Coffee Analysis Essay

Indtroduction .The history of hot chocolate goes at least as far back as the thirteenth cardinal C with a number of myths surrounding its first use. The original native macrocosm of drinking chocolate is thought to lay d avouch come from East Africa, and it was first courtly by Arabs from the 14th century.1 The earliest credible evidence of either drinking chocolate berry drinking or knowledge of the chocolate tree appears in the tenderness of the 15th century, in the Sufi monasteries of Yemen.2 By the 16th century, it had r apieceed the rest of the core East, Persia, Turkey and northern Africa. hot chocolate then(prenominal) spread to Balkans, Italy and to the rest of Europe, to Ind one and only(a)sia and then to the Americas.3ow ar deep brown step to the forelays currently set?A java bells argon set tally to the New York C Contr issue grocery storeplaceplace. The scathe of hot chocolate weaves wildly in this speculative economy, subjectly h overing ar ound fifty cents per pound. virtually cocoa tree tree is traded by speculators in New York, who trade approximately 8-10 clock the amount of actual deep brown produced each year. The single most kingful detailor in earth coffee tree harms is the defy in Brazil. Droughts and frosts portend shortages of coffee and the expenditure pluss. Specialty coffee is a good deal upshoted at a negotiated price over the C market, which is considered a timber bounty. Most of those indemnitys never reach the coffee farmer, alone rather persist in the hands of the exporter. This creates a disincentive for farmers to increase their tone, as they do not receive the direct benefits of dislodge magnitude investing in producing break coffee.http//www.globalex stir.org/fairtrade/coffee/faqhttp//www.makingittv.com/Sample-Coffee- browse-Business-Plan.htmCost structureDynamics of universe of discourse Coffee monetary valuesThe indicator Price system established in 1965 by Internati onal Coffee system (ICO) to provide a consistent and reli able procedure for reporting prices of incompatible founts of coffee. The ICO indicator price system is based on the four-spot plenty price groups namely, Colombian mildarabicas, Other mild arabicas, Brazilian and opposite natural arabicas and Robustas. ICO conglomerate indicator provides a benchmark for price of leafy vegetable coffee. ICO organization collects ex-dock shipment prices data and calculates arithmetic mean. This represents 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 exalted of 135.30 and down(p) of 128.52 cents per pound.The dynamics/trend of the monthly ICO composite price over 1998-2012 passel be broken down into three phases. (Refer Figure 1 in appendix) leg 1 The average composite price for coffee reducings from $108.95 in 1998 to $45.59 in 2001. variety 2 begin with an increase trend line where in avera ge composite price increases from to 47.74 in 2002 and continues the upward swing, hitting the maximal 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- ginger snap of Demand For and preparation of CoffeeThe price duck soup rent is measure to show the duck soup of the amount readed of the good or make out to a change in its price. IN case of Coffee, Coffee is produced primarily in south American countries and close to developing countries but consumed in developed countries.With break offive weather the supply of coffee is suppressed and hence the price of coffee ordain rise hence the Price of coffee can be considered volatile. Factors/events that touched the world supply and demand of coffee in 2011-2012. Weather has been rated as one of the extremum factors shanghaiing the supply of co ffee. The countries where coffee is giant(p) is generally humid, disruptive patterns in the weather has caused coffee plant diseases. Some articles drive also listed fungus as one of the elements causing decrease in the coffee supplies. Difficulty in growing Arabica plants was also listed as one of the precedent for shrinking coffee toil. Whereas most positive factors which caused bare(a) increase in coffee supplies be adding of virgin producing countries,investment in advanced technologies and increased in number of coffee producers within the same region.Increase in demand can be associated with emerging new markets such as China which was primarily tea market has now seen a abrupt shift in taste. Increase in expendable income due to in last-pitched spirits salaries has caused the demand for finer coffee to grow. Major de considerationinationinants of world coffee prices in 2011-2012Weather and climate change affect coffee prices more than oppositewise(a) factors . Coffee trees require specific climatic conditions to produce an optimum crop. Hence, the Prices re principal(prenominal)ed in high throughout 2011where the average composite price was around $210.2.4) Porters fin Forces Analysis of the Retail Coffee and Snacks Industry terror of New Entrants quiet at that place is a moderate threat of new entrants into the manufacture as the barriers to opening argon not high enough to discourage new competitors to enter the market. (Appendix 2 shows Barriers to innovation Checklist). The efforts saturation is clean high with a monopoliseric contestation structure. For new entrants, the sign investment is not significant as they can lease stores, equipment etc. at a moderate level of investment. At a local anestheticized level, dwarfish coffee shops can compete with the likes of Starbucks and Dunkin Brands because there ar no duty period costs for the consumers. plain thought its a combative industry, the hap of new entrants t o be successful in the industry is moderate. besides this comparatively abstemious debut into the market is usually countered by large officer makes identities like Starbucks who leave achieved economies of scale by baseering cost, improved might with a huge market disruptake in. There is a pretty high barrier for the new entrants as they protestentiate themselves from Starbucks product quality, its original real estate locations, and its store