Adjustments to Prices for COFFEE HOUSE Restaurant in Moscow during the Recession - Essay Example

John Q. Doe English 101 5 December 2009 • Research question What adjustments to prices could Moscow’s Kofe Haus restaurant in order to draw more customers during the recession? Theoretical Framework This paper will examine the current offerings of COFFEE HOUSE. A review of industry literature and analyses of other retail coffee strategies will be conducted. Some of the best general advice and recommendations made by economic experts will be applied to the coffee business in general, locally adapted for the Russian market and then specifically tailored for the COFFEE HOUSE chains current and future pricing strategy. Methodology A simple SWOT analysis will be applied along with a consideration of the traditional 4 Ps of marketing to get a clear picture of the situation. Many assumptions will have to be made due to a lack of good market data, typical of the non-transparent Russian business operating environment. Anticipated Difficulties Most of the raw information will be based on anecdotal evidence, scarce industry reports, and some publicly available company literature. Action plan 1)analysis of coffeehouse current situation 2)literature review 3)selection of appropriate strategies Executive Summary An anecdotal SWOT analysis and literature review was conducted to find solutions to the difficult economic conditions confronting COFFEE HOUSE in the global recession. Marketing strategies and business models from North America were examined. Local competition was surveyed and the target market consumer was profiled. Although the North American market leaders have a dominant world position, they have also suffered during the recession. Not all the strategies and tactics are applicable in the Russian market; but some techniques were adapted with some reservation. COFFEE HOUSEs strength lies in its long history adapting to local market conditions, close contact and development of loyal customers. An evolving strategy must respond to deteriorating purchasing power of consumers and possible loss of market share to new competitors. A shift away from food-based price discounts towards value-based espresso drinks is recommended. Introduction The retail hospitality industry is generally vulnerable to downward swings in the economy. Coffee retailers in specific exist in an extremely competive environment and need a strong strategy to survive. The retail coffee market is generally susceptible to fickle consumer tastes and highly price sensitive. Russian coffee and tea franchises are relatively young and it is assumed that much can be learned from experiences in the international arena where a longer track record is evident. Additionally, the hotter competitive scene in mature markets may provide excellent examples for where the Russian market can expect to evolve. Coffee establishments in North America, Europe and Australia have already weathered economic downturns and have applied creative tactics to maintain profitability. These examples, if carefully selected fit unique Russian consumer demands, may provide a attractive pathways to success for the COFFEE HOUSE chain in the current global recession. Methodology The focus of this study is to examine the current menu and prices of products offered at COFFEE HOUSE, and make conclusions and recommendations for new product offerings and a comprehensive retail price structure that will capture consumer demand. The goal will be to soften customer price-shocks, compel new customers to consume, and maintain customer loyalty. Main Results and findings Coffee consumption in Russia boomed in the post-Soviet period as consumers changed from a tea drinking nation to a nation of coffee drinkers. Russian consumers have also since developed new coffee tastes and an appreciation for naturally brewed coffee. In the past, instant coffee was the only available choice. Now, espresso drinks, specialty or gourmet blends, Turkish coffee and exotics have appeared in the market. The Soviet Union started importing coffee in large amounts in the mid eighties. By the 90s, growth had taken off, particularly in the period between 1993-1996. Growth contined until the latest economic shock led to a steep devaluation of the Ruble in 2008. People under stress change their buying patterns and habits during an economic crisis. These may be particularly acute for luxury goods and impulse purchases. In this changing economic environment, managers must be proactive about adjusting their approach to their target markets. The dynamics of customer behavior and management response to shape demand can make or break a company during critical periods. The retail coffee industry will probably be completely reconfigured by the global recession. The survivors will be the players with a clear and sustainable strategy, preferably in place early enough to keep up with the upheaval. Some of the dynamics are counter-intuitive; calling for a focus on statistical results, observation of real changes and not allowing much room for guesswork. Looking at the North American market, some interesting changes are taking place. The single most important figure is that 80% of coffee consumers are doing nothing