining power of buyers is referring to the ability of the customers to bring down the market prices of coffee. Within the market of Smithfield, Dublin, the number of potential buyers of coffee is quite large. Furthermore, the presence of potential buyers is very much fragmented. For this reason, the bargaining power of buyers within the industry of coffee retailing business is low. It means that the buyers of coffee products are not enough to bring down the market prices of retailed coffee. (See Appendix I – Summary of Porter’s Five Forces Analysis on page 14) Target Market To learn more about the company’s target market, it is necessary to conduct a market segment (Kotler 263 – 266). Regardless of gender, family size, income, occupation, educational background, religion, race, generation, ethnicity, and social class, the demographic profile of the company’s target market are the young individuals more than 16 years of age who prefer to have their cup of coffee within a quiet place that offers the use different types of communication facilities and other services such as printing services, scanning services, fax services, and free access to the internet. By knowing the demographic profile of the company’s target market, the company can start developing its own mission and vision statement which could inspire the entire team to work together towards the development of its branding strategies. (See Appendix II – Market Segmentation on page 15) Based on the company’s psychographic segmentation, the target market of this particular coffee shop includes not only the active and outgoing individuals but also the IT fanatics who are coffee lovers and non-price conscious individuals with positive attitude and buying behavior on high quality coffee drinks. With more than 1.183 million people as of 2006, Dublin is the most populated region in Ireland (Central Statistics Office 2). The market size in Dublin is expected to increase by up to 1.659 million by 2026. On the other hand, the geographic segmentation of Smithfield in Dublin is characterized with having a land area of 0.51 km2, a population of 6,386 with a population density of 12,554 people / km2 (Smithfield in Dublin, Ireland). Roughly 51.4% of the total population of Smithfield are immigrants who lives in areas close to “Mountjoy Square, the border of Gardiner Street Upper / Mountjoy Square West” (Duncan). Since the population size in Dublin is expected to increase, the chances wherein the population density in Smithfield will also increase accordingly. (See Appendix III – Actual Projected Population of Regional Authority on page 16; Appendix IV – Geographic Map of Smithfield in Dublin, Ireland on page 17) Total Market Value is defined as “the figure of total market value of a business in relation to the sum of the present value of the components of the business” (Gallagher and Andrew 334). The proposed coffee shop is not yet existing. Therefore, the only way to measure the total market value of the proposed business is to compute for the required capital cost versus the actual market valuation of the company’s expected asset (DeGeeter 578). For example, assuming that the initial capital outlay is IR?500,000. Although the proposed business has a strong product potential, there is a risk associated with implementing the business because the business owner has not yet proven whether or not the expected target market would patronize the company’s products and services. The expected market value for this particular market is quite high. In case the business owner will receive 8 times its total investment value, then the company’s expected market value will be IR?4,000,000. [IR?500,000 total investment x 8 as the estimated initial return]. In case the business owner will only receive 5 times its total investment value, then the company’s expected market value will be IR?2,500,000. [IR?500,000 total investment x 5 as the estimated initial return]. Target Company Revenue As part of computing the company’s expected revenue, this project will consider the following assumptions: 1. The average unit cost of coffee and other beverages is IR?1.8; 2. The average unit cost of food is IR?2.5; 3. The average unit cost of printing service, fax service, and scanning service is IR?1.5 each; 4. The monthly rent expense is IR?5,000; 5. The monthly salary and wage expense is IR?3,000; 6. The monthly cost of electricity is IR?800; 7. The monthly cost of food and beverages supply is IR?1,500; 8. The one-time fixed cost of furniture and equipment is IR?50,000; 9. The one-time fixed cost of construction expenses is IR?100,000; 10. A total of 5% of the population in Smithfield will purchase at least 1 cup of coffee four times (4x) a week; 11. A total of 3% of the population in Smithfied will purchase at least 1 type of food three times (3x) a week; 12. A total of 1.5% of the population in Smithfied will purchase printing, fax, and