Processed and Packaged Goods

Mitchell Schmitt

Coffee Production in the US

“This industry produces coffee, typically by purchasing coffee beans and processing them into roasted or ground coffee products…

…the industry excludes tea production and revenue from coffee made on premises, such as in a coffeehouse or cafe. Coffee creamer production is also excluded from the industry.”

Supply IndustriesBaking Mix & Prepared Food ProductionHay & Crop FarmingPlastic Film, Sheet & Bag Manufacturing

Demand IndustriesGrocery WholesalingSupermarkets & Grocery StoresConvenience StoresFood Service Contractors

Source: IBIS World

Coffee Production in the US

Source: IBIS World

Coffee Production in the US

Source: IBIS World

Coffee Production in the US

Source: IBIS World

Major Industry Players

Source: IBIS World

Industry Performance• Key external drivers:

– Demand from supermarkets, grocery wholesalers, and grocery stores• Wholesalers are the link to stores, and stores are the link to customers• Fighting for in-store advertising and shelf space

– World price of coffee• Risen sharply recently growing demand in other countries leading to supply

shortages

– Per capita coffee consumption• Recent studies have shown positive health effects of coffee

– World price of crude oil• Transportation costs

Industry Performance• Current performance: coffee production industry’s revenue has

performed well despite increases in commodity pricing, which has been passed on to the consumer.

• Increased demand: consumers are increasingly demanding specialized, high-quality coffee, particularly in single-serving amounts.

– Though economic recession curbed consumer income in 2013, consumers view coffee as an affordable luxury item.

– Media attention pointing to positive health benefits from coffee has also spurred greater demand.

Industry Outlook

• Life cycle: industry is mature, characterized by saturated domestic market and a range of well-established brands.

• Premiumization and stable coffee consumption will drive the Coffee Production industry's growth over the next five years.

• Weak dollar against the currencies of major trading partners will boost industry exports.

• Revenue is forecast to grow at an annualized rate of 1.0% to $11.5 billion over the five years to 2018.

Products and Markets

Key Buying Industries:• Grocery Wholesaling• Supermarkets & Grocery

Stores• Convenience Stores• Food Service ContractorsKey Selling Industries:• Baking Mix & Prepared Food

Production• Hay & Crop Farming• Plastic Film, Sheet & Bag

Manufacturing

Products and Markets

Coffee manufacturing• Gourmet and specialty

coffee segments• Ground roasted coffee• Whole bean and other

coffee

Products and Markets

Market Segmentation• By age• Brewed in home vs.

purchased in store• Exports

Consumers by Age

Exports Consumers aged 13-24Consumers aged 25-39 Consumers aged 40-59Consumers aged 60+

Products and Markets

International Trade• Imports are increasing• Exports are increasing

Competitive Landscape

Market Share Concentration• High industry

concentration• Expected market share

going forwardBasis of Competition• Competition is medium

and increasing• Internal Competition• External Competition

Competitive Landscape

Barriers to Entry• High and increasing• Major players have

established high brand and customer loyalty• Contracts with key

suppliers

Competition Medium

Concentration High

Life Cycle Stage Mature

Capital Intensity High

Technology Change Medium

Regulation & Policy Medium

Industry Assistance Low

Source: www.ibisworld.com

Major CompaniesPercent Market Share

Kraft

Starbucks

Nestle

J.M. Smucker Co.

Green Mountain Coffee Roasters

10.9%

15.6%

16.2%

21%

22%

Market Participants

Brands

Maxwell House, General Foods, Seattle’s Best, StarbucksNescafe, Taster’s Choice, Coffee-MateFolgers, Dunkin, Millstone, Café BusteloGreen Mountain, Keurig, Tully’s, Diedrich

Operating Conditions

High levels of Capital Intensity Plants require sophisticated

technology Recent CapEx Expenditures

for major companies Increased automation,

decrease in labor hours $.38 is spent on capital per

labor dollar

Technology and Systems• Level of technology is

determined by processing method

• 2 Methods: Dry and Wet

• Change in the technology necessary to roast and grind coffee beans is low

Operating Conditions pt.2

Industry is defined by high levels of revenue volatility Revenue is dependent

upon  cost of raw materials, energy and oil prices, weather conditions, exchange rates, and household incomes

Extremely sensitive to economic conditions

Industry revenues have been rapidly increasing in recent years

Average levels of regulation Governed by FDA Required to label nutrition

contents Consumers are demanding

more detailed information Failure to abide by

regulations can cause product recalls

Environmental Regulation

Industry Assistance

Governed by EPAEco-friendly

operations are used as selling points to potential customers

Adherence has created more efficient operations and improved quality

Low amounts of tariff protection exists for manufacturers

The U.S. protects coffee bean to prevent there rusting

Further research is being conducted by Global Agriculture and Food Security Program

International Coffee Organization is made up of coffee importing and exporting countries to facilitate trade

Operating Conditions pt. 3

Starbucks Coffee Company

Relevant Facts CEO is Howard Schultz (Highly

Regarded) Headquartered in Seattle, WA $13.3 B in revenues in 2012 with

operating margins of 15% Nearly 80% of stores are company-

owned vs. franchised SBUX has paid a dividend for the past

12 quarters

Brief History First Store opened in 1971 in Seattle, WA;

Only sold coffee beans and equipment 1980’s- Howard Schultz started Il Giornale

coffee bars and bought out Starbucks 1990’s- Franchise expands beyond Seattle

and becomes a leading coffee provider in North America

06/26/1992- Starbucks is taken public at $17 per share

Present Day- 18,000 stores in 62 countries with stock trading around $75 per share

StrategyMission Statement: To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time. Product Differentiation; Sell premium

products with large profit margins Outstanding Marketing Campaigns Repeat Business (Starbucks cards) Keep Employees Satisfied Make entering their stores an

experience Company Operated stores

ProductsStarbucks is the premier roaster, marketer and retailer of specialty coffee in the world Frappuccino, Lattes, Iced Coffees, Espresso Also sell tea, other beverages, and fresh

food items Sell packaged products through licensed

stores, grocery stores, and other foodservice accounts

K-Cups and Coffee Grounds

Business Units and Markets Segmented into four markets1. Americas (75%)2. Europe, Middle East, and Africa(EMEA)

(9%)3. China- Asia Pacific (CAP)(5%)4. Global Consumer Products (10%)

Competition Premium coffee sales compete against

quick service restaurants and specialty coffee shops

Main competitors for this segment include Dunkin Donuts, McDonald’s, and Caribou Coffee

Competes with all packaged coffee and tea products sold through supermarkets and other retailers

Risk Factors Global Economic Conditions Increased prices of Arabica Coffee Beans Success is dependent upon perceived

value of brands Adverse public or medical opinion about

health effects of products Changes in healthcare laws may induce

employees to elect Starbucks’ insurance plan

SWOT AnalysisStrengths Customer Loyalty Employees #1 coffee sales Strong

management Product Innovation

Weaknesses Difficulty adopting

café culture in Europe

Heavily dependent on sales in the Americas

SWOT AnalysisOpportunities Enter emerging

Economies Expand Retail

Sales Increase Product

Offering Vertical

Integration

Threats Health effects Rising price of

coffee beans Low barriers to

entry for competition

Recent Performance