different. That means they are continuing to consume in the same pattern as before the recession. It is the other 20% that requires closer investigation, and as expected they are trading down; they may drink coffee at home more often than going out. They may pay less by paying cheaper discounted prices. Predictably, the fast paced growth of new coffee establishments will slow and then retract. Bob Phibbs, a consultant and former coffee chain marketing director estimates "closures will reduce the all-time high by 20 percent, or 5,000 shops before the recession ends." Americans drank 146 billion cups of coffee in 2008, they consumed nine pounds of coffee annually, three quarters of that coffee is drunk at home. About 20 percent of coffee drinkers prefer espresso drinks most of all. “This category of coffees has, quite surprisingly perhaps, actually thrived in these difficult times,” says Daniele Giovannucci, in an annual survey of North American coffee importers. Russia has been hit hard by the recession. At least half of all Russian cities have suffered severely by the global economic recession. "The percentage of Russians living below the poverty line – those with not even enough cash to buy food – climbed from 8 percent in February 2008 to 14 percent in February 2009. The number of the poor – those who have enough cash for food but not clothes – increased from 28 to 32 percent. At the same time, the percentage of those with enough cash for food and clothes but not for durable goods shrank from 46 to 39 percent." As can be expected, the repurcussions are felt by the coffee industry. Coffee consumption in Russia is down 30% since the economic crisis started. A Russian spokesperson for Kraft, Jacobs Suchard, part of U.S. multinational Philip Morris reports, "Russian consumption of all coffees was at 45,000 tonnes per year before the crisis hit." He claims that, "the price rise in ruble terms caused by devaluation led around 30 percent of Russias coffee drinkers to stop consuming altogether, while the remaining 70 percent had cut back. A change in the import tariff regime may force prices even higher". In addition to home made coffee, retail coffee establishments have appeared. Currently the market is dominated by three major competitors, the "COFFEE HOUSE", “Shokoladniza” and “Coffeemania” chains. Recently, Starbucks and Costa Coffee have announced openings in Russia. Although COFFEE HOUSE has an enviable dominant position in Russia, and a first on the block advantage; competition is increasing and the new competitors are well-backed international heavyweights. There are about 1000 coffee establishments in Russia, the choice locations are mostly centered on the "garden-ring-road" of Moscow. If not for the difficult economic situation, growth potential for retail coffee locations is still very high in Russia. MKD Partner analysts point to the fact that "In Moscow there are about 0.7 coffee houses for every 100 thousand Moscow citizens. In New York this number is about 27, in Seattle – about 62, in Milan – about 135." The Russian coffee consumer has been categorized according to research done by conducted by AMIKO company. The data indicates the following profiles, "Two thirds of coffee-houses visitors are young women, 40% of whom are under 25. Most of male- visitors are about 30. 40% of visitors are students and young people whove just started to work. Choosing a coffee house, 50% of visitors trust their friends’ opinion, for 35% the most important role plays its location, 24% and 26% respectively mentioned that they visit chain cafes and pay attention to the nice shopwindows." The world coffee leader Starbucks has declared its recession strategy. A "food-pairing" program has been introduced. This offers a package price for one drink and one food item available all day. For example, a coffee cake and latte is provided, or a drip coffee and hot sandwich. This "value zone" menu may in fact be a response to challenges asserted by McDonalds and other fast-food chains that have been taking market share recently with lower priced coffee, rather than a direct appeal to consumers suffering from the recession. On the other hand, it may indirectly prevent recession induced flight of customers to more affordable options like McDonalds. Part of the business model of COFFEE HOUSE and other Russian chains, is a highly varied food service menu in addition to coffee offerings. Their strength is in having something for everyone. Beer, coffee cocktails, mixed drinks, complete meals, deserts, banquets, catering, and gourmet teas round out the menu. The fashionability of coffee may serve as just a hook for people to come and enjoy a more complete experience. Unlike North American and European markets, take-out coffee is an almost unheard of concept. This significant difference in consumption patterns has enormous consequences for the business model; and demonstrates the inadvisability to apply copy-cat approaches in the Russian market. COFFEE HOUSEs espresso menu and prices are as follows: Espresso Classic 30ml, 85r. 60ml, 105R. 90ml, 135r. Ristretto 15ml, 85r. 30ml, 105R. 45ml, 135r. Espresso Romano 60ml, 85r. 120ml, 105R. Espresso makkiato 100ml, 85r. 200ml, 105R. Espresso con panna 100ml, 85r. 200ml, 