scanning services each week; 13. Each year, the expected annual sales will increase by 10% conservatively; and 14. All variable costs will increase by 0.1% each year. Considering all of the assumptions mentioned above, the estimated total revenue after the first (1st) year will be IR?81,953. After establishing a long-term relationship with the company’s target customers, the company is expecting its annual sales to increase by 10% each year. For this reason, the expected revenue after tax will constantly be increasing from the first (1st) year up to the fifth (5th) year respectively. By the end of the fifth (5th) year, the company’s expected revenue after tax will be IR?618,762. (See Table I – Actual Computation of the Expected Revenue After Tax on page 9) Table I – Actual Computation of the Expected Revenue After Tax Price per Unit Expenses Annual Cost Expected Annual Sales 1st 2nd 3rd 4th 5th Total Revenue after Tax After 5 years Initial Capital Outlay 500,000 One-Time Fixed Cost Furniture & Equipments 50,000 Construction expense 100,000 Total One-Time Fixed Cost 150,000 Variable Costs Rent expense 5,000 60000 Salary & Wages 3,000 36000 Electricity Costs 800 9600 Food & Beverages Supply 1,500 18000 Total Annual Variable Cost 123600 123600 123724 123847 123971 124095 Expected Sales Coffee & Other Beverages 1.8 119868 Food 2.5 74917 Printing Services 1.5 7492 Fax Services 1.5 7492 Scanning Services 1.5 7492 Total Expected Annual Sales 217260 217260 238986 262885 289173 318090 Expected Revenue before Tax 93,660 115,262 139,037 165,202 193,995 Less Tax of 12.5% 11,708 14,408 17,380 20,650 24,249 Expected Revenue after Tax 81,953 100,855 121,658 144,552 169,746 618,762 Assumptions: 1. 5% of the population in Smithfield will purchase at least 1 cup of coffee 4x a week. 2. 3% of the population in Smithfied will purchase at least 1 type of food 3x a week. 3. 1.5% of the population in Smithfied will purchase printing, fax, and scanning services each week. 4. Each year, the expected annual sales will increase by 10% conservatively. 5. All variable costs will increase by 0.1% each year. Market Trends The market structure of coffee retailing industry in Smithfield, Dublin is a perfect competition. It means that there are excessively large number of buyers and sellers within the said industry that sells homogenous product (Jain and Trehan 243). Aside from the presence of Starbucks in this area, other coffee retailing companies those shops that are being managed by Quails (McKay), the Coffee Kiosk Ballsbridge, the Greenbean Coffee Roasters, Java Republic Coffee Company, and Kopi Luwak are also currently operational in this area. For this reason, the market price of retailing coffee is very much dictated by the industry. To compete in the market, most of the existing coffee retailing companies invested on product innovation and product differentiation. In the case of Starbucks, the company’s product differentiation includes serving coffee with different flavors such as amaretto, hazelnut, mint, and raspberry into its specialty coffee. Other local-based coffee shops have publicly introduced specialty coffee like Mocha Cookie Crumble Frappuccino (Newenham) whereas Kopi Luwak is known for its caramel and cinnamon flavored Arabica coffee that offers smooth flavor with tastes of cacao and a hint of berries (Irishtimes.com). Basically, the process of having product differentiation will give the public consumers some reason to become one of these companies’ loyal customers (Schrage). Other coffee shop retailing companies are also competing with one another in terms of the quality of its customer service, convenience, and the ambience or atmosphere offered within the coffee retailing outlet (Newenham). Based on the demographic profile of the target market, young individuals are becoming highly dependent on the use of information technology. Economic factors such as the rapid developments that are taking place in Smithfield, Dublin also add up to the increase in demand for these devices. For this reason, part of my future predictions is that the public consumers such as in the case of the students and young professionals will be looking for a place where they can use extra facilities like printers, scanners and fax machines on top of having a free access to the internet. To compete with other existing coffee retailing companies, the business plan includes further investment on product and service innovation. By coming up with a good tasting coffee at a much competitive prices, the target market for this particular company will be highly encouraged to take some time to try at least one cup of their preferred coffee. On top of making extra facilities like printers, scanners and fax machines available inside the coffee shop, the business owners will also have to create a unique coffee experience by making its interior design more suitable for working and busy people. Competitive