Table of Contents
Coffee is a household stable in the US, UK, Europe and Asia and it is consumed by people from all ages, genders, incomes, and countries. Coffee started out being consumed as a breakfast beverage but people are now consuming it anytime of the day and anywhere. Consumers are also getting increasingly attracted to the innovations that have been introduced to coffee products including flavours, variety, price points and convenience packaging. The global coffee market is mainly dominated by multinationals and other companies that have committed to providing customers with sustainable coffees by establishing purchasing targets, and naming their sustainable sourcing through their corporate social responsibility policies. Even though fresh coffee dominates the coffee industry, instant coffee is increasingly gaining a stable market share due to the increasing preference of convenient, versatile and branded experience (Mintel, 2012, p. 19).
Cenlow Limited manufactures instant coffee and is considering launching the product in an improved pack that is lighter and cheaper to produce than the current glass jars. The company has been operating successfully for the past two years, but has faced increased competition. The company’s products are well accepted in the market and business is starting to pick up in the past 18 months. The change in product, if launched, will have an impact on the financial capability of the company and its’ production line. The company is also considering launching the improved product and packaging internationally with a view to increasing the product range, however there are concerns that the market may already be saturated. This report analyses the current market situation of the coffee industry and how these might affect the company. The report analyses and discusses the situation of the company in terms of SWOT analysis, PESTEL/STEEPLE analysis, Porter’s 5 forces, and Porter’s Generic Strategy in the current market situation while providing recommendations for the company.
This report applies SWOT analysis, PESTEL/STEEPLE analysis, Porter’s 5 forces, and Porter’s Generic Strategy of the company in the analysis of the current market while providing conclusion and recommendations on Cenlow company limited intentions of launching a product change and the intentions of improving product and packaging internationally with a view to increasing the product range. By focusing on the company analysis and the conditions in the current market, it is possible to analyse where the company stands. The report concludes that the move to change product and considering launching the improved product and packaging internationally with a view to increasing the product range would work for the best for the company.
An overview of the coffee industry
Coffee is a household staple and is consumed by people of all ages, gender and income. Consumption of coffee has been found different among consumers as some drink coffee as a morning beverage while others drink it any time of the day. In the USA, coffee is consumed across all income levels but instant coffee is more popular in households with fewer earnings below US$25,000 while whole bean coffee is mostly consumed in households with higher income over US$150,000. According to Mintel, price, flavour, brand and roast are the most important factors that affect the purchase of coffee in the US. Instant coffee is gaining momentum worldwide and according to Euromonitor, worldwide sales of instant coffee was worth $31 billion in 2013 and are expected to be worth $35 billion by 2018 (2012, p. 56).
There are two types of coffee, Arabica and Robusta in the coffee industry. Most of coffee consumed in the US is Arabica and it makes up a larger portion of whole coffee consumed in the US. This has been due to a huge surge of demand of the Arabica coffee in emerging markets in Asia like India and China and also Brazil. The global market for coffee for coffee is complex and is mostly dominated by multinationals that mainly rely on traders for the supply of coffee beans. There has been a steady increase in growth and supply of sustainable coffee and the entry of multinational companies in the sustainable coffee market increases market competition for smaller firms (International Markets Bureau, 2013, p 17).
The SWOT analysis involves the external and internal analysis of a business environment so as to identify inner strengths, maximize opportunities, address weaknesses and avoid external threats (Panagiotou, 2003, p 8). The SWOT analysis can be used as a strategic planning tool which evaluates internal strengths and weaknesses and external opportunities and threats in a situation whereby a business or an organization wants to make a decision. A SWOT analysis monitors both the internal and external marketing environment. A SWOT analysis groups information on the marketing environment into internal factors which include the organization’s internal strengths and weaknesses and the external factors which include the threats and opportunities that the external environment presents (Panagiotou, 2003, p 10).
According to Nasri, SWOT analysis is mainly used to gather meaningful insights about organizational competencies after gathering marketing information and enable the appropriate use of that information in order to utilize opportunities, relating them with the internal strengths, identifying any threats and addressing weaknesses (2011, p. 54). SWOT analysis can also be used as an intermediary between strategic planning and marketing intelligence and chose the most appropriate strategy among alternatives. Marketing intelligence involves gathering information about consumers, competitors and other dynamic market conditions on a regular basis so as to keep track of the situation at the market place. Marketing intelligence therefore provides information on SWOT which can then be analysed prior to decision making.
