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Expresso Espresso

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Julie Brandsma

on 4 May 2014

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Transcript of Expresso Espresso

The Industry
The Environment
Expresso Espresso
It’s important for Expresso Espresso to continue to dedicate themselves to quality and convenience while striving for faster service, but they should also focus on adding variety to their menu. They should also look at what flavors are popular to cater to current tastes. Like here in Washington State, coffee is a big deal, and white chocolate syrup has become a best seller. It’s also important that Expresso continues to cater to the needs of the students and staff of the University of South Alabama, which will be easy if they continue their long hours and continue to improve their café across from the campus so that coffee drinkers stop in for a drink there instead of somewhere else.
Coffee is one of the most favored drinks and I’ve been told that coffee is second to water (although I’m sure alcohol wasn’t included in this estimate). It is the second largest traded good behind oil. The leading drinks in 2004 were espresso-based drinks followed by drip-brewed coffee drinks and cold or iced beverages. There are many competitors in the coffee industry with Starbucks being the largest. They can be blamed for the shift in coffee preferences and the high value placed on coffee. The threat of new entrants is relatively low because of large established companies like Starbucks while the threat of substitutes is high because of the many different options like tea, energy shots, energy drinks, soft drinks, sports drinks, and my favorite, coffee beans (for the caffeine fix). Suppliers don’t have that much bargaining power as well, since there are so many suppliers that buyers can choose from. Buyers have a little bit of bargaining power but not much. Buyers usually just buy a cup of coffee or snack so their purchases don’t impact much but they do have many other options to choose from so that gives them a little power.
Situational Analysis
by Julie Brandsma
Economic Trends & Growth Conditions
Coffee is becoming more and more common in all age groups, especially in the United States.
According to Azcentral,
the United States is the largest importer and it is believed that
of Americans are coffee drinkers
drink a cup
Our text notes that there has been steady growth in the coffee industry for years with the number of specialty coffee retailers quadrupling from 250 retailers in 1979 to 1,000 in 1989. In 2002, there was an estimated 15,000 retailers. SBDCnet states that there were 20,000 coffee shops in the United States in 2011, bringing in a collective $10 billion in revenue. This source also notes that the gross margin for most coffee shops is around 85%, “with operating income averaging 2.5% of net sales.”
Trends in Cultural and Social Values
Like what is stated above, 75% of Americans are coffee drinkers. There has also been an increase in coffee drinkers between the ages of 18-39 and 29% of those said that they were able to drink coffee everyday because they felt better about their financial situation. The text also mentioned that coffee drinkers are usually well educated, live and/or work in urban areas, and are comfortable in their financial health. It makes sense that college students or those with degrees account for more than 50% of coffee consumption. I mean, its pretty much right up there with beer. I found an interesting article by Globalpost about college students and their relationship with coffee in that a moderate amount of caffeine from coffee can help improve test scores! This also leads into why working couples with children are also buying more coffee. They have more of a disposable income and with their children, coffee is essential for tantrums and booboos. The text also states that there are three influencing factors when it came to choosing coffee and that the number one reason someone chooses a specific coffee shop is convenience and quality. Price isn’t even a high influential factor in the minds of the coffee drinker. Unfortunately, according to International Business Times, energy drinks and sports drinks may be increasing in popularity and may hurt the success of the coffee industry. Drinks like these are easily accessible and are easily stored, not to mention the low bundling prices.
The opportunities for Expresso Espresso are that coffee shops are becoming more and more popular and have seen steady growth in the past. People are now making coffee a part of their daily lives, especially if they need a caffeine fix for their schoolwork, their careers, or for their family lives. For Expresso, their focus is on students. Their long hours and inviting atmosphere are welcoming to students who need their fix and need a quiet place to study. Also, the fact that their location is convenient is a big plus along with their dedication to quality coffee. These two factors are on the top of the list when it comes to influencing coffee drinkers to buy.
Touching on influential factors again, the third most influential factor was variety. Although Expresso has many different options when it comes to coffee or tea, they are still filling requests for drinks that their competitors make. Expresso doesn’t seem to offer a variety of drinks, but they offer quality in its place. Another threat that Expresso faces is the fact that so many more coffee shops are available in the same area that they operate, so differentiating themselves can be challenging.