Advantages The presence of an alternative product can easily make the price-sensitive consumers to shift from one coffee retailer to another. To avoid the risks of losing a large part of the market shares to other similar companies within the same industry, creativity is very much considered as an essential part of product or service innovation (Goldenberg and Mazursky 1). Therefore, it is up to the companies’ discretion on how they can be able to offer product innovation to its target customers. Market-led innovation when combined with product and service innovation can offer the best competitive advantage to the business. To be able to satisfy the specific needs and wants of the company’s target market, the business owner should first conduct a market-based information to learn more about product specification and services that a coffee drinker is looking for in a coffee shop. Although product and market innovation are closely related to one another, there is still a huge differences between these two concepts. Earlier, it was mentioned that product innovation is possible by simply being creative (Goldenberg and Mazursky 1). It means that creativeness is necessary before the company can produce a different taste of coffee that will be readily accepted by the company’s target market (Ulwick 2). On the other hand, a market-led innovation aims to create an entirely new concept of coffee shop based on the information that was taken directly from the public consumers. It means that market-led innovation is more focused on gathering useful information straight from the company’s target customers (Ulwick 3). The idea of putting up a coffee shop that offers the use different types of communication facilities such as printing services, scanning services, fax services, and free access to the internet actually came up after having few minute conversations with some of friends and colleagues. After discussing the quality of coffee and services offered by few of the nearby coffee shops in town, we have concluded that the process of allowing our customers to use these extra facilities will give them more reasons to visit our future coffee shop. By offering these extra services to our target customers, the company can invite more business people to visit our shop more often. Conclusion Before establishing a coffee shop in Smithfield, Dublin, the business owner will have to initially conduct an industry and market analysis to know more about the existing companies that are currently operational in this area. Basically, the industry analysis will provide the business owner a better insight with regards to the macroeconomic environment of the business. On the other hand, the marketing analysis is necessary in order to learn more about the company’s target market and what the target market is actually looking for in a coffee shop. Based on the industry and market analysis results, the business owner will be able to come up with a more feasible and lucrative plan for the business. Appendix I – Summary of Porter’s Five Forces Analysis Appendix II – Market Segmentation Demographic: Age Family Size Family Life Cycle Gender Income Occupation Education Religion Race Generation Ethnicity Social Class 16 years old and above 0, 1 – 2; 3 – 4; 5+ Young & single; young & married; with or without children; old & single; old & married Male, female, gay, lesbian Under IR?9,999; IR?10,000 – 14,999; IR?15,000 – 19,999; IR?20,000 – 29,999; IR?30,000 – 49,999; IR?50,000 – 99,999; IR?100,000 and up Professional and technical; managers, officials and proprietors; clerical, sales; craft people; forepersons; operatives; farmers; retired; students; homemakers; unemployed. Grade school or less; some high school; high school graduate; some college; college graduates, under graduates. Catholic, Judaism; Islam; Paganism; Protestant; Presbyterianism; Methodism; Others. White; Black; Asian; Hispanic; etc. Baby boomers; Generation X and Y. Bretons; Cornish; Manx; Scottish; Ulster Scots; Welsh; English; Anglo-Irish; etc. Lower-lower; upper lower; working class; middle class; upper middle; lower upper; upper-upper. Psychographic: Lifestyle Personality Values Active / outgoing / IT fanatics. Coffee lovers; non-price conscious individuals. Positive attitude and buying behavior on high quality coffee drinks. Geographic: City / Density Dublin ? 4,588/km2 Smithfield ? 12,554 people/km2 Urban Appendix III – Actual Projected Population of Regional Authority Source: Central Statistics Office, p. 2 Appendix IV – Geographic Map of Smithfield in Dublin, Ireland Source: Smithfield in Dublin, Ireland References Boyd, Brian. “How do you take yours?” Irishtimes.com. 11 August 2012. Web. 16 November 2012. . Central Statistics Office. “Regional Population Projections. 2011 – 2025”. Central Statistics Office. 4 December 2008. Web. 17 November 2012. . DeGeeter, Melvin J. 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