PESTLE analysis is a popular analysis tool used to identify and evaluate external factors that could affect the activities or decisions of an organization. Most of these external factors are those that an organization has no control over but they affect business decisions. These factors can be categorized according to the PESTLE model into political factors, economic factors, social factors, technological factors, legal factors and environmental factors. Political factors include government policies, regulations, priorities and political decisions that can impact vital areas of an organization and may include policy changes. Economic factors include factors affecting the economy including inflation, exchange rates, interest rates or even economic growth which can in turn impact an organization (Gehlhar, Regmi, Stefanou, & Zoumas, 2009, p. 115).
Social factors are those social trends that can affect the activities of an organization such as how the population perceive and demand a firm’s product. Technological factors are the innovation and technology factors that improve business activities. Legal factors involve the legal environment and legal changes that might affect the activities of an organization for instance legislation on minimum wage, terms of business or even discrimination legislation. Environmental factors might include weather and climatic factors, global warming and waste issues, that might affect the business environment and activities of a firm. PESTLE analysis enables firms analyse issues in the macro environment that could affect business activities and make best decisions based on these factors (Nasri, 2011, p. 57).
Porter’s 5 forces
Porter’s five forces involve an evaluation of the strength of the threat of new entrants, bargaining power of suppliers, bargaining power of customers, threats of substitute products and the degree and nature of business rivalry among competitors. These forces are used to assist a firm to assess the profitability of the industry and its position in that industry. According to Porter, the profitability of a firm is negatively associated with lower barriers to market entry, increased competition, large number of substitutes, and high bargaining power of suppliers and customers (Porter, 1980, 39).
Porter’s 5 forces are used to assist in analysing forces that affect competition in an industry and hence understand the attractiveness of an industry as well as the weak points (Porter, & McGahan, 1997, p. 17). The five forces provide a framework used to assess the potential profitability of a certain industry and all firms in an industry are subjected to this. According to Porter, all the five market forces determine the attractiveness and profitability of an industry and the strongest forces are used in making decisions or formulating strategies. The strongest forces therefore become crucial when it comes to strategy formulation or decision making (Porter, & McGahan, 1997, p. 21).
Porter’s Generic Strategy
Firms use strategies that differ in a number of ways in order to compete in an industry. Such strategies include brand identification, technological leadership, cost position, service, among other strategies (Porter, 1980, p. 34). These competitive methods enable a firm to identify the strategies of other competitors in an industry. According to Porter, a firm can be able to deliver superior performance by developing a generic competitive strategy. Porter came up with three generic strategies that would enable an organization have a defensible position and outperform its competitors in an industry. These strategies include low cost strategy that involves low cost compared to competitors, differentiation which involves creating a unique product or service that would fetch higher than average prices, and focus strategy whereby a firm concentrates on a product line, group of consumers or geographic markets (Porter, 1980, p. 38). A firm must therefore choose a strategy that would enable it to be successful in an industry failure to which a company can fail to perform. These shows that a commitment to at least one of the three Porter’s generic strategies will enable a firm achieve a higher performance than failing to develop a strategy. It is therefore important for a firm to identify a strategy that would not place it in direct competition with larger firms (Stonehouse, & Snowdon, 2007, p. 256).
Analysis and Discussion
Coffee is a global commodity and so its manufacture is dependent on global factors. The soaring demand of coffee in emerging markets in the East and South America has increased the demand for coffee manufacturers to produce more instant coffee. According to Euromonitor International, more consumers are buying instant coffee than ever before. The demand for instant coffee is also on the rise in the US and Europe market although not at the extent of the markets in the east. Cenlow Limited manufactures instant coffee and is considering launching the product in an improved pack that is lighter and cheaper to produce than the current glass jars. This could be a good move based on the direction the coffee market is taking. With the demand of instant coffee increasing, Cenlow Limited is likely to reap great benefits from this move.
The coffee industry has various strengths, weaknesses, opportunities and threats. Coffee is among the biggest commodity in the world and people have drunk and enjoyed coffee for many years. Another strength it has is that it has consumers around the globe and its consumption reaches more than 2.5 billion cups a day and so people will always drink coffee. Coffee is mostly producing by the developing countries of the world and so it supports the economy of the developing world (Mintel, 2012, p. 32). Many consumers also consider it to be a good brain stimulus. One of the weaknesses of the coffee industry is that coffee is affected by weather, altitude and soil and this could affect the supply of quality coffee. Being a global commodity, it is also influenced by the global financial instability and price volatility. Some of the opportunities for the industry are the increasing demand of instant and specialty coffee around the world, demand for sustainable coffee and quality improvement programs that promote the purchase of quality coffee beans from farmers and opportunity to source coffee directly from farmers. The biggest threat for the industry is competition from other cash crops that fetch more money from coffee farmers in the developing world. The changing climate and weather is also a big threat to the supply of quality coffee (International Markets Bureau, 2013, p. 30).