The coffee industry has always been a booming one, with it being one of the most valuable commodities since the 1800s (Black Gold). Coffee is still one of the most traded commodities coming in second to oil. The industry employs over a million people who are all involved in either growing, processing, trading, shipping, selling, and other ways to get the coffee from the ground to the filters to brew cups of coffee for consumers. According to the International Coffee Organization’s website, “world coffee exports amounted to 9.52 million bags in March 2014, compared with 10.12 million bags in March 2013.” Also, according to our text, “the leading drinks in 2004 were espresso-based beverages with average sales of $50,396 per store.” The text goes on to note the second best selling drinks were drip-brewed coffee drinks and the third best selling drinks were cold or iced coffee drinks.
Existing Competitors
Like was mentioned before, there are an estimated 20,000 coffee shops in the United States and the industry has seen $10 billion in revenue. According to Azcentral, 70% of that revenue generated comes from the top 50 coffee shops in the industry, with Starbucks being one of the top 50, of course. Starbucks is by far the biggest competitor in the coffee industry. Our text mentioned that analysts believe that Starbucks made specialty coffee popular and made it possible to charge higher drink prices for these drinks. Starbucks’ main goal is to dominate 40% of the market share and so far they’ve been pretty successful with a reported $6.3 billion in revenue. Another competitor is Caribou Coffee Co. In the same year that they become public, they reported sales of $191 million and expected to open 40 new stores by the end of that year. They recently updated their offerings and expect to see a 6 to 7 percent growth in the coming years.
Other competitors include Coffee Beanery with their success internationally and Peet’s Coffee & Tea with their reported $175 million in revenue in 2006. It should also be mentioned that large restaurant chains, like McDonalds or Dunkin Donuts, are modifying their menus to include upscale coffee or even revamping their stores to resemble a coffee shop. Other local competitors for Expresso Espresso include Satori Coffee House located across the street from Expresso with the same target market, Carpe Diem who was located 2 miles down the road with a little more focus on the local college instead of the University of South Alabama, the Daily Grind which was located inside the campus and easily accessible to students, Beaners and their success of the “honor box” in which patrons can pay for their coffee as they help themselves, and then the many new locations popping up in the Mobile area around Expresso Espresso.
Threat of New Entrants
Although there is still a threat present because of the increasing popularity and apparent success of the industry, the threat of new entrants in the coffee industry is relatively low. The biggest competitors in coffee are well known and are well established. They know how to cut costs and they know what drives customers in their shops or to buy their products. An upside for upcoming coffee makers is the ease to obtain licenses and meet government qualifications since there are not many legal issues when it comes to coffee drinking or making.
Threat of Substitute Products
The threat of substitute products for the coffee industry is high. Not only is it easy to find a cup of coffee anywhere, whether it be from a fast-food chain or other coffee shop, people can simply buy a bag of ground coffee beans at their local grocery to make at home. Also, more and more people are turning towards tea. According to NBC, the tea industry saw a $40.7 billion in retail sales, that’s compared to the $75.7 billion the coffee industry saw in retail sales. Another substitute NBC mentioned was carbonated Soda’s, which recorded a $183 billion in retail sales. NBC estimated that tea could be the next big thing when it comes to beverage consumption because of the many different varieties offered and society’s shift to healthy living. If caffeine is the only thing the consumer is craving, then they have the choice of energy shots, energy drinks, and even concentrated coffee beans covered in chocolate (my personal favorite alternative to coffee).
Bargaining Power of Suppliers
There is not one source I can give credit too, but from doing research on the topic it seems that the bargaining power of suppliers is low. According to many different sites, there are low costs of switching suppliers and this may be due to the fact that many suppliers are from developing countries and cannot afford to raise prices. Another thing I read is that there are many suppliers to chose from in the coffee industry and suppliers don’t have much of an option when it comes to bargaining with buyers in fear that they may miss out on possible profit.
Bargaining Power of Buyers
I would say that the bargaining power of buyers is right around the middle. The bargaining power can be higher because of the fact that buyers can simply go home and make their own cup of coffee. They can also walk across the street in most cases since the popularity of coffee shops has increased and this is especially true for Expresso Espresso. Going to another coffee shop wouldn’t cost buyers much because most coffee shops offer around the same price for a cup of coffee. Bargaining power can be lower, however, since most of the purchases made by buyers are small; most buyers come in for a cup of coffee or a snack.
Expresso Espresso needs to focus on differentiating themselves from their competitors. Their competitors are located on every street corner and they may have to compete with 7 different Starbucks cafes in the future. They should continue to focus on creating an environment of comfort and encourage loyalty. Expresso Espresso should also look into cutting costs in some way by switching suppliers since switching wont cost much to do and may help in the long run. Expresso should also continue to sell tea but should also look into selling energy drinks or sports drinks since these tend to be adequate substitutes for coffee.
The Organization
