Coffee Analysis Essay

Indtroduction .The history of drinking chocolate berry goes at least as far back as the thirteenth century with a add together of myths surrounding its first use. The original native population of umber is thought to prolong come from eastward Africa, and it was first cultivated by Arabs from the 14th century.1 The earliest credible evidence of either hot chocolate drinkable or knowledge of the chocolate tree appears in the middle of the 15th century, in the Sufi monasteries of Yemen.2 By the 16th century, it had r for each oneed the rest of the Middle East, Persia, Turkey and northern Africa. chocolate tree past spread to Balkans, Italy and to the rest of Europe, to Ind superstarnesssia and then to the Americas.3ow argon coffee tolls currently set?A hot chocolate worths be set according to the unsanded York C Contract foodstuff. The legal injury of coffee displaces wildly in this speculative economy, gener wholey hovering around l cents per pound. Most coffee is traded by speculators in New York, who trade approximately 8-10 times the amount of effective coffee produced each year. The single close to influential factor in dry land coffee prices is the brave out in Brazil. Droughts and frosts portend shortages of coffee and the price increases. Specialty coffee is ofttimes imported at a negotiated price over the C food marketplace, which is considered a quality premium. Most of those premiums never reach the coffee farmer, but rather stay in the hands of the exporter. This creates a disincentive for farmers to increase their quality, as they do non receive the direct benefits of increase investment in producing better coffee.http//www.globalex remove.org/fairtrade/coffee/faqhttp//www.makingittv.com/Sample-Coffee- fund-Business-Plan.htmCost social grammatical constructionDynamics ofWorld Coffee PricesThe indicator Price system established in 1965 by International Coffee Organization (ICO) to provide a consistent and reliable pro cedure for reporting prices of varied eccentric persons of coffee. The ICO indicator price system is based on the quartet spate price groups namely, Colombian around the bendarabicas, crude(prenominal) mild arabicas, Brazilian and opposite natural arabicas and Robustas. ICO composite lay out indicator provides a benchmark for price of green coffee. ICO arrangement collects ex-dock shipment prices data and calculates arithmetic mean. This re gives ICO composite indicator. The current ICO composite price (US cents per pound) as listed for March, 2013 is 131.38 cents per pound with a extravagantly of 135.30 and deplorable of 128.52 cents per pound.The dynamics/trend of the monthly ICO composite price over 1998-2012 female genitalia be broken d cause into three phases. (Refer Figure 1 in appendix)Phase 1 The average composite price for coffee decreases from $108.95 in 1998 to $45.59 in 2001.Phase 2 begin with an increasing trend commercial enterprise where in average com posite price increases from to 47.74 in 2002 and continues the upward swing, hitting the maximum in 2011 at an average composite price of $210.39.2Phase 3 starts the decline in 2012 to an average price of $156.34 from 210.39 in 2011 and continues in 2013 where the current average price for the first three months is $131.38.Price- snap fastener of Demand For and Supply of CoffeeThe price centering shoot is measure to show the elasticity of the quantity demanded of the good or usefulness to a change in its price. IN case of Coffee, Coffee is produced primarily in south American countries and several(prenominal) developing countries but consumed in developed countries.With disruptive weather the generate of coffee is suppressed and hence the price of coffee leave rise hence the Price of coffee can be considered volatile. Factors/events that affected the instauration supply and demand of coffee in 2011-2012. Weather has been rated as one of the take factors affecting the supply of coffee. The countries where coffee is take onn is generally humid, disruptive patterns in the weather has ca employ coffee plant diseases. Some articles guide as well as listed fungus as one of the elements causing decrease in the coffee supplies. hindrance in growing Arabica plants was also listed as one of the reason for shrinking coffee occupation. Whereas some commanding factors which caused marginal increase in coffee supplies ar adding of unexampled producing countries,investment in advanced technologies and increased in number of coffee producers within the uniform region.Increase in demand can be associated with emerging new markets such as China which was primarily tea market has now seen a sudden shift in taste. Increase in expendable income due to high salaries has caused the demand for finer coffee to grow. Major de edgeinants of valet de chambre coffee prices in 2011-2012Weather and climate change affect coffee prices more than other factors. Coffee trees require specific climatic conditions to produce an optimum fruit. Hence, the