The coffee industry is largely influenced by political factors since it is a global commodity. Political factors in countries producing and consuming coffee influence the industry and so much cooperation is needed for all the involved governments. Environmental laws, trade restrictions or reforms, political stability, consumer protection, among other factors can impact the industry. Since coffee is a global commodity, economic factors like inflation exchange rate, interest rates, labour cost trends, among other factors affect the supply and market of coffee. Social factors like changes in lifestyle, employment levels, attitudes, beliefs and social convention affect consumption coffee. The changing lifestyle and globalization has led to increased coffee consumption and demand for instant and specialty coffee (International Markets Bureau, 2013, p. 26).
Technology plays a big part in the coffee industry as innovation can make it easier to grow and market coffee. Consumers are also attracted by the innovations of coffee products and are looking for price points, variety, convenience, flavour and formats. Legal factors like current legislation in areas such as competition, environment, employment, import and export affect the industry mostly because the business involves different countries. Environmental factors like climate change, contamination, legislation, social implications and ways of growing coffee can affect the industry particularly on supply and availability of quality coffee (Gehlhar, Regmi, Stefanou, & Zoumas, 2009, p. 119).
Porter’s 5 forces
The coffee industry has various barriers to entry by new manufacturers. Currently, coffee and particularly instant coffee is becoming really popular among people from different ages, gender and income. In general, it wouldn’t seem hard to enter into the industry by opening up coffee shops but it would be hard for manufacturers who want to venture into bigger business. There are also big competitors who make it difficult for new entrants to succeed in the industry. The bargaining power of suppliers is generally limited as coffee suppliers mostly come from developing countries and so they have inadequate funds and not in a position to increase prices of coffee beans. The bargaining power of customers in the instant coffee industry is big and the industry generally depends on the customer. The customer has to be satisfied and the firm should find ways of appealing more to customers. The main competition for the coffee industry is tea industry which is widely spread and used all over the world. However, countries that have been known to be exclusively tea drinkers are taking a lot of coffee currently. There are several substitute products for coffee and these include soft drinks, beer, ice cream, cigarettes, among other easily available substitutes. There is therefore the need to make coffee more appealing or easily drinkable in the market (Mintel, 2012, p. 32).
Porter’s Generic Strategy
Porter’s generic strategies in the coffee industry are characterised by firms’ response to the industry. The three generic strategies are applied by companies in the industry. For the cost differentiation strategy, a company has to have a broad market and demand a considerable market share in order to use the strategy. The large multinationals that dominate the industry can use this strategy. The differentiation strategy is used by companies that sell a wide product range of coffee products based on flavours, specialty or format. Coffee purchases in the industry are mostly influenced by prices, roast types, choice of flavours and choice of blends. Concentrating on a wide product range of coffee products would enable a firm utilize the differentiation strategy. Focus strategy is also another generic strategy used in the coffee industry by targeting particular customer groups or segments (Roland-Philipps, 2007, p. 1).
Conclusions and Recommendations
Cenlow limited manufactures instant coffee for and is considering launching the product in an improved pack that is lighter and cheaper to produce than the current glass jars. The instant coffee market is increasing globally and so launching the product in an improved pack that is cheaper to produce could be ideal for the company. The company has been successfully operating for the past two since and so it already has a considerable market base. The company can therefore focus base strategy whereby it can target consumers of instant and specialty coffee. Because of increased competition the company is currently facing, using a cost strategy would not be ideal as some of the larger companies already use this strategy.
The idea of considering launching the improved product and packaging internationally with a view to increasing the product range is also ideal for the company now that focus base strategy will be implemented. Since the company’s products are well accepted in the market, increasing the product range will enable the company take advantage of this opportunity. The international demand for coffee is increasing and so increasing the product range can work for the better of the company.
The current economic situation shows that the dollar rate is unstable and this could affect the ability of the company to source coffee beans. The company could seek to source coffee beans directly from farmers in order to get quality coffee bean and offer better prices to farmers. This will enable the company establish a good relationship with the suppliers and so they will able to have constant supply. It will also reduce some of the uncertainties in the coffee industry. The issue of production is also uncertain based on the global weather and climatic conditions. However, coffee consumption is growing especially the consumption of instant coffee. The company can always be sure that coffee would always be on demand.