New Marketing Strategy for Caribou Coffee
To survive firms need to adapt and change in line with the general marketplace. Many successful firm have been able successful deal with dominant competition and high levels of challenge. One firm which faces these challenges is Caribou Coffee, although the second largest coffee house chain in the U.S. it is an underdog when compared to Starbucks, with just over 400 stores across 18 states in the U.S. and 203 stores in 10 international countries, many of which are franchises (Caribou Coffee, 2016). The company has faced some setbacks due to the high level of completion within the coffee house market, closing some 80 stores in 2013, and a further 88 were converted to Peets Coffee and Tea (Leavitt, 2014; Leonard, 2013). This indicates the firm needs to be able to adapt and change if they are to remain competitive. The aim of this report is to examine the firm and present a new marketing strategy.
2. Situational Analysis
To examine a firm to determine a suitable marketing strategy it is essential to look at the firm within its’ environment (Thompson, Scott, & Martin, 2010). This section will look at the firm and then its environment with the use of a SWOT analysis.
2.1 Company Analysis
Founded in 1992, Caribou Coffee is a speciality coffee company, selling a range of coffee and expresso drinks though coffee bars. The firm roasts their own beans, which are sold in 400 coffee shops in the U.S.; 273 owned by the company and 127 franchises, and 203 international franchise stores (Caribou Coffee, 2016). The organisation operates with four core values, these are the commitment to guests, including quality innovation connection, a connection to the community, where the company seeks to act in a fair, accepted and responsible manner, a commitment team members, listening, developing, and recognising them, but they commitment to deliver the company’s unique personality with fun, passion, and an authentic experience (Caribou Coffee, 2016).
The core product is the coffee shop experience, with coffee made to order, and a selection of food items to complement coffee. During much of 2014 the company undertook some related diversification, product line to incorporate high quality toasted lunchtime sandwiches (Business Wire, 2014). The company sought to continue the competitive advantage of differentiation through a high level of quality in the design of the sandwiches, which included Turkey and brie gets with a pepper jam, and a turkey ciabatta with an aioli pesto (Business Wire, 2014). This expansion into the sector facilitates an enhanced experience for customers, and also provides a greater level of ability to compete with major competitors such as Starbucks, as well as more local firms. This may be seen as a risky strategy, especially as Starbucks reversed this strategy in 2010, citing over diversification resulting in a loss of focus on the quality of the coffee (Schultz & Gordon, 2011).
In addition to the coffee houses, the company also will make a save for the grocery trade, available for mass merchants, wholesale clubs, as well as grocery stores (Caribou Coffee, 2016). The retail range, which includes a full spectrum from light to dark, as well as whole bean and ground varieties in different sizes, is supported the provision of point of sale material, including a four shelf display rack, as well as ongoing trade promotions (Caribou Coffee, 2016). Therefore, diversification into the retail/grocery channels has already occurred.
2.2 SWOT Analysis
Within a SWOT analysis, the first two elements; strengthen pieces, look at the internal elements of the organisation, while opportunities and threats look to the external environment (Mintzberg, Ahlstrand, & Lampel, 2008).
As the second largest coffee shop later in United States, Caribou Coffee have a number of benefits, including the well-known trade name which can support sales (Kotler & Keller, 2011), as well as the ability to gain from economies of scope and scale due to the size of the organisation. With the company retaining control over roasting their own coffee, the organisation is able to ensure quality, which is a source of competitive advantage, it retained, as well as maintain control over the supply chain (Caribou Coffee, 2016). The innovation over introduction of new products may also be seen as a strength. This may also be creating a new form of competitive advantage, with the announcement that all of the a menu item are being reviewed, in order to create a “clean label standard,” were all food and drink items will eliminate artificial flavourings (Watrous, 2016). The processor started with the vanilla syrup, but will be expanded to all products sold by the company by the end of 2016 (Watrous, 2016).
Diversification of the distribution channel, were coffee is sold through the grocery channels, to restaurants, and to offices and catering services, as well as the coffee shops (Caribou Coffee, 2016) facilitate the diversification of risk, which is also a strength (Mintzberg et al., 2008). As the product the same as those sold in the coffee shops, the costs are marginal, using the existing roasting facilities, with additional distribution costs.
The diversification is also seen with the recent acquisition of Keurig Green Mountain Incorporated, well-known for its single serve take-up, along with coffee machines, has been sold to the current owner of Caribou Coffee; JAB, for $14 million (Hammerand, 2015). While a separate company with in the parent group, this may also facilitate increased opportunities Briscoe and scale and alignment distribution channel.
The reorganisation in 2013/14 was necessary, but it created some, especially in terms of the closures having a negative impact on the organisation’s reputation, and internal culture (Leavitt, 2014). The limited geographical presence of the firm in only 18 U.S. states may be seen as a limitation, not only limiting the sales through coffee shops with exposure to regional shocks, but also limiting potential brand awareness to support alternate distribution sales. It may also be argued that despite the organisation being the second largest specialist coffeehouse in America, when compared to the major competitors; Starbucks, although there is some ability to gain economies of scope and scale, they are much less than the major competitor.
