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)

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

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

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

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

Answer 1

(1)

The following are the main reasons for the success of the industry. Giomo Coffee Industry customers are defined as price reactive and enjoy low-cost changes. Second Cup Coffee is a coffee shop with a fair price system and a choice to choose from among consumers, making it the biggest factor for success. There was a price rise in the coffee retail stores during the decreasing periods, and the launch of the low priced system outlet can be described as the market demand for the circumstance. An effective sales team also helps the company grow rapidly. The Second Cup Coffee has recruited an powerful selling team for the activities, enabling it to meet the full consumers.

(2)

Launch of the New Entrant is achieved by making the arrival of Second Cup Coffee, which services consumers at fair rates with massive range of flavours, is the key explanation for the decline in market share for leading firms. Control of the New Entrant is done by having control of the dominant companies with more than 65 per cent of the market share controlled by the Second Cup Coffee automatically decrease.

(3)

Costs Conversion performed by the previous dominant firms will adjust the cost structure to reduce or even limit the entrance of the new entrant. Negotiation with suppliers by the existing firms may have prevented the entrance of the new entrant by bargaining with suppliers and may have extended the supply arrangement with suppliers.