Costa Coffee: Business Analysis - Essay Example

 Costa Coffee: Business Analysis EXECUTIVE SUMMARY Costa Coffee is a preferred coffee house headquartered in the United Kingdom sustaining operating income of £340.9 million in 2010. This is because the organisation is able to keep its operating costs low and gain consumer interest through a lower-than-competition pricing structure on its many finished coffee products. The company holds 36.7 percent market share in the UK against Starbucks and Pret-a-Manger. Research had indicated that the five most imperative issues facing the company are threat of new entrants in the market, the brand power of Starbucks, lack of diversification, the rising cost of commodities along the supply chain, and a growth in negative publicity regarding business strategy. Recommendations for improvement offered to Costa Coffee include repositioning the company, gaining consumer knowledge through market research to determine appropriate diversification strategies, and working with international governments to improve costs and gain positive long-term relationships for future international expansion of the brand in new markets. 1. Introduction Costa Coffee, owned by Whitbread PLC, is the leading coffee house in the United Kingdom today. Founded in 1971, the company was acquired by its parent company Whitbread which provided the firm with its first opportunities for significant strategic expansion by 1996. In April of 2013, Costa Coffee sustained 1,578 outlets in the United Kingdom and the organisation averaged one new store opening every two days since April 2013 (Poulter 2013). In 2010, Costa Coffee maintained an operating income of £340.9 million (Whitbread 2011). In its current business model, Costa is well-positioned for future competitive capabilities against its most prominent competitive rival, Starbucks, which maintained revenues of USD $13.29 billion in 2012. The company’s main competitors are Starbucks and Pret-a-Manger. Costa, against these competitors, currently holds 37.6 percent market share in the UK, making it the second largest coffee house in the world. Costa’s most significant competitive advantage against rivals is the company’s focus on maintaining a low price structure on most of its coffee products. Starbucks, however, has worked diligently over the last two decades to adopt a premiumisation strategy, positioning the brand under quality. Costa Coffee is a more down-to-earth company with a strong focus on people development and customer relationship management (CRM) which gives the company considerable brand recognition and brand preference in the UK and abroad. 2. Defining marketing and its practical advantages Marketing is the ability of companies that sell products and services to communicate the value of these outputs to customer segments in the pursuit of improving sales and profitability. It is a process that gives an organisation the ability to concentrate its many resources to optimise market opportunities in the pursuit of building a long-standing and sustainable competitive advantage (Baker 2008). Marketing creates the ability of a company to build positive emotional, psychological and direct relationships with consumers by linking company values and product attributes to known market characteristics (Abimbola 2001). As a tool for enhancing business performance and ensuring higher sales revenues, marketing serves as both an analytical tool and a strategy that assists in meeting company goals and objectives. Companies utilise marketing using a variety of different approaches. They can focus on any of the four dimensions of the marketing 4Ps, which include product, price, promotion and place as a means of positioning the company or differentiating it against competition. Companies can further use pricing strategies as a means of gaining competitive advantages through either penetration pricing, which is setting a price low during launch of the product and then raising the pricing structure after consumer demand and satisfaction increases (Monroe 2003). Companies can also invest heavily in the promotional function, devoting more capital resources to advertising in a variety of different mediums in order to raise brand awareness. Additional strategies include conducting market research on consumer behaviour and preferences in order to adjust product benefits and attributes or understand how best to distribute the product to meet with the most demand and sales revenue growth. There are a variety of strategies, however whichever is chosen by a marketer will depend on the firm’s level of knowledge of external market conditions, competitive behaviours and strategies, and the ability of the company to be flexible and responsive to consumer needs and preferences. Costa Coffee, as one example, is a company that understands the imperative of marketing and approaches it with a customer-centric business model. 3. The marketing objectives of Costa The following represents the most primary objectives of Costa Coffee: Increase sales revenues from the current level of £672.4 million to £2 billion by 2018 (Whitbread 2013). Open 3,500 stores globally by 2016 (Whitbread 2013). 25 percent carbon footprint reduction of the company, 15 percent reduction in the consumption of water within the firm, and “zero waste to landfill” (Whitbread 2013, p.9). 