Prices re chief(prenominal)ed in high throughout 2011where the average composite price was around $210.2.4) Porters Five Forces Analysis of the Retail Coffee and Snacks industriousness Threat of New Entrants Moderate There is a sustain nemesis of new entrants into the industry as the barriers to unveiling argon non high full to discourage new competitors to enter the market. (Appendix 2 shows Barriers to unveiling Checklist). The industrys saturation is moderately high with a monopoliseric contention structure. For new entrants, the initial investment is not significant as they can lease stores, equipment etc. at a moderate level of investment. At a localized level, small coffee sleuths can compete with the standardizeds of Starbucks and Dunkin Brands because there argon no switching comprises for the consumers. as yet thought its a agonistical industry, the possibility of new entrants to be successful in the industry is moderate. But this relatively easy gate into the market is unremarkably foreknowed by large incumbent brands identities like Starbucks who have achieved economies of scale by lowering cost, improved faculty with a huge market sh atomic number 18. There is a moderately high barrier for the new entrants as they differentiate themselves from Starbucks output quality, its prime reliable estate locations, and its store ecosystem experience. The incumbent firms like Starbucks have a larger scale and scope, yielding them a learning curve advantage and golden access to raw material with the relationship they build with their suppliers. The expected retaliation from well-established companies for brand equity, resources, prime real estate locations and price competition ar moderately high, which creates a moderate barrier to insertion.Threat of Substitutes broad(prenominal) There be many another(prenominal) reasonable substitute beverages to cof fee, which are mainly tea, fruit juices, water, sal sodas, dexterity drinks etc. Bars and Pubs with non/alcoholic beverages could also substitute for the social experience of Starbucks Consumers could also make their own home produced coffee with household premium coffee makers at a portion of the cost for purchasing from premium coffee retailers like Starbucks. There are no switching cost for the consumers for switching to substitutes, which makes the panic high. But its important to note that industry leaders like Starbucks are currently trying to counter this threat by selling coffee makers, premium coffee packs in grocery stores but this threat still puts pressure their the margins.Bargaining powerfulness of Buyers Moderate to Low Pressure There are many different buyers in this industry and no single buyer can demand price concession. It offers vertically differentiated products with a diverse consumer base, which make relatively low volume purchases, which erodes the buy ers power. Even though there are no switching costs with high availability of substitute products, industry leaders like Starbucks prices its product mix in relation to rivals stores with prevailing market price elasticity and competitive premium de margeine. Consumers have a moderate sensitivity in premium coffee retail as theypay a premium for high quality products but are watchful of uppity premium in relation product quality.Bargaining Power of Suppliers Low to Moderate Pressure The main inputs into the value chain of Starbucks is coffee beans and premium Arabica coffee grown in select regions which are streamer inputs, which makes the cost of switching between substitute suppliers, moderately low. Strategic Analysis Of Starbucks Corporation Certified coffee under its coffee and farmer equity (C.A.F.E) program, which gives its suppliers a fair partnership status, which yields them some moderately, low power.7 The suppliers in the industry also pose a low threat of competing against Starbucks by forward vertical integration, which lowers their power. warmth of Competitive Rivalry High to Moderate The industry has a monopolistic competition, with Starbucks having the largest markets share and its closest competitors also having a significant market share, creating significant pressure on Starbucks. Consumers do have any cost of switching to other competitors, which crates high intensity in rivalry. But its important to note that Starbucks maintain some competitive advantage as it differentiates its products with premium products and services, which cause a moderate level of intensity in competition. The industry is mature and growth rate has been moderately low which cause the intensity of competition among the companies to be moderately high due to all of them seeking to increase market shaper from established firms like Starbucks. This industry does not have over capacity currently and all these factors contribute to the intensity among rivals to be m oderately high.Looking at the Porters five forces analysis, we can get an aggregate industry analysis that the dominance of forces and the profitability