The franchising model is weak, as it is estimated by the company that can take up to 5 years for a new franchise operation to breakeven (Caribou Coffee, 2016). This is a relatively long period, especially compared to many other franchise in the food and beverage industry (Nijmeijer, Fabbricotti, & Huijsman, 2014). This can be a severe constrained on an expansion strategy.
The closure of numerous stores in 2013/14 also indicates there are in the marketing model, leading to many stores failing. This may have been the result of underlying operating decisions and control over costs, but may also have been an issue associated with marketing, and inability to generate effective marketing to attract sufficient customers. This weakness will need to be considered and addressed in the way and opportunities identified in the leveraged.
There are significant opportunities within the gourmet/speciality coffee market in the U.S. It is estimated that approximately 50% of the existing adult population, equal to approximately 150 Americans, either espresso coffee, cappuccino, lactate, or iced coffees, approximately 3.1 cups per day (E-imports, 2016). Furthermore, it is estimated that speciality coffee sales are expected to increase by 20% per annum over the next few years (E-imports, 2016). Therefore, there is an increasing market in the U.S., which the company may be leveraged. When the economic situation in the U.S. is considered, with the current recovery taking place in North America, increased disposable income is also likely to increase the demand for non-essential goods, such as gourmet coffee (Baye, 2007).
When examining the penetration of coffee stores, it is apparent that some areas within United States offer great opportunities and others indicated by saturation levels. For example, Seattle has approximately 15 stores per 100,000 residents, or both Manhattan and San Francisco have just over nine coffee shops per 100,000 residents (E-imports, 2016). Meanwhile, other areas have a much saturation, for example Chicago has just over three per 100,000 residents, Houston has less than three, New Orleans has one, and Oklahoma City had less than one per 100,000 residents (E-imports, 2016). These may offer opportunities for national expansion.
There is also a potential for expansion. The organisation has literally created international expansion, having undertaken into franchise operations only. However, when looking, there is a higher level of either coffee, with a recent report indicates Canadian drink coffee on a daily basis (CAC, 2013). This market must be growing at the same rate as the U.S., with expansion expected market demand expected percent per annum (CAC, 2013), but it does provide a significant advantage for Caribou Coffee. Expanding into Canada would help to diversify the risk, especially risk associated with the condition of the U.S. economy which may impact on sales. This opportunity has already been recognised by other companies, with Tim Horton’s indicating that they plan to open more than an additional 500 stores in Canada in the next few years (George-Cosh, 2014).
The company has undertaken some expansion utilising strategic partnerships with placement or concessions in bagel stores (Watrous, 2016). This also provide opportunities, locating suitable strategic partners which may facilitate the placement of concessions, providing access to the company’s existing target market in a cost-effective manner.
The main threat for Caribou Coffee is the high level of competition in the marketplace. The dominant company is Starbucks, but there is also a high level competition from other large national firms, such as McDonald’s, who have recently expanded into gourmet coffees (Schultz & Gordon, 2011). Notably, the firms are not only larger, they also have more significant marketing budgets, and may therefore increase marketing expenditure in order to retain customers.
Other threat within the environment may include the ongoing flow recovery. Gourmet coffee may be an affordable luxury, but sales are still likely to decline if the economy declines. Therefore, although there is recovery at the current time, ongoing flow growth may constrain the potential level of increased demand in the future, and a reversal may result in a decline in demand.
3. Marketing Proposal
The organisation has a number of potential opportunities which may be leveraged from a marketing perspective. The main opportunities focus on the positioning element of the 4 P’s marketing mix, by increasing sales by increasing the distribution channel. Currently, limitations exist in terms of spending through the franchise model, due to the high payback period. Therefore, with the assumption this may not be adjusted easily otherwise strategy would already have pursued, it is suggested that the strategy is undertaken in a cost-effective manner, to maximise distribution while minimising capital expenditure. Therefore, the proposal will be to expand in both the U.S., and Canada, utilising strategic partnership with place of concessions in existing retail outlets which serve the same target market. Therefore, the following strategies will be pursued.
Identification of suitable strategic partners serving the same target market, for example existing delicatessens and sandwich shops, as well as department store.
The setting up of an additional 200 concessions over a period of two years, 30 to be set up with in the first three months.
The concessions to have a breakeven period of six months only.
The concessions to increase brand awareness of Caribou Coffee in the areas they are set up by 10% (demonstrated by market research), this will also support grocery/retail sales.
The new concessions to be supported actively by social media, utilising interactive promotions to leverage the benefits of word-of-mouth, create a cost-effective marketing strategy.
