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Strategy and Business Modelling: The UK Coffee Shop Industry

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Becki Colson

on 19 August 2015

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Transcript of Strategy and Business Modelling: The UK Coffee Shop Industry

Porter's 5 Forces
SWOT Analysis:
Costa Coffee
SWOT Analysis:
The White Rabbit
Strategy and business modelling:
The UK Coffee shop industry

Political / Legal
Bad press for not paying corporate tax.
Recognised as a risk in their annual report (Starbucks, 2014)
The recent growth in the industry of 3.5% to 2014
Owing to convenience and the purchases of treats (Childe, 2014)
27% of customers are not committed to one brand (Childe, 2014).
According to Hospitality and Catering News (2013), 21% of customers would prefer to visit an independent shop as opposed to one of the ‘Big Three’ coffee shop chains such as Caffé Nero.
The majority of our participants visit only a few times a month.
The main purposes of going to a coffee shop are to socialise and to enjoy a good coffee.

Self-service machines
The importance of 'Free-Wifi'
Environmental / Ethical
The Big Three are showing signs of unethical practise.
The growth of Fairtrade demand
Criticising Starbucks

Threat of a New Entrant
Between 2011-2013, the UK saw a 15% rise in the number of independent coffee shops in the country (Hospitality and Catering News, 2013). Therefore, demand in this segment of the sector is growing fast.

Threat of a Substitute
Source: Mintel (2014)
The major coffee chains e.g. Starbucks are currently facing competition because consumer no longer think their products are ‘value-for-money’. This may mean that consumers are looking for cheaper alternatives, potentially from independent coffee shops.
Personal coffee machines are becoming ever more popular with the general public and are a cheaper alternative to visiting coffee shops.
There are 3400 Costa coffee express machines in the UK (Costa, 2015b)
Bargaining power of suppliers
A lot of influence
"Starbucks tends to trade on a negotiated basis with long term partners” (Starbucks, 2014: p5)

Bargaining power of customers
Starbucks in their formal accounts have stated that
they are “failing to satisfy their existing customer base” due to the lack of innovative new products they offer (Starbucks, 2014: p4)
Coffee chains need to start listening to consumers as they are potentially losing sales

Degree of Competitiveness within the Coffee Industry
In December 2014, the coffee shop industry in the UK has an estimated £1.45 billion (Childe, 2014).
Costa Coffee was voted as the preferred coffee shop in our market research.
“Costa coffee is particularly active in creating [a portfolio] of different outlet concepts to appeal to varying consumer demands” (Mintel, 2014).
"A quality cup of coffee or tea, offered on premises or taken to-go while browsing the shelves, can be a brand boosting value addition for shoppers" (Telford, 2014)

Childe, H. (2014) ‘Coffee Shops – UK – December 2014’ Mintel.
Available at: http://academic.mintel.com/display/725873/

Costa (2015a) 'Join the Costa Coffee Club Today' Available at: https://www.costa.co.uk/coffee-club/about-coffee-club/

Costa (2015b) 'Always fresh milk and the same beans as our coffee shops' Available at: http://www.costa.co.uk/menu/costa-express/

Euromonitor (2015) ‘Coffee in the United Kingdom’ EuroMonitor Available at: http://www.euromonitor.com/coffee-in-the-united-kingdom/report

Glassdoor (2015) 'Caffe Nero Reviews' Glassdoor Available at: http://www.glassdoor.co.uk/Reviews/Caff%C3%A8-Nero-Reviews-E13311.htm

Hospitality and Catering News (2013) ‘UK sees 15% rise in independent coffee shops’. Available at: http://www.hospitalityandcateringnews.com/2013/12/uk-sees-15-rise-in-independent-coffee-shops/

Indeed (2015) 'Costa Coffee' Available at: http://www.indeed.co.uk/cmp/Costa-Coffee/reviews

Kasprzak, E. (2012). Vintage Style: The Rise of Retro Fashion. Available at: http://www.bbc.co.uk/news/uk-england-17667524. Accessed: 22/05/15.

Levitt, T. (2015) ‘ Starbucks and Harris + Hoole share the dregs in ethical coffee rankings’ The Guardian. Available at: http://www.theguardian.com/sustainable-business/2015/apr/21/starbucks-caffe-nero-costa-tesco-ethical-coffee-rankings

Mintel (2014) ‘Coffee Shops – UK – December 2014: Executive Summary’ Mintel Academic. Available at: http://academic.mintel.com/display/725873/