in the retail coffee and snacks industry are Moderatehttp//scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf Cost structure4.1 interpolationCoffee prices fluctuate heavily from year to year. However, coffee prices do not fluctuate proportionally in each stage of the marketing chain. Consumer prices for example fluctuate less than prices of green coffee on the world market. The degree of fluctuation depends strongly on the way prices are de circumstanceined. When farmers know in which stage of the fruit and marketing chain their prices are the most resistant to pressure by buyers and sellers, they can select the most profitable position to increase their market power. Section two takes a look at how prices are influenced and by which factors they are influenced. In scratch three a closer look is taken at the in constancy in receipts from coffee exports, caused by fluctuations in prices. This is followed in section four by an exposition about the influence of international commodity agreements on world coffee prices. In this section a short history is presented of the International Coffee Agreements (ICAs). Section five describes how the margin on coffee is distributed over each stage in the marketing chain. The final section of this chapter presents some conclusions about the pricing in the world coffee market.4.2 Influences on coffee pricesWhen looking at the price pattern of coffee, one notices that prices are not stable. Price instability occurs in the long tie, but also short term prices may change. This section takes a closer look at how coffee prices are determined. Determination of prices depends in the first place on the type of prices. World coffee prices are largely set on the futures and forward coffee markets. The quantity traded on these markets is much larger than act ual trade in coffee. Prices are determined on the world market by means of speculation and arbitrage. Since coffee prices are influenced by speculation, pricing depends strongly on expectations about future supply and demand. Local coffee prices may differ between several coffee producing countries. According to De Rijk (1980), prices paid to Indonesian exporters at a given world price depend on the quality of the coffee and regularity and reliability of the quality. Other influences on local prices, according to De Rijk, consist of costs, taxes, information on prices and reliability of contracts. For some decades now the coffee market is exhibit a structural overproduction. This overproduction is one of the causes of theweak position of coffee farmers. Figure 3.3 shows that exporting countries sustain large stocks. These stocks are largely set up in abundant years and are used in years of general shortage. Shortages in the supply of coffee are ofttimes caused by crop failures thr ough natural incidents.The price of coffee is wherefore susceptible to frost and drought, which are two of the star(p) factors in natural causes. Stocks can be kept by local farmers but more often these stocks are kept by large profession companies, which act as arbitrageurs. Trading companies buy at low prices when supply is abundant and they keep it in stock till prices rise. This provides some extra gains to trading companies, besides the normal margins on trading. Local farmers often do not have the financial resources and transshipment center capacity to keep these stocks themselves. Therefore, they have to sell their coffee to exporters at harvest time against low prices. Farmers could have earned higher prices if they had kept their coffee in stock till the market improved. World prices, farmer prices and consumer prices are correlated with each other. Because stocks appear at different stages in the marketing chain, these prices do not fluctuate proportionally. This is s hown in figure 4.1. Mostly these price shocks are taken by exporters stocks. As has been mentioned before, exporters often possess more financial resources for storage than local farmers. Also consumer prices fluctuate less than world coffee prices. This is explained by the price setting conduct of coffee roasters. When world prices go down, consumer prices decrease entirely fractionally. In case of increasing world prices, consumer prices increase to a larger extent than in case of a price decrease.Besides correlation between prices at different stages of the marketing chain, different types of coffee are also related in pricing. Vogelvang, in his 1992 study, tested some hypotheses concerning the long-run relationships between spot prices of the four main types of coffee. Because coffee types are related to each other, some specific factors concerning the coffee market will be relevant here. These factors are the rate of substitution of coffee types, changes in total world supply or demand, and the existence of an International Coffee Agreement. Besides these specific factors, factors that influence all prices, such as world inflation, interest rates and expectations about frugal