Increasing sales through alternative distribution channels by 15% within a period of six months in areas where concessions are established.
The marketing mix for this strategy is as follows.
Within the concessions there will be limited space, and the organisation also need to consider the products sold by the host company. Therefore, the products will be limited to coffee-based beverages, using the same high quality beans and products found in company and franchise speciality coffee stores. A range of coffee, from dark to light growth, as well as iced coffees will be available, with a choice of milk type. The product will be mainly sold in takeaway containers, in a range of three sizes.
The product line with the current pricing strategies of Caribou Coffee, with the premium pricing for the gourmet coffee serving as an indicator of positioning (Dolgui & Proth, 2010). Base prices will be provided for the different products, with customisations facilitated, such as the addition of syrups. It is expected there will be a mean price of between $3.20 small coffee/lattes, rising to $5.50 for a large sized drink. Pricing will inevitably vary depending upon the location, but will remain competitive within the area, while maintaining a premium positioning. By limiting the concessions to drinks only, not food items, operations will be simpler and require less space, and are less likely to be a clash with strategic partners own interests, who may already sell food items, or in the case of shopping malls less likely to attract alienation from other food outlets.
The placement is the key element of this strategy with placement being salt in a large number additional outlets in order to increase sales. By looking for concessions in existing retail outlets, the amount of capital required for the strategy will be minimised. Furthermore, the marketing budget may also benefit, as the placement assault concessions will be placed in existing retail businesses that have existing customers aligned with Caribou Coffee target market.
It is expected that the concessions will be mainly in busy retail outlets, such as middle to upper market department stores, and in areas such as shopping malls, whether concessions may be provided through the use of a coffee cart. This approach reduces overheads, but still facilitates sales, and increase lending to support alternative distribution channel sales.
With knowledge that different areas of the country has different saturation levels, there may also be a case for targeting areas of low saturation, such as Houston, as there will be less competition. However, prior to undertaking any concessions in any areas a full assessment will need to be taken not only of competition in the area, but also demand that exists, or may be created. Therefore, market research will be undertaken in the different potential destinations prior to contracts being signed.
Promotion will be undertaken to maximise awareness of the new concession placement, seeking to engage the target market in a cost-effective manner. There will be two aims to the marketing, first the strategy will be to inform potential customers of the presence of the new outlet/concession, and secondly to increase the purchase intent.
An integrated approach will be adopted. Firstly, billboards will be used to inform customers of the imminent opening, and then direct them to the new concession. This will be undertaken with in-store marketing undertaken with the strategic partner hosting the concession stores. These marketing messages will emphasise the differentiation of the product, and experience of drinking it, including the absence of artificial additives as well as a superior taste. The use of which colours, and enticing images of coffee that looks delicious will help to stimulate interest, and create a purchase intent (Lockyer, 2006).
Social media will also be utilised to expand brand awareness. This will benefit the new, and will also aid with increased brand awareness for existing Caribou Coffee outlets. The new outlets will ask new customers to take a Sophie of themselves in the concession, with a picture of their coffee, and use the hashtag #CaribouNow. This strategy may be utilised across both Facebook and Twitter, with the company tracking the activities through the hashtag. All those that post will be entered into a contest, with prizes ranging from a free cup of coffee every day for a year, to merchandising and a single free cup. Numerous entries are likely to emerge where the contest offers a large number of smaller prizes (Schulten & Rauch, 2015). This strategy is not only cost-effective, it also benefits from user generated content, which have a higher level of credibility compared to company generated content (Hudson, Roth, Madden, & Hudson, 2015). When a company sends out a marketing message, there is a natural level of resistance on the part of consumers, even those who are advocates of the brand, as it is perceived as a message communicated to support sales (Hudson et al., 2015). By comparison, when the marketing message comes from a third party, who is deemed to be independent from the company, consumers perceive this as having a higher level of credibility (Chaffey & Smith, 2013; Hudson et al., 2015). Therefore, those reading the user created content by third parties have a lower level of resistance, and are more likely to believe the messages, which are demonstrated having a high potential impact on purchase intent compared to marketing messages (Mauri & Minazzi, 2013).
A contest will be launched for each new concession that is set up, with information provided about the contest in-store, as well as on the existing social media accounts of Caribou Coffee. In addition, the strategic partners hosting the Caribou Coffee concessions may also market the context. This is likely to be in their own interests, attracting new customers in for the coffee concession will also attract more customers to their own retail sales.
It is the conclusion of this marketing research report that the organisation should increase sales by tackling the placement element of the marketing mix, and pursuing attitude to open concessions in existing retail outlets in order to increase sales and brand awareness. The marketing strategy will be supported by local billboard advertising, in-store marketing, and the use of social media with contest. The social media will facilitate word-of-mouth marketing that will encourage engagement with the brand by the consumers, as well as spread the marketing message through word-of-mouth.
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