The primary objective for Expresso Espresso was to create an environment of comfort for their customers. The owner, Todd Sylvester, wanted to create a place where people could come sit on their leather couches to meet with friends, grade papers, write papers, study, read, or just simply have a nice cup of coffee. He also wanted to commit to quality and “tried to remain a ‘purist’ in developing his products” (Marketing Management). A European-style shop was another goal of Sylvester’s along with charging prices 10% below his competitors. Another important objective of Sylvester’s was expansion into a downtown area of Mobile.
The major constraints that Expresso Espresso faces are the developments of new coffee shops in the area. If all developments come through, Expresso may be facing 7 different Starbucks Cafes along with 8 other café’s that could steal business. Also, because of the expected expansion, it is hard to estimate the strategic position Expresso may have when the new location is opened. Another constraint is the fact that Expresso may not be bringing in enough profit to expand or even operate without a loss long enough before the new expansion.
Financial Condition
Expresso Espresso is currently operating at a loss with a recorded net income of $-7,450.54 in May of 2006. This doesn’t mean that they will continue this way, however. When looking at the financials, the gross profit doubled within the first month and there seems to be decreasing operating expenses in categories like repairs, supplies, and fees. Also, Sylvester and his wife, Angelle, took out a $100,000 equity loan for start-up funds for Expresso Espresso. Although Sylvester prides himself on dedicating his money to quality coffee, the costs of the coffee product itself along with operating costs is higher than his competitors which makes little sense with his 10% lower prices for buyers. Another expense that Expresso Espresso has is payroll. Sylvester thought it best to pay his employees a little over minimum wage instead of depending on tips to pay their wages. This is good for employee loyalty, but bad for revenue.
Management Philosophy
Expresso Espresso only has one manager, which is also the owner - Todd Sylvester. He has some entrepreneurial experience in the past but decided he wanted to work with people. Todd didn’t consider himself a manager per se and gave employees the responsibility of opening and closing the shop. He felt that people could self-manage if he trained them properly. He is a very hands-on manager and enjoys helping people become good employees. Todd decided to hire a bookkeeper to handle the financials so he can continue to be hands-on and involved. Along with that, he didn’t want to be considered a “tyrannical boss,” meaning, he didn’t want his employees to look at him as just a boss, but someone to confide in. He cultivated a family atmosphere to where employees were comfortable enough to stick around after working hours to either help out or hang out.
Organizational Structure & Culture
Like stated before, Todd Sylvester is the only manager but delegates some of the managerial responsibilities to employees and even a bookkeeper. His job outside of the shop is youth minister, so most of the employees hired are from the church where he knows them well and can pick the “cream of the crop.” The employees are thought of as family and some of them even are family, with Expresso employing two of the Sylvester’s children. He also paid his employees above minimum wage and donated the tips earned to local charities instead of supplementing the wages of his employees.
The primary objective of Expresso Espresso is pretty clear and Todd Sylvester has done a great job in cultivating an atmosphere where people want to stay – even employees. Todd wanted to create a work family with the coffee shop and has taken the proper steps to do so by donating tips and paying a little over minimum wage. He also knows his employees well and hires the ones he finds to be most capable. The dedication to quality is admirable and can bring in business, but the costs of the high-quality espresso along with high operating costs may prove to be detrimental to profits. The many competitors pay less for their espresso beans and charge more, while Expresso Espresso pays more for their espresso beans and charges less.
Expresso Espresso has done a great job in achieving its main objective with employees and customers alike, but should look into switching suppliers, bargaining with their existing suppliers or simply charging a little more for their coffee to compete. Expansion may prove to be difficult with the financial conditions as well.
The Marketing
Objectives & Constraints
Expresso Espresso’s target markets are the college students, staff, and faculty of the University of South Alabama, which is located across the street from the shop. According to the owner, Todd Sylvester, “the street in front of the store had between 24,000 and 27,000 cars a day and these potential customers had a median income of about $45,000.” This is constrained because of the many different competitors.
Analysis of Sales & Profits
According to the daily sales report for April 2006, the best days in terms of sales are Fridays and Saturdays. The average (mean) Friday sales are $366.79 and the average Saturday sales reach $400.80. Expresso managed to double their gross profits in the first month but didn’t see much difference after the second.
Analysis of Target Markets
Like mentioned a billion times before, the target market for Expresso Espresso are the students, staff and faculty of the University of South Alabama. According to SBDC, 40% of coffee drinkers ages 18-24 are drinking coffee daily.
SWOT Analysis
Location across from University of South Alabama
Entrepreneurial background of owner
Clear vision of “creating an environment of comfort”
High Quality
Lower average prices
Employee Loyalty
Community & Charity involvement
Close second favorite to Starbucks in area
Operating at a loss
Inability to differentiate the business from larger competitors
High costs of goods sold
High operating costs
Poor choices of media mix
Too much focus on live music with no place to showcase the band