variables, explain relatedness in prices. Vogelvang computes the following long run equilibrium equationspcm = 0.91 + puapom = 11.39 + puaprob = -21.47 + puawhere prices are measured in US cents per pound. In these equations cm applies to Colombian Milds, om to Other Milds, rob to Robusta and ua to Unwashed Arabicas (Brazilian). The equations show that prices of Colombian Milds, Other Milds and Robusta are linearly related to price behaviour of Brazilian coffee. In his study, Vogelvang concludes that all the coffee prices move together in the long run. Absolute prices therefore deviate with a certain constant. The equations imply that in the long run Colombian and Other Milds are priced 0.91 cents applaudively 11.39 cents per pound higher as Brazilian coffee. The Robusta price of one pound of Robusta is 21.47 cents lower in the long run than the price of Brazilian. Hypotheses concerning a relationship between Robustas and Other Milds are not statistically rejected, but results from this study can not prove a strong relation between low quality coffee like Robusta and high quality coffee like Other Milds.4.3 Instability in export earningsIt has been mentioned previously that the proportion of primary products in total exports of developing countries is high. Prices of primary products fluctuate rather strong. Therefore, these fluctuations may have a large impact on export earnings, imports, investment, employment and disposal expenditures. Instabilities like these may disrupt the economy of these countries (MacBean & Nguyen, 1987, p.88 Sdersten, 1980, p.249-255). Price instability and earnings fluctuations are interrelated. Yet, they do not fluctuate proportionally. This depends on the values of the price elasticity of demand, the income elasticity of demand and the price elasticity of supply. The price elasticity of demand measures responsiveness of coffee demand to prices. So, it represents the ratio of circumstances change in thequantity demanded to percentage change in price. Similarly, the ratio of percentage change in the quantity supplied to percentage change in price is called the price elasticity of supply. The income elasticity shows how responsive quantity demanded is to a change in income Suppose price elasticity of demand is (-1). Some coffee farmers decide to increase their production. This implies that world coffee supply increases. In a competitive market, coffee prices will decrease and therefore, demand for coffee will increase. Besides the fact that farmers will receive less payment for each bag of coffee, demand and total quantity exported increases.Therefore, the fall in prices has been exactly offset by higher sales, and the farmers income will tarry unchanged. This conclusion only applies to the world coffee ma rket in its entirety. The outcome may be all different for individual countries and individual farmers. Mostly one or a few farmers are amenable for an increase in supply. These farmers must be able to produce at low costs, since prices will disgrace below the initial level. Other coffee farmers may also face a lower price per unit. Therefore some marginal farmers may go out of production, causing prices to return to the long term level. Remaining farmers, who did not change production, have to sell the same output against lower short term prices. Because of this, their total returns will be lower and with the same level of costs, their profits will decrease temporarily. The effect of shifts in supply would be larger if there were economies of scale in coffee production. With economies of scale farmers are stimulated to increase their production, in attempt to reduce their average costs. So, farmers who increase their production earn higher profits at the expense of farmers with a fixed level of production. However, increases in scale are not possible unlimitedly. Mostly this is restricted by the scarcity of fertile land.Price elasticity of demandIn general, price elasticities of demand are low when the product has a low income elasticity, has little or no substitutes and forms a small part of the consumers calculate. The average price elasticity of demand in industrialised countries with respect to retail prices is, according to estimates by the UN Food and Agriculture Organisation (FAO), about (-0.34). This implies that a 1% price increase (decrease) is accompanied by a decrease (increase) in consumption by 0.34%. Estimates with respect toimport prices amount to (-0.2). Other studies have indicated an elasticity of between (-0.2) and (-0.3) in high income countries and of between (-0.4) and (-0.5) in lower income countries (EIU, 1995, p.17).http//www.greenbeanery.ca/bean/documents/scriptie.htmhttp//www.grin.com/en/e-book/111348/coffee-shop-industry-a-st rategic-analysisCompetitive Forces that impact competition (Porter Model)3.1 contest within the Coffee Shop Industry20,000 stores with annual revenue of $11 billionHighly concentrated at top and split at bottom Starbucks 75% of sales Major companies