4. Justifying choice of analysis for Costa When attempting to determine how best to analyse the performance and potential prospects to meet company objectives, there are a variety of analytical models and instruments that can be used to measure company accomplishment. The respected PESTLE Analysis, an acronym for political, economic, social, technological, legal and environmental, is not suitable for measuring the domestic performance and competency of the UK division of Costa Coffee. The UK is a very liberal nation in which the government provides ample support for business development under a free market economy. Furthermore, the social environment in the UK is favourable for advancing the brand reputation of Costa Coffee as consumer are drawn to its flavours and pricing structures to fit their diverse lifestyles. Hence, there are very few threats to the business, from an external perspective, that need to be considered. The UK is an environment in which there is ample supply access to modern technologies that assist in business planning and development whilst the legal environment is also favourable to businesses that provide fair and equitable business dealings, under the aforementioned free market economy. Hence, this model is ineffective in understanding the genuine factors, both internal and external, that could impact business strength today and into the future. 4.1 Highlights Figure 1: Revenue growth changes between 2012 and 2013 (in millions) 5. SWOT Analysis The SWOT Analysis, measuring the strengths, weaknesses, opportunities and threats, allows researchers to understand the internalised factors that lead to better business performance and growth as well as several external factors that could impact current and future business strategy. This is the most viable tool for understanding how to evaluate the potential for success with Costa Coffee as the company maintains many different internal and external strategies that give the company competitive advantage and the ability to build a solid and respected brand personality. Strengths: The company’s main strength is its pricing structure, which is considerably lower than Starbucks that maintains a premium positioning strategy. To develop Costa stores, it only costs the company an estimated £230,000 on leasehold properties (Mark and Birkinshaw 2013). Additionally, the company is highly vested in establishing its own influential and self-regulated supply chain across the world to ensure the company maintains high bargaining power along the supply chain for coffee beans. Hence, the organisation has very low operating costs that can be passed back to consumers in the form of lower pricing structures. This is highly beneficial considering that consumer disposable incomes in the UK are shrinking as a result of austerity package measures by the government in response to the 2008-2010 recession. Additionally, inflation rates on food and beverages in the UK increased 5.6 percent in just one year (Hawkes, 2013; Allen 2012). By keeping pricing structures lower than competition, price-sensitive consumers in a variety of disparate markets who have strapped household incomes can be lured toward high quality products that satisfy budgets. This is a significant strength for Costa Coffee over that of competition. Additionally, Costa Coffee devotes a considerable amount of labour and financial capital into building human capital and establishing a cohesive and dedicated organisational culture. The company was voted the number 10 best company to work for in the United Kingdom (Costa Coffee 2013). The business also devotes considerable effort into developing people through career progression training under a very well-developed and contemporary HR model. Through this training and HR focus, employees are instructed on how to provide top quality service to customers. Additionally, Costa Coffee is very well-vested in corporate social responsibility through a variety of charitable activities and philanthropic objectives and instils this sense of volunteerism with its employee population in the UK. This is highly important as marketing literature indicates that there is a growing trend toward ethical consumption, which is selecting companies with a strong focus on ethics and morality over that of competition (Grande 2007). Today, consumers actually reward ethically-minded cultures and ethic-conscious business models by increasing expenditures with these firms and reducing consumption with companies that do not maintain this ethical focus. The company has a very well recognised brand with much brand preference (as a result of pricing structures) in the UK. Customers who are loyal to a brand are more enticed to increase their expenditures on the company’s products and provide businesses with much more quality word-of-mouth advertising (Chaudhuri and Holbrook 2001). The company devotes considerable financial capital toward the promotional function as a means of expanding its brand presence in multiple market segments which gives the company the ability to expand and know they will be recognised domestically and even internationally; this leads to higher sales volumes long-term. Weaknesses: The company has received considerable negative publicity since 2011 for its alleged unfair and illegal business behaviours. In 2011, three different coffee houses that opened in Bristol were charged with not receiving appropriate planning commission approvals (BBC News 2012). Though only a moderate weakness, negative publicity regarding business strategy development could tend to erode its gains in corporate social responsibility earned in the last decade. Furthermore, residents of Totnes, Devon (UK) raised a great deal of public