Caribou Coffee- External Environment

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Anh T. Nguyen

Professor Lois Shelton

BUS-497 Strategic Management

Exam One

September 27th, 2010


Industry Structure:

Caribou Coffee’s business is in the industry of specialty coffee, where high quality of coffee is a main characteristic. Hence, Arabica coffee bean is mainly roasted to produce specialty coffee as it is considered superior to its counterpart, the Robusta, which is usually low-quality bean used in production of non-specialty coffee. High-quality Arabica bean provides a mild aroma and a pleasing flavor which are suitable for specialty coffee.

The specialty coffee industry comprises of two business segments: coffee beverage sales and whole bean coffee sales for home, office, and restaurant consumption. Dominant economic factors that attribute to the structure of the specialty coffee industry include market size and growth, product differentiation, scope of competitive rivalry, number of rivals, and price of coffee bean.

Specialty coffee is a strong and growing industry as its sales continued to grow in both the U.S. and abroad. Specialty consumption increased by more than 48% in the U.S. from 2001 to 2006 and is estimated to be worth $11 billion annually. The increase of specialty coffeehouses from only 500 units in 1991 to 24,000 units in 2006 is a major thrust to this rapid growth. Underlying factors contributing to this increase are credited to development of new quality beverage, an expanding coffee menu, and coffeehouses becoming “the third place” for social consumption. Besides, consumers’ growing interests in specialty and traditional products such as micro-brewed beer, single malt liquor, and organic foods trigger the growth in the industry of specialty coffee, which promises to deliver more authentic, more traditional, flavor, and healthful products. The industry is in a rapid growth stage and expected not to peak until 2015.

Product differentiation is the second most important economic factor as it helps firms to retain consumers’ loyalty and compete for market share. Specialty coffees are moderately differentiated products, due to only few big players in the industry, based on features such as brand loyalty and quality level of customer services. For instance, by providing “an experience that will make the day better” Caribou coffee has created competitive advantages in their store operations to differentiate their products.

Scope of competitive rivalry and number of rivals or competitors are two other dominant economic factors characterizing the industry structure. The specialty coffee industry is highly fragmented, with exception of market leader Starbucks Corporation, and contains only few strong brands such as Caribou Coffee, Dunkin’s Donuts, Green Mountain Coffee Roasters (GMCR), and etc. Competition in the industry is not only on the national level but also in regional and local markets as there are about 500 smaller and regional brands. Many regional companies are looking to expand. In addition, specialty coffee companies compete with commercial coffee roasters to attract customers to the gourmet coffee segment.

Last factor, also a unique dominant economic trait, is price of coffee beans. High-quality materials are used to make differentiated products in the industry, and coffee beans are essentially commodity. Price volatility of coffee beans is a major concern for specialty coffee companies as suppliers, typically farmers, are unable to exert control over prices.

Competitiveness of the Industry

To examine whether or not an industry is highly competitive, a five forces analysis and net value analysis are conducted. Five forces analysis was first introduced by Michael Porter as an important tool in assessing the potential for profitability in an industry. Five forces include the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products and...
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