Starbucks, Caribou Coffee, Coffee Bean and Tea Leaf, Diedrich (Gloria denims), Peets Coffee Competitors can also be found in other industries (convenience stores, gas stations, bustling service, fast food restaurants, gourmet food shops, donut shops, filter / specialty coffee machines for home use) e.g. Dunkin Donuts and McDonalds Competition through special offers (new tastes), outstanding service/ environment (internet, music, comfortable seating areas, short waiting queues), consignment programs (bonus cards ensuring frequency of visits) and for premium locations (retail centers, university campuses, etc.) windup Competition within the Coffee Shop Industry real competition within the industry for new customers, premium locati ons, etc. but overall the industry is saturated, colonized and stable which allows almost all of the competitors to yield very good margins (40 to 60 percent)43.2 Substitute ProductsCompetition with other drinks that are not the main focus of by coffee shops Soda, Juice, Water, Beer, Sports DrinksCompetition with other products, people are spending their money on Ice Cream, Cigarettes, SweetsConsumers have limited discretionary budget to spend on consumer goods, such as cigarettes, beer and also coffee coffee shops are therefore fighting for a fraction of this budgetConclusion Substitutes in the Coffee IndustryVery b power of substitute products as oddly young people might prefer other products, such as beer, cigarettes or soda3.3 Barriers to EntryRather low doorway barriers easy to open a single small caf call for a place, remodel, install the equipment, get license as needed5 However there are high entry barriers for the specialty level or big league/chain players High up-fron t investment needed to grow significantly (distribution system shops, equipment, premium locations marketing creation of brand awareness & brand recognition, customer retention) real brand recognition of major players, especially Starbucks Partnerships with large, international companies also serve as potential entry barrier for new competitors Starbucks with Pepsi/ Jim Beam/ Dryers Grand Ice Cream/ Barnes & Noble or Caribou Coffee with Apple6 (See Exhibit 2). Economies of scale (purchase advantages centralized HR and Marketing) realized by big players, especially Starbucks cost disadvantage for new entrantsConclusion Barriers to Entry in the Coffee IndustrySmall barriers to entry for small regional chains / cafs, but their expansion is relatively slow due to the increasing cannonball along of the expansion of the major players High barriers to entry into the industry for big players due to high industry dousing on top, huge brand recognition of major brands and high up-front investments are needed3.4 Power of Suppliersexplosive Raw Material Costs7Particular dependence on supply of higher-priced Arabic beans (premium coffee) as imported mostly from developing countries, price varies along with the economical and political dapple of the export country Dairy products, whose retail prices vary a lot, used for specialty drinks Coffee Shop Chains have contracts securing price stabilityFor most coffee-exporting countries (over 60 ) that is their only source of cash8 Higher world market demand and higher prices for differentiated (Gourmet and specialty coffees) and sustainable coffee (organic, fair trade, eco-friendly or shade grown) than for coffee commodity Farmers not agile enough or dont have the means to switch production Companies are helpingcommunities to make the change (train them, purchase at fair trade prices9 and provide technical assistance)10Conclusion Power of Suppliers in the Coffee IndustryVery limited power of suppliers as they depend on pr oducers help and sell a commodity.3.5 Power of CustomersHigh dependency of coffee shop chains on frequency of customer purchases Most customers appreciate the nice atmosphere in the coffee shops Preferences of customers are very likely to switch as they might get bored with / tired of the same flavor (relatively low brand loyalty) Shopping behavior is very likely to be influenced by budget constraints, weather conditions or health concerns in the general public Interested in continuous product innovation or seasonal specialties Essential for success word of mouth and frequency of purchases11Conclusion Power of Customers in the Coffee IndustryVery b power of customers as coffee shops depend on word of mouth and customer retention Furthermore a customers opinion, preferences and shopping habits can be influenced easily which creates a big threat for the companies.http//www.grin.com/en/e-book/111348/coffee-shop-industry-a-strategic-analysisMarket Structure2.1 IntroductionMarkets are characterised by the interaction of buyers and sellers. Generally, economic writings distinguishes two ways of interpreting the market concept. These interpretations concern the cover and abstract concept of markets. The first deals with tangible markets. The latter concerns interaction of supply and