awareness about their concerns and anger over yet another store opening in the town. The general belief was that Costa would erode the productivity and profitability of local businesses in this same industry and felt that this growing conglomerate, Whitbread, could put locals out of work. This, too, serves to potentially erode gains on CSR so important under the growing trend of ethical consumption. Costa Coffee does not have a well diversified business model, focusing primarily on coffee products. Companies have a tremendous risk for putting all of their eggs in a single basket (proverbially) and need to consider opportunities to expand their product lines or service varieties to avoid growing stagnant in their industry (Thompson, Gamble and Strickland 1992). Starbucks provides desserts, take-out bean coffee, music and books to diversify the business model and gain the interest of diverse consumer segments; Costa Coffee does not which could be impacting revenue growth. Opportunities: The company could be focusing on using social media as a means of better engaging with consumer segments and building a strong brand personality. There is a tremendous growth in the UK for mobile telephony subscriptions using smartphones that have the capability to utilise social media as a lifestyle. Companies such as Apple, Inc. use dedicated internal representatives that continuously engage consumers in real-time and build important relationships. Known as movement marketing, social media provides a platform for selling corporate values and beliefs, rather than focusing on product as a selling tool, that builds loyalty and brand preference. The company can also establish processing centres in foreign nations that grow coffee beans to gain more control over cost of agricultural processing, harvesting, and distribution rather than relying on external, foreign partners and suppliers. This would give the company a long-term foothold in these countries, to build brand awareness, for future market entry through foreign direct investment to improve corporate revenue growth and gain loyal consumers prior to market entry. Threats: The first and most primary threat for Costa Coffee is the brand reputation of Starbucks. Many consumer segments believe that Starbucks beans and processes for final product production are superior to other coffee houses. This is a product of a very adept and well-developed set of ongoing integrated marketing communications that have given consumers a positive perception of total brand quality. Undoing this asset for Starbucks is exceedingly difficult and puts Costa Coffee in a lesser position as a brand competitively. With more advanced premiumisation strategies, promotions and quality-focused positioning with Starbucks, this competitor could continue to seize market share from Costa with many domestic and international markets. Another threat is the risk of new market entrants in an environment where start-up costs are low and there are ample opportunities to set up rental sales units in commercial malls and other shopping districts. The company should be seeking opportunities to set up barriers to market entry to avoid new brand names from coming into the market and seizing market share whilst also building a positive brand personality. A final threat to the business is the rising cost of commodities (beans) along the global supply chain. Inflation rates on food across the world are the highest they have been in decades and it is giving suppliers a great deal of power along the supply chain as it is becoming more costly (higher switching costs) to seek out new suppliers. Additionally, there are only limited regions across the world in which coffee beans can be grown successfully and harvested, thus rising prices along the supply chain (whilst maintaining a lower pricing structure than competition) could erode operating profits after considering sales volumes. 6. Conclusion and recommendations The company’s five main issues are the competitive prowess of Starbucks and its strong brand personality and brand reputation, threat of new market entrants, rising cost of commodities along the supply chain, lack of diversification, and growing negative publicity that serves to erode advantages gleaned through CSR efforts and focus. All of these issues need addressing by the company. To combat Starbucks, the company can reposition itself away from a lower price structure to that of corporate social responsibility in order to capitalise on the growing consumer trend to value and respect ethically-conscious business. The company should develop a holistic and integrated campaign that spotlights the lifestyle and human welfare advantages achieved through its philanthropic efforts and development of agricultural supply chains across the world. Television advertisements showing how regions had been transformed would re-inject a consumer-perceived view of responsibility that would make the brand seem more viable and interesting as a social-centric organisation. This would likely, according to theory, lead to higher sales volumes. Auditing is an important and fundamental aspect of ensuring marketing success for a company. It provides metrics for understanding how to be responsive to changing market conditions, reviews competitive behaviours in an established market, and gives executives a new snapshot that can lead to contingency plans to avoid risk to the business model and its strategies. As a means of gaining both diversification strategies, the company can rely on real-time market