Inability to create customer loyalty
Time consuming and hands-on machinery
Inability for owner to cut costs and compromise
No middle ground when it comes to staffing
Only one manager
Sacrifice variety for quality
Changing dynamics of coffee industry in Mobile
Success of competitor Starbucks
The adoption of specialty coffee by large restaurant chains like McDonalds and Dunkin donuts
Many close locations of Starbucks
Many close locations of other cafés and coffee shops
Many substitutes for products offered
The specialty coffee industry has seen steady growth
Cafe’s attributed to the growth in the industry
Accessibility to the target market
Drive-through contributed 40% of total revenue
Problems Uncovered
Primary Problem
The primary problem that Expresso Espresso faces is the fact that they cannot seem to differentiate themselves from Starbucks. Expresso is always catering to the wants of the customers and these desires are usually brought on by Starbucks themselves. Todd Sylvester is also unsure of exactly what alternatives he has.
Like mentioned before, Starbucks is the forefather of the coffee shop industry and has set the standard for how coffee shops operate and what consumers expect. Expresso Espresso has gotten requests to make drinks like Starbucks as evidenced by Todd having to make their popular “green tea cappuccino.” The text also mentioned that he must offer the same drinks they offer during the holiday season, like the eggnog cappuccino or pumpkin spice latte, just to compete with them. Also, Starbucks has a lot to offer in terms of marketing while Expresso devotes itself to local marketing.
Not being able to differentiate from Starbucks can pose a big threat to Expresso Espresso. They could become consumed with what their biggest competitor is doing and lose site of what is important, which was creating a comfortable environment while focusing on quality espresso.
Strategic Alternatives for Solving Problems
Solution 1
To differentiate their product offerings and cafe atmosphere, Expresso Espresso should continue its dedication to quality.
Starbucks isn’t exactly known for it’s high quality coffee so this can be a benefit for Expresso. Quality is also the most important feature consumers look at when it comes to their coffee. An emphasis on quality can bring customers in and the continual delivery of quality coffee can make people stay.
Continuing the high quality coffee is good as far as differentiating but it can add up for Expresso. They are also offering the lowest price when it comes to their coffee. The top three important features are product quality, convenient location, and product variety. Expresso has all of those features satisfied, so an increase in the price of their average coffee may not hurt but help. According to Peter Baskerville, “your best margins are in the prepared drinks rather than the roasted beans and merchandise, so put all your efforts into your product with the highest profit: the manufactured drinks” (slate).
Solution 3
Another solution Expresso Espresso can use to differentiate themselves is to cultivate customer loyalty while developing relationships.
Starbucks and other competitors don’t have the small time feel and they also don’t seem to have the time to get to know their customers. They simply write the customer’s name on the cup rather than remember their customers by name and face or maybe even drink preference. Competitors also enforce strict codes of conduct and processes that can take away the human aspect of customer service. Allowing employees to deal with customers the way they see is best (assuming their trained adequately) and can help the customer feel at home. Peter Baskerville, who opened up 20 café’s suggest this as a solution and says to “get to know your customer's names, learn their drink preferences, chat about all sorts of things that friends do, and trade the professional process-driven service for a very personal and familiar one” (slate).
This approach costs nothing. In fact it will bring in more sales because it will develop customer loyalty and repeat buyers. The only cost I can foresee would be the loss of business due to longer wait times because the employee may be chatting it up with the customer at the counter. But that’s just if the employee has poor customer service and hasn’t acknowledged the waiting customers.
To differentiate themselves against their competitors, Expresso Espresso needs to continue to devote themselves to high quality espresso and cultivating customer relationships. Their existing location alone can generate a lot of sales, but the dedication to quality espresso and customer service will get customers to stay and prefer their coffee shop and drinks over their competitors.
Executive Summary
The Environment
• The coffee industry has seen steady growth since the mere 250 retailers in the 70s.
• Records show there are currently 20,000 retail shops in the United States.
• 75% of Americans drink coffee
• The average coffee drinker is:

• 3 important factors that influence customer loyalty:

Live and/or work in urban areas
Financially Stable
Convenient Location
Product Variety
The Industry
A $10 million industry.
Coffee has been one of the most valuable commodities since the 1800s.
It is the most traded, coming second to oil.
70% of the revenue can be attributed to the top 50 coffee shops, including Starbucks.
Located in Mobile, Alabama; Across from the University of South Alabama.
Owned by Todd Sylvester, a youth pastor with entrepreneurial experience.
Charges 10% less than competitors.
Gives back to the community.
Has been opened for 3 months.
Expresso Espresso
Problems Uncovered & Solutions
Starbucks dominates the market, so coffee shops may lose themselves in the process of meeting consumer preferences.
Expresso Espresso suffers with differentiating themselves and positioning themselves in the right way.
Solutions to problem;

cultivate customer loyalty
continued focus on quality
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