Chosen Coffee Shops
SWOT Analysis:
Caffé Nero
Relaxed atmosphere
Can enjoy a coffee at a leisurely pace
Italian ambiance
Convenient locations
Sells own branded products
Good quality fresh food and coffee
Low employee morale
Technology: Nowadays, it is rare to visit a coffee shop that does not offer free Wi-Fi but this is not something the White Rabbit offers.
We found that the White Rabbit is used more for a socialising purpose than a working purpose.
However, if free Wi-Fi continues to be a deciding factor for customers this could become a weakness in the future.
Size: The White Rabbit is a Nottingham based business with two outlets in the city centre. We visited the original tea shop which only had 7 tables and we felt this was almost too many tables for the floor space of the building.
This sentiment was reflected in an online review posted by a customer (TripAdvisor, 2015a) who commented that it felt a little bit cramped, which led them to leave a lower rating.
Therefore, we feel this is a weakness for White Rabbit as this limits its competitive advantage over larger coffee and tea shops which may have more space and are not as over-crowded.
Vintage: The rise of vintage has been well documented in recent years in the media (Kasprzak, 2012) and if this trend continues it is likely that White Rabbit will benefit from this as their business model focuses on providing a traditional tea shop service.
More people will be intrigued by the vintage style of the White Rabbit compared to the standardised approaches of the large chain coffee shops such as Costa Coffee which are predictable and not as quirky.
Coffee: More people, especially the younger generation, are converting to coffee from tea, probably due to the emergence of large companies such as Starbucks (Euromonitor, 2015) which could be a threat to White Rabbit as it has a reputation of being a traditional tea room, despite offering coffee products.
Business Model
Business Model
Starbucks (2014) ‘Annual Reports and Financial Statements’. Available at: http://documentslibrary.bvdep.com/MapperFamePdf/chlffaomldoblopkiccedhljamhdbppdagiibjcpdfgmekgaeaplccmdlfmnldibocffonklibhpnjhmojdgcjfnappk.pdf

Telford, H. (2014) 'Store Owned Café Concepts Can Help Improve the Retail Experience' EuroMonitor Available at: http://www.portal.euromonitor.com/portal/analysis/tab

The London Toolkit (2015) 'London Coffee Shop Prices 2015' Available at: http://www.londontoolkit.com/blog/eats/coffee-shop-chains-in-london/

Tripadvisor (2015a) White Rabbit Teahouse. Available at: http://www.tripadvisor.co.uk/Restaurant_Review-g186356-d2510740-Reviews-or10-White_Rabbit_Teahouse-Nottingham_Nottinghamshire_England.html#REVIEWS. Accessed: 22/05/15.

Tripadvisor (2015b) Deli-icious. Available at: http://www.tripadvisor.co.uk/Restaurant_Review-g186356-d4912595-Reviews-Deli_Icious-Nottingham_Nottinghamshire_England.html. Accessed: 24/05/15.

Whichfranchise (2015) 'Caffe Nero - is it available in the UK?' Available at: http://www.whichfranchise.com/feature_template.cfm?FeatureID=314

Yahoo Finance. (2013). The Real Cost of… a Coffee. Available at: https://uk.finance.yahoo.com/news/the-real-cost-of----a-coffee-115633690.html. Accessed: 24/05/15.

Expansion plans
Possibility of franchising (WhichFranchise, 2015)
Costa, Starbucks
Competitive pricing (The London Toolkit, 2015)
Changes in future trends
Threat of individual coffee shops becoming more popular
Well-known brand with a wide customer base. It was voted the nation's favourite shop 3 years in a row (Costa, 2015)
Clear logo and well recognised
Strong position in the market - 8.4% share (Euromonitor, 2015)
Free Wifi
Seasonal drinks
Returning customers due to location
Rated 4/5 stars as a good place to work (Indeed, 2015)
Brand and stores are becoming outdated
Crowded and busy
Little range of products within the food department
The main reason people go to Costa is for convenience, rather than brand loyalty
Too many stores?
A 'stop out', not a 'go out'
Improve the loyalty card system
Delivery service (coffee and sandwiches for business functions / working lunches)
Improve social media platforms
Competitors: Independent coffee shops are becoming more popular
Natural disasters, droughts, storms etc
Two separate business models for the café and the deli and a strength is how well they integrate these two models together.
Products were on display all around and so, although we had only visited for a coffee
Tempting to buy products we had not intended to purchase.
From our visit, we felt that the size of the outlet was a big weakness for Deli-icious, as it felt quite small, a sentiment reflected in an online customer review (TripAdvisor, 2015b) that stated that the eating area is a bit cramped.
This is a weakness we found with both White Rabbit and Deli-icious, which highlights the fact that independent cafes may find it more difficult to afford larger premises.
Due to the weakness addressed, we feel an opportunity is to expand in both premise size and the number of outlets.
They consistently receive positive feedback on TripAdvisor, with one reviewer commenting that “on a miserable, cold, rainy morning in Mapperley, Deli-icious was a rare treat” (TripAdvisor, 2015b) and so we feel the business has the potential to expand further into Nottingham.
Level of competition in the area is a threat for Deli-icious due to the high volume of substitutes.
In terms of food, it is located close to a Co-Op and so customers who desire a quicker, more convenient service may wish to purchase food from Co-Op instead, especially as we noticed Deli-icious gets very busy at lunchtime.
A brief insight into the profitability of the Coffee Industry
Source: Yahoo Finance, 2013
Retail analyst, Allegra Strategies, carried out a study regarding the coffee industry.
In 2003, the average price for a cup of coffee was just £1.30, but it is now 70% more at £2.20 (Yahoo Finance, 2013).
Business Model
Deli and Coffee Shop
Traditional Tea Shop
Rustic feel
Vintage and clean-cut
Limited capacity
'Go To'
Eclectic mix of products
Uniform appearance
Full waiter service
Element of self-service
Market Research
Conducted a survey into customer insights
Gained over 90 responses via social media
Business Models - Defined
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