Coffee Industry Analysis

Michelle Rizza M.
Mora
MBA2
MB - 1800071
U.K Coffee Industry Analysis
Introduction
The Coffee segment consists of Roast Coffee, that incorporates caffeinated and decaffeinated
coffee in the form of ground coffee and whole beans, that is prepared with coffee machines or
a French press, as well as Instant Coffee, that includes soluble coffee that does not need further
equipment for preparation. The segment does not include Ready-to-Drink coffee beverages
which are included in the Soft Drinks segment of the Non-Alcoholic Drinks market instead.
While Roast Coffee, or fresh coffee is especially popular in traditionally coffee-leaning countries
like the U.S., Germany, Italy or Brazil, Instant Coffee is important in traditionally tea-leaning
countries like the UK, Czechia or Asia in general as the method of preparation is very similar to
that of tea.
In retail, the biggest player in the Coffee segment by a wide margin is Nestlé whose Nespresso
and Nescafé brands are globally recognized household names. Other important players are
Jacobs Douwe Egberts (JDE), Keurig Dr Pepper, Tchibo, J.M. Smucker and Lavazza. Out of home,
Starbucks, Tim Hortons, Panera Bread, Costa Coffee, Peet’s Coffee, Dunkin’ Donuts and Caribou
Coffee are the most important players. An important company in the background of both at-
home and out-of-home coffee is the Luxembourg-based JAB Holding which has built a sizable
portfolio in retail and coffee shop brands and owns at least partially both Jacobs Douwe Egberts
and Keurig Dr Pepper as well as Panera Bread, Peet’s Coffee and Caribou Coffee among others.
The market for Hot Drinks is structured into retail sales for at home consumption and on-
premise or foodservice sales for out-of-home consumption. The at-home market, also called
off-trade market, covers all retail sales via super- and hypermarkets, convenience stores or
similar sales channels. The out-of-home market, also called on-trade market, away-from-home
market or HORECA encompasses all sales to hotels, restaurants, catering, cafés, bars and similar
hospitality service establishments. Both the at-home and the out-of-home market are valued at
retail selling prices including all sales and consumption taxes. The price per unit in the out-of-
home market always references the total price over the kg amount of coffee consumed,
regardless of the other components of the finished beverage. One cup of coffee (0.2 liters) is
assumed to contain on average 11 grams of Roast or 2 grams of Instant Coffee. One kilogram
therefore represents roughly 90 cups of Roast Coffee or 500 cups of Instant Coffee. The
valuation of the out-of-home segment at retail prices means a significant change of the market
definition in comparison to earlier iterations of the Consumer Market Outlook, as out-of-home
consumption was valued at wholesale prices before. This means, market totals are not
comparable to published data from prior years.
Buyer Power
In UK, distribution channels for coffee market are complemented by hypermarket and
supermarkets (covering 79.7% of market volume). British customers prefer tea more than
coffee products hence companies selling coffee faces challenging situation to alter taste bud of
local customers. The coffee industry is associated with low switching cost and product
differentiation, which increases buyer power up to certain extent. Homemade coffee shops and
motorways stations act as alternate retail channel for hot drinks market in the industry. Overall,
buyer power can referred as moderate in UK hot drinks market.
Supplier Power
Major supplier companies selling hot drinks are farmers harvesting coffee beans and cocoa
seeds. Suppliers are largely located in various countries such as Africa, Latin America and South
Asia. Various factors such as poor economic condition of suppliers, presence of large number of
independent farmers are undifferentiated nature of coffee beans decreases bargaining power
of suppliers up to as significant extent. Meanwhile multilevel supply chain of large coffee
retailers is complemented with inclusion of intermediaries, decreases earning potential of
individual farmer. Overall, supplier power in UK hot drinks market is estimated as low medium.
Threat of New Entrants
New entrants in UK hot drinks market try to distinguish their offering by emphasizing taste,
health benefits and quality of coffee bean. Low switching cost for customer enhances market
opportunity for new players. Brand equity of companies like Starbucks, Nero and Costa can
create significant competition barrier for new entrants. Leading players in the market use
economies of scale in order to create paradigm shift in market equilibrium and achieve
competitive advantage over new entrants. Established brands such as Starbucks, offer a wide
range of coffee product portfolio to customers, which further decrease product differentiation
scope of new entrants. Overall, it can be inferred that threat of new entrants is moderate in the
country.
Threats of Substitutes
Tea and coffee are the most popular hot drink products in the country. Coffee plays crucial role
in creating cultural heritage of UK, decreasing threat of substitute products. Although
consumers prefer to take functional drinks over traditional hot drinks in order to prevent
caffeine intake but their number is too small to perturb market equilibrium. Hence, overall
threat of substitute is assessed as very weak.
Degree of Rivalry
Hot drinks market in the country is fragmented because due to presence of any clear market
leader. The degree of rivalry is complemented with low switching costs, limited scope of
product differentiation and high start up cost. High exit costs can be classified as important
factor for increasing market fragmentation. Existence premium coffee brands increases
dynamics of business competition in the market. Overall, competitive rivalry for UK hot drinks
market is assessed as high medium.

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What are the major distribution channels for coffee in the UK?

What factors affect supplier power in the UK coffee market?

Michelle Rizza M.

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