105R. American Espresso 150ml, 89r. 250ml, 125r. Glace 230ml, 119r. Classic Cappuccino 200ml, 155R. 300ml, 170r. 350ml, 185r. Cappuccino with the tastes of your choice 200ml, 160r. 300ml, 170r. 350ml, 190r. Classic Latte 220ml, 180r. 320ml, 200r. Latte with caramel and nuts 220ml, 180r. 320ml, 200r. Mocha Classic 280ml, 165r. Mocha with the tastes of your choice 280ml, 165r. Milk 250ml, 49r. The "Crisis Menu": -breakfast specials -business lunch specials -Night party specials -Student discount card -take-out specials Analysis and discussions Examination of COFFEE HOUSEs anti-crisis menu strategy reveals a "time of day" approach; there are essentially specials offered 1) morning 2) mid-day 3) night. These are package deals that include food items paired with low price coffee drinks. Additional discounts are available for one targeted segment, students, in the form of a 15% discount card. The take-out special is a separate unrelated attempt to emulate and stimulate the not-yet-adopted Western tradition of coffee-to-go. As if to say, yes, we offer that also. This is not unlike the Starbucks "pairing" program, although much more complicated. Unfortunately, relying on breakfast and lunch specials takes customer focus away from the coffee drink per se and emphasises food. The night special is essentially a 179 Ruble fixed cocktail price from 23:00-08:00. This offer is not even coffee related. There are a strong low-price leaders in the food and restaurant industry in Russia, and it would be virtually impossible for a coffee retailer like COFFEE HOUSE to beat them at their own game. Everything available from "stolovaya" diners, kiosks, and street vendors will always be able to under price a fine coffee establishment in food prices. Similarly, a night cocktail discount at COFFEE HOUSE can never compete on price with the multitude of pubs, bars and other drinking establishments on offer in Moscow. At best, these discounts give some small incentives for regular customers to remain loyal and feel like they are not paying top-dollar during the crisis. A more strategic approach to pricing that will foremost maintain loyalty in the existing customer base during the crisis while continuing to attract new dedicated coffee drinkers is needed. A strategy that can also provide a realistic challenge to the formidable newcomers Starbucks, Costa Coffee, and Gloria Jeans who are just now entering the Russian market. It would, after all, be tragic if the economic pressures on fickle consumers drove them to sample these new options and then permanently switch loyalty. This is a significant threat during the crisis and post-crisis recovery. The strengths offered by the international chains are consistent high quality of product and service. If they are unable to adapt to the Russian style of sit-down and slowly drink small coffees from ceramic cups, then this may be an anticipated weakness. The opportunity for COFFEE HOUSE to re-position itself as the dominant player and friend to all Russian coffee drinkers during fair and foul economic weather is to return to its core competency as a fine espresso drink establishment. It needs to keep offering the outstanding all encompassing food service menu, yet also not lose the reputation of best gourmet coffee in town. By refocusing on value, not just price, COFFEE house can remain competitive with the low-price/low quality attacks and also take on the high-quality not yet proven newcomers. We recommend that COFFEE HOUSE find the price point for espresso drinks that is not the lowest and not the highest. A price discovery focus group can be run to find the value price where consumers will respond by appreciating the best cup of coffee they are drinking for the best price. This can be conducted across the board for all espresso drinks on the menu. Then a reactive price war can be avoided when competition heats up after the recession. Conclusions and Recommendations COFFEE HOUSE has an excellent position in the Russian retail coffee market, yet is vulnerable from threats driven by new international competition and an increasingly impoverished customer base. Strengths include a finely tuned food and service offering attractive to local customers and a large loyal customer base. Current response to the economic crisis has been weak, COFFEE HOUSE has not yet distinguished itself in a meaningful way to weather the downturn. The opportunity is now to refocus on the core business of making high quality espresso drinks at a high value to price image. A series of focus groups is recommended to develop coffee drinks and set exact price points for current and future economic conditions. Promotions should highlight the espresso side of the menu. Store locations and interiors can continue to reflect the sit-down style of coffee consumption to distinguish from the take-away style of international competitors; at the same time take away service should be implemented. The style of take-away should be designed to appeal to Russian consumers, through judicious market survey and analysis, including pricing and coffee drink designs. These parameters should be different and more locally attractive than the international competitors, and should convey good value during economic hardship. Read More