research to determine what consumers would prefer as alternative products and services with the Costa Coffee brand and business model. This would give new insights into changing consumer preferences to ensure that any changes to product variety and service variety are directly aligned with actual consumer values and beliefs. The company should also work with international governments and the World Trade Organisation to identify opportunities for tariff reductions on imported coffee beans to lower the operating costs of the business model. This would allow the company to maintain its lower priced structure on its many menu products and also build important government-to-business relationships that would be beneficial for future expansion. If the company adheres to the recommendations provided in this research report, the company will be better positioned for growth and the ability to satisfy diverse consumer segments of varying lifestyles and socio-economic backgrounds. Costa Coffee has a long way to go to outperform Starbucks, however with revenue growth and credit availability as a result of business improvement and sales growth, Costa Coffee can become the number one coffee house domestically and internationally. References Abimbola, T. (2001). Branding as a competitive strategy for demand management in SMEs, Journal of Research in Marketing & Entrepreneurship, 3(2), pp.97-106. Allen, K. (2012). UK food inflation pushes higher, The Guardian. [online] Available at: http://www.theguardian.com/business/2012/apr/04/uk-food-inflation-higher-brc-neilsen (accessed 31 January 2014). BBC News. (2012). Investigation into third Bristol Costa Coffee shop. [online] Available at: http://www.bbc.co.uk/news/uk-england-bristol-16423230 (accessed 2 February 2014). Baker, M. (2008). The strategic marketing plan audit. Cambridge Strategy Publications. Chaudhuri, A. and Holbrook, M.B. (2001). The chain of effects from brand trust and brand effect to brand performance: the role of brand loyalty”, Journal of Marketing, 65(2), pp.81-92. Costa Coffee. (2013). A great place to work. [online] Available at: http://www.costa.co.uk/our-people/culture/ (accessed 1 February 2014). Grande, C. (2007). Ethical consumption makes mark on branding, The Financial Times. [online] Available at: http://www.ft.com/cms/s/2/d54c45ec-c086-11db-995a-000b5df10621.html#axzz2kT95cwFY (accessed 29 January 2014). Hawkes, S. (2013). Britain has highest food and energy inflation in Europe, OECD says, The Telegraph. [online] Available at: http://www.telegraph.co.uk/finance/10098624/Britain-has-highest-food-and-energy-inflation-in-Europe-OECD-says.html (accessed 30 January 2014). Mark, K. and Birkinshaw, J. (2013). Costa Coffee: a proposal to build the next generation self-serve espresso bar, London Business School. [online] Available at: http://edenmccallum.com/pdfs/Costa_Coffee_Case_A.pdf (accessed 1 February 2014). Monroe, K.B. (2003). The pricing strategy audit. Cambridge Strategy Publications. Poulter, S. (2013). Costa, the coffee chain that keeps on growing: brand to open hundreds more stores across the UK and around the world, Associated Newspapers – Mail Online. [online] Available at: http://www.dailymail.co.uk/news/article-2317419/Costa-coffee-chain-keeps-growing-Chain-open-hundreds-stores-UK-world.html (accessed 1 February 2014). Thompson, A., Strickland, A. and Gamble, J. (1992). Crafting and executing strategy: the quest for competitive advantage, 19th edn. McGraw Hill. Whitbread. (2011). Annual Report and Statements 2010. [online] Available at: http://annualreport.whitbread.co.uk/pdfs/0910/Whitbread-AR-0910-Section-Our-Businesses.pdf (accessed 1 February 2014). Whitbread. (2014). Whitbread PLC annual report and accounts 2012/2013. [online] Available at: http://www.whitbread.co.uk/content/dam/whitbread/pdfs/investors/reports-and-presentations/annual-reports/2013/10052013-annual-report-and-accounts-201213/Annual-Report-and-Accounts-2013.pdf (accessed 1 February 2014). Appendix A: Company Background Costa Coffee was founded in 1971 by two Italian brothers, Bruno Costa and Sergio Costa. The company was started primarily as a wholesale business that provided a variety of roasted coffee beans to select buyers and coffee houses in Italy. In 1995, due to a struggling business model, the company sold to Whitbread which provided the foundation and capital for expansion of the business. With the competency and capital availability of Whitbread, the company rapidly grew in the UK market and now boasts over 1,700 stores in 35 different countries. The company has also modernised in recent years with the addition of self-service vending operations of Costa products. In 2009, Costa Coffee, under the guidance of Whitbread, acquired a primary UK competitor, Coffee Heaven, for a total of £36 million. This gave the country more presence in Eastern Europe, where until 2009 it had limited presence, which gave the company more brand awareness in this region of Europe. In recent years, the company has determined that it could improve its revenue position by adding small outlets within select Pizza Hut restaurants, hospitals, universities, in Marriott Hotels, and even Tesco grocery stores as a means of expanding its brand visibility domestically and across the world. Today, the company is well-positioned for growth with strong brand awareness domestically and internationally and a low cost operational model (leasehold agreements) that allow the company to extend lower pricing structures to its loyal consumer segments. Read More