Question

The Coffee Retail Industry in Giomo

The coffee retail industry in Giomo was dominated by large coffee shops such as Tan Hortons, Coffee Time, Starlarks Coffee and Country Style. Tan Hortons had the largest share of the market of coffee consumers at 31%, followed by Starlarks Coffee with a market share of 25%, Coffee Time at 21% and Country Style holding 13%. The Coffee growers in Giomo traditionally sold the bulk of their coffee beans produce to the coffee shops.

As a result of a combination of advanced technology in farming and good weather conditions, the coffee growers increased their production of coffee beans. However, they found to their dismay that the coffee shops were reluctant to increase their supply of coffee even though the demand for coffee beverages was on the increase. This was in a bid to create artificial fall in supply of coffee beverages and increase retail prices of the beverage.

In an attempt to survive and prevent the fall in supply price of the raw material, the coffee growers formed a cooperative and together raised $6.5 million. They opened their own chain of coffee shops called Second Cup Coffee, which they supplied themselves. An excellent sales force was put together to facilitate the sale of the beverage to the residents in Giomo. The sales force succeeded in convincing people that a second cup of coffee was a great way to start a day, a second cup was necessary when taking a break at midday and at night, a second cup was the way to finish an evening meal.

The Giomo Coffee retail industry was characterised by consumer sensitivity to price and low switching cost. Within two years of the establishment of Second Cup chain of coffee shops, the annual coffee consumption in Giomo had increased by 15%. However, Tan Hortons’ market share had fallen from 31% to 12% resulting in the laying off of about 200 of its employees. Starlarks Coffee had lost 15% of its market share while Coffee Time retained only 7% of its share of the market. Country Style could only hold on to 5% of the total market share.

After five years of operation, Second Cup Coffee controlled more than 65% of the market of coffee consumers. While other coffee shops served traditionally brewed coffee, Second Cup Coffee has a variety of coffee in different flavours such as vanilla, strawberry, caramel and mint. It opened drive-through services for hard pressed for time customers. It also formed distribution alliances with Wendy’s, producers of sandwiches and pastries which customers of coffee loved to eat with their drinks.

By the tenth year of operation, Second Cup Coffee had more than 200 coffee shops, about 1200 employees and 8 different kinds of coffee drinks. Its shareholders were mostly coffee growers who owned more than 100,000 acres of coffee beans farms and produce millions of tonnes of coffee each year. Coffee has become the traditional drink of the people of Giomo.

(Source: Adapted from Carpenter et al, (2011) Strategic Management, A Dynamic Perspective, New Jersey, Pearson Prentice Hall)

a. Explain three factors that made the major supplier group powerful in the Giomo Coffee Retail Industry

b. Explain three reasons for Second Cup Coffee’s success even as a new entrant into the Giomo Coffee Retail Industry

c. Examine two factors that accounted for the fall in market share of the four dominant companies in the Giomo Coffee Retail Industry​

d. Discuss two barriers that could have prevented new entrants from entering the Coffee Retail Industry

Answer 1

Factors that made Major Supplier Group Powerful in Giomo Coffee Retail Industry

- Domination of Large Coffee Shops

The major players of the industry were Tan Hartons, Coffee Time, Starlarks Coffee, and Country Style. The bulk supplying of coffee beans to these players is the reason of higher revenues for the suppliers.

- Use of Advanced Technology

The use of advanced technology in suitable weather and farming conditions helps in the increased production of the coffee beans which eventually helps the suppliers.

- Introduction of "Second Cup Coffee"

During the artificial decline in supplying activities, the suppliers formed their own chain of coffee outlets which proved to be the correct decision for the situation.

Reasons of Success for Second Cup Coffee

- Reasonable Prices

The customers of Giomo Coffee Industry are described as sensitive to pricing and prefer low-cost shifts. Second Cup Coffee is a coffee outlet with a reasonable pricing structure and a variety for customers to choose from, thus it's the main reason for success.

- The demand for the Situation

During the declining times, there was an increase in the price in the coffee retail stores was experienced, thus the introduction of the low pricing structure outlet can be defined as the demand of the situation for the consumers.

- Hard Working SalesForce

An effective sales team also helps the business in rapid growth. The Second Cup Coffee hired an effective salesforce for the operations and that enables it to reach the maximum customers.

Factors that Accounted for the Fall in Market Share of the Dominant Companies

- Introduction of the New Entrant

The introduction of Second Cup Coffee, which serves the customers at reasonable prices with huge variety of flavors is the main reason of the fall in market share for dominant companies.

- Control of the New Entrant

With more than 65 percent of the market share controlled by the Second Cup Coffee, the control of the dominant companies diminishes automatically.

Barriers that could have Prevented New Entrants

- Costs Switching

The former dominant companies can switch the cost structure to minimize the impact of the new entrant or even restrict the entry of it.

- Negotiation with Suppliers

The dominant companies could have restricted the entry of the new entrant by negotiating with suppliers and can continue the supplying relation with them.