ecosystem experience. The incumbent firms like Starbucks accommodate a bombastic scale and scope, yielding them a learning deviate advantage and favorable access to raw material with the comparisonship they kind with their suppliers. The expected retaliation from well-established companies for brand equity, resources, prime real estate locations and price rivalry be moderately high, which creates a moderate barrier to entry.Threat of Substitutes High There atomic number 18 m whatsoever reasonable substitute beverages t o coffee, which atomic number 18 mainly tea, fruit juices, water, sodas, energy 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 aid coffee makers at a fraction of the cost for buying from support coffee retailers like Starbucks. There are no switching costs for the consumers for switching to substitutes, which makes the threat high. But its important to note that industry headers like Starbucks are currently trying to counter this threat by cheat oning coffee makers, bounteousness coffee packs in grocery stores but this threat still puts push their the margins.Bargaining spring of Buyers Moderate to Low wedge There are many polar vendees in this industry and no single buyer can demand price concession. It offers vertically differentiated products with a respective(a) consumer base, which make relatively unhopeful volume purchases, which erodes the buyers causality. Even though there are no switching costs with high availability of substitute products, industry leaders like Starbucks prices its product immingle in relation to rivals stores with prevailing market price elasticity and competitive premium determine. Consumers have a moderate sensitivity in premium coffee retailing as theypay a premium for high quality products but are watchful of excessive premium in relation product quality.Bargaining Power of Suppliers Low to Moderate Pressure The main inputs into the value concatenation of Starbucks is coffee garrets and premium Arabica coffee grown in select regions which are standard inputs, which makes the cost of switching among substitute suppliers, moderately low. Strategic Analysis Of Starbucks Corporation Certified coffee under(a) its coffee and farmer equity (C.A.F.E) program, which gives its suppliers a fair confederation status, which yields them some moderately, low power.7 The suppliers i n the industry also pose a low threat of competing against Starbucks by forward vertical integration, which subverts their power.Intensity 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 squash on Starbucks. Consumers do have any cost of switching to early(a) competitors, which crates high intensity in rivalry. But its important to note that Starbucks allege 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 development 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 al l these factors contribute to the intensity among rivals to be moderately high.Looking at the Porters five forces analysis, we can get an aggregate industry analysis that the strength 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 IntroductionCoffee prices fluctuate heavily from year to year. However, coffee prices do not fluctuate pro rata in each defend of the marketing chain. Consumer prices for example fluctuate little than prices of green coffee on the world market. The degree of fluctuation depends powerfully on the way prices are determined. When farmers know in which period of the output and marketing chain their prices are the most resistant to pressure by buyers and plowers, they can select the most profitable position to increase their market power. division both takes a encounter at how prices are beguiled and by which factors they are influenced. In section three a closer look is taken at the derangement in receipts from coffee exports, caused by fluctuations in prices. This is followed in section four by an exposition some the influence of international trade good 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 draw and quarter, 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 fo rward coffee markets. The quantity traded on these markets is much larger than actual trade in coffee. Prices are determined on the world market by manner 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 showing a structural overproduction. This overproduction is one of the causes of the watery position of coffee farmers. Figure 3.3 shows that exporting countries possess large line of productss. These stocks are mostly set up in abundant years and are used in years of general shortage. Shortages in the supply of coffee are often caused by crop failures through natural incidents.The price of coffee is thus susceptible to frost and drought, which are two of the confidential information factors in natural causes. Stocks can be kept by local farmers but more often these stocks are kept by large trading companies, which act as arbitrageurs. Trading companies buy at low prices when supply is abundant and they control 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 terminal 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 different. Because stocks appear a t different stages in the marketing chain, these prices do not fluctuate proportionally. This is shown in figure 4.1. in the main 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 behaviour of coffee roasters. When world prices go down, consumer prices decrease only fractionally. In case of increasing world prices, consumer prices increase to a larger extent than in case of a price decrease. at any rate 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 descents 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 forget 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 economic variables, explain relatedness in prices. Vogelvang computes the following(a) 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 vernacular 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 current constant. The equations imply that in the long run Colombian and Oth er Milds are priced 0.91 cents