demand, without the need of immediately provision the products or having them in the market place. Section two of this chapter presents four main types of market structures. The type of market structure largely determines the relationship between buyers and sellers. Therefore, it also influences pricing of the product and thedistribution of income between economic agents throughout the production and marketing chain. Section three deals with the reasons why markets might diverge from a incident of perfect competition. This situation of imperfect competition is caused by the front end of barriers to entry. This section presents six sources causing these barriers as mentioned by Mich ael Porter (1980). Finally, section four draws some conclusions.2.2 Types of market structureIn the introduction of this chapter it was mentioned that the market concept has two different interpretations. Next, this study operates the abstract concept of markets, when dealing with market structures. Economic literature distinguishes four main types of markets. These markets are divided into perfectly competitive markets, monopoly markets, oligopolistic markets and markets with monopolistic competition. Each stage in the production and marketing chain considered in next chapters, may be characterised by a different type of market. Before examining the coffee market, this section will deal briefly with each type of market. absolute competitionWhen economists talk about a competitive market, they mean a market with the following four characteristics First, the market consists of many small buyers and sellers, where no individual buyer or seller is large enough to influence the market p rice of their product. Second, the product is standardised, which implies that it is a homogeneous product. Third, there are no entry and exit barriers. Fourth, there is complete and perfect knowledge about technology and market prices (Martin, 1993, p.15). In competitive markets suppliers can sell their products only with short term economic profits. In the long run this situation cannot persist. When suppliers earn profits, i.e. their price exceeds their average costs, new suppliers enter the business and established suppliers increase their output in the long run.MonopolyOn the other hand there are markets which are dominated by one supplier. This market structure is called a monopoly. Two things distinguish a monopolyfrom a competitive market. First, there is only one single supplier that supplies the market. Secondly, entry by other potential suppliers is blockaded. The first characteristic ensures that the monopolist faces no actual competition. Because of this, the monopolist may choose to supply at any point on the market demand curve. To earn the largest possible profit, the monopolist will choose the output that makes his marginal costs equal to his marginal revenue. His output decision will determine the price of the product, which makes him a price setter. The insurgent characteristic implies that the monopolist faces no potential competition. To restrict other suppliers from entering the market there have to be some barriers to entry (Martin, 1993, p.23-24). These barriers are discussed in more detail in the next section.OligopolyIn a competitive market, each supplier is so small that it cannot affect the price. When the supplier raises its price in a higher place equilibrium price, he will loose his sales to other suppliers or new entry is provoked. At the other extreme, the monopolist has no rivals to worry about. The monopolist can raise his price without provoking new entry. Between these two extreme cases there is another type of market. Ma rtin (1993, p.110) characterises this type of market by the presence of a few large suppliers which dominate the industry. These suppliers recognise their mutual interdependence and therefore cannot act as a monopolist. This third type of market is called an oligopolistic market. So, under oligopoly there is intense rivalry. Yet, barriers to entry are present which allow for long term profit (Maddala & Miller, 1989, p.375).Monopolistic competitionAn essential characteristic of this fourth type of market is product differentiation. Maddala & Miller characterise this market by a large number of suppliers, each of which has a little market power because it offers a differentiated product. Yet all the suppliers are in competition because their products are close substitutes. So, there are no barriers to entry under monopolistic competition and, hence, there are no economic profits in the long run (Maddala & Miller, 1989, p.375).Differences in market structure lead to differences in mark etpower. Therefore, within the framework of this study, it is important to picture these differences in market structure among subsequent stages. In chapter five it is shown that these differences can be very large for some of the stages in the production and marketing chain of coffee.http//www.greenbeanery.ca/bean/documents/scriptie.htm