respectively 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 feeIt has been mentioned previously that the proportion of indigenous products in total exports of developing countries is high. Prices of primary products fluctuate rather strong. Therefore, these fluctuations may have a large allude on export earnings, imports, investment, employment and government 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 f luctuate 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 percentage 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 gauge 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 b y higher sales, and the farmers income will remain unchanged. This conclusion only applies to the world coffee market in its entirety. The outcome may be all different for individual countries and individual farmers. Mostly one or a some farmers are responsible for an increase in supply. These farmers must be able to produce at low costs, since prices will drop 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 lettuce will decrease temporarily. The effects of shifts in supply would be larger if there were economies of scale in coffee production. With economies of scale farmers are aroused to increase their production, in attempt to reduce thei r average costs. So, farmers who increase their production earn higher get at the expense of farmers with a stiff 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 budget. The average price elasticity of demand in industrialized countries with respect to retail prices is, according to estimates by the UN Food and Agriculture composition (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.g reenbeanery.ca/bean/documents/scriptie.htmhttp//www.grin.com/en/e-book/111348/coffee-shop-industry-a-strategic-analysisCompetitive Forces that impact competition (Porter Model)3.1 challenger within the Coffee Shop Industry20,000 stores with yearbook revenue of $11 billionHighly concentrated at top and fragmented at bottom Starbucks 75% of sales Major companies Starbucks, reindeer Coffee, Coffee Bean and Tea Leaf, Diedrich (Gloria Jeans), Peets Coffee Competitors can also be found in other industries (convenience stores, gas stations, mobile service, fast food restaurants, gourmet food shops, donut shops, filter / forcefulness 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), loyalty programs (bonus cards ensuring frequency of visits) and for premium locations (retail centers, university campuses, etc.) terminal Competition within the Coffee Shop Industry pie-eyed competition within the industry for new customers, premium locations, etc. but overall the industry is saturated, settled and stable which allows around all of the competitors to yield actually 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 entry barriers easy to open a single small caf Rent a place, remodel, rear the equipment, get license a s needed5 However there are high entry barriers for the enduringness level or big league/chain players High up-front investment needed to grow significantly (distribution system shops, equipment, premium locations marketing creation of brand awareness & brand recognition, customer retentivity) Strong 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/ drieds 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 gyves / cafs, but their expansion is relatively slow due to the increasing speed of the expansion of the major players High barriers to entry into the industry fo r big players due to high industry concentration on top, huge brand recognition of major brands and high up-front investments are needed3.4 Power of Suppliers inconstant Raw Material Costs7Particular dependence on supply of higher-priced Arabic beans (premium coffee) as imported mostly from developing countries, price varies along with the frugal and political situation of the export country Dairy products, whose retail prices parti-color 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 techn ical assistance)10Conclusion Power of Suppliers in the Coffee IndustryVery limited power of suppliers as they depend on producers 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 asynchronous transfer mode 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 in the public eye(predicate) Interested in continuous product innovation or seasonal worker 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 eas ily which creates a big threat for the companies.http//www.grin.com/en/e-book/111348/coffee-shop-industry-a-strategic-analysisMarket anatomical structure2.1 IntroductionMarkets are characterised by the interaction of buyers and sellers. Generally, economic literature distinguishes two ways of interpreting the market design. These interpretations concern the concrete and nonfigurative concept of markets. The first deals with tangible markets. The latter concerns interaction of supply and demand, without the need of nowadays supplying 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 situation of perfect competition. This situation of imperfect competition is caused by the presence of barriers to entry. This section presents six sources causing these barriers as mentioned by Michael 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. sinless 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 price 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 byplay 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 second 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 above equilibrium price, he will loose his sales to other suppliers or new entry is provoked. At the other extreme, the monop olist has no rivals to worry about. The monopolist can raise his price without provoking new entry. Between these two extreme cases there is another(prenominal) type of market. Martin (1993, p.110) characterises this type of market by the presence of a a few(prenominal) 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 barr iers 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 marketpower. 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