Costa Coffee Strategy

MMS assignment: Costa Coffee STRATEGY: 1. Identify, analyse and discuss Strategic issues in Costa Coffee. â€Å"Costa has flourished in a recession which has claimed many victims in the industry,† says Whitebread company. 1The reason for this success is its strategy. Using the PESTEL framework will help identify, analyse and discuss Costa’s strategy. Despite the importance of political, environmental, technological and law factors, for the purpose of this essay we will focus on the economic and social factors affecting Costa Coffee. We will first see how economic factors such as the recent raise of coffee beans price influence Costa’s prices. We will then use social factors such as consumer trends to identify the different trends today and explain how Costa is reacting to them. Through this essay we will have then explained how â€Å"Costa has flourished in a recession which has claimed many victims in the industry,†2 The main economic factor affecting the coffee market today is the raise of coffee beans price. Due to heavy rains brought on by Caribbean storms in the coffee producing 1 Zekaria, S. , 2010. Whitbread Says Costa Coffee ‘Flourished' During Recession. [online] 2010 FOX News Network, LLC. Available at: [Accessed 23 December 2010] 2 Zekaria, S. , 2010. Whitbread Says Costa Coffee ‘Flourished' During Recession. [online] 2010 FOX News Network, LLC. Available at: [Accessed 23 December 2010] countries from Central America, coffee prices have increased3. Coffee futures have gone up 35% since June 2010 to reach the highest price for a pound since December 1997: $1. 848. 4 This is a significant problem because coffee beans are raw materials for coffee shops. Hence if shops do not have coffee beans or not enough, their sales will plummet. As John Wolthers, a trader at coffee exporter Comexim in Santos reports: â€Å"It's a great time to be a producer, and a difficult time to be a roaster. 5 Because these prices are due to natural disasters, it is possible that they will not change until at least end of 2010 or 2011. A normal consequence would therefore be to raise prices in order to retain money. However, Whitbread PLC, owner of Costa Coffee, announced November 10th 2010 that â€Å"it has no plans to increase beverage retail prices , even as it remains concerned over escalating wholesale costs. † 6One of the reasons for this action is because Costa had already bought many coffee beans before the storm hence has enough to provide the outlets with enough beans during this period of increased prices. This shows that Costa â€Å"plans† its purchases well because as we 3 Zekaria, S. , 2010. Whitbread's Costa Coffee Plans No Retail Price Rises. [online] 2010 The Connors Group, Inc. Available at: [Accessed 23 December 2010] 4 Danby, T. and Sellen, T. 2010. No Relief in Sight for the Coffee Market. [online] 2010 Dow Jones & Company, Inc. Available at : [Accessed on 23 December 2010] 5 Danby, T. and Sellen, T. 2010. No Relief in Sight for the Coffee Market. [online] 2010 Dow Jones & Company, Inc. Available at : [Accessed on 23 December 2010] 6 Zekaria, S. , 2010. Whitbread's Costa Coffee Plans No Retail Price Rises. [online] 2010 The Connors Group, Inc. Available at: ; http://www. tradingmarkets. com/news/stockalert/sbux_wtbrf_-update-whitbread-s-costa-coffee-plans-no-retail-price-rises-1297481. html; [Accessed 23 December 2010] 7 Zekaria, S. , 2010. Whitbread's Costa Coffee Plans No Retail Price Rises. [online] 2010 The Connors Group, Inc. Available at: < http://www. tradingmarkets. com/news/stock- can see, thanks to its bulk-buying in coffee beans, it is now unaffected, unlike the other coffee shops, by the coffee bean market. However this could be a risk because one can never know exactly how many beans are consumed per day and Costa does not know for certain how long these prices will remain high. Another reason Costa would not want to raise prices could be because in a period of recession, where consumers are being more and more careful with the way they spend their money8 they will not want to buy a drink at Costa if it is too expensive. Moreover if it is therefore cheaper at Starbucks or Caffe Nero for example why would they want to pay more for the same drink? Hence a third reason for Costa’s decision is due to the competitiveness with the all the other coffee stores. The final reason is â€Å"With total sales growing at 33% year on year, and like for like sales up 9%†9, and with over 1,100 outlets in the UK and 130 new shops to open within this year in the UK10 perhaps Costa is not too affected by the increase of coffee beans price. Hence, with the increase of coffee beans, Costas strategy is not to increase prices for different reasons which demonstrate Costas strength in the coffee industry which therefore explains why it has flourished during the recession: Costa stops at nothing. lert/sbux_wtbrf_-update-whitbread-s-costa-coffee-plans-no-retail-price-rises-1297481. html> [Accessed 23 December 2010] 8 Rodenberg, J. , n. d. Costa Coffee vs Starbucks. [online] Templates Wise. Available at: [Accessed 16 December 2010] 9 Hospitability And Catering News. , 2010. Costa Coffee has wins „Best Branded Coffee Shop Chain?. [onl ine] Available at: [Accessed on 23 December 2010] 10 Zekaria, S. , 2010. Whitbread Says Costa Coffee ‘Flourished' During Recession. [online] 2010 FOX News Network, LLC. Available at: [Accessed 23 December 2010] Moreover, social factors such as consumer trends enable us to see how Costas strategy is brilliant. According to CJ Bobrowski, Head of Costa Systems, â€Å"With greater insight into trends we can adapt more quickly to any changes in consumer needs, helping us to stay ahead of competition in a crowded marketplace. â€Å"11 Hence identifying and explaining the trends and how Costa adapts to them explains its success. For this essay, we will focus on three trends. With prices that cannot increase due to competitively another way in which companies can now compete is through quality. As more and more coffee shops open in the UK, demonstrating high quality is an important aspect for consumers today. With each one providing the same type of product, they need to know which one is the best quality-wise. One of Costa’s advertisements promotes its cappuccino by saying: â€Å"Sorry Starbucks, the people have voted. †12 This advert clearly shows the consumers concern for quality. Through this advert Costa shows it has clearly adapted to consumers new trend. The thirst for an experience is another trend. It has become so important that a word for consumers searching for an experience was invented: â€Å"Transumers†13. Consumers no longer look for simple coffee but for an experience. Costa provides this by training its baristas at official training academies opened by Costa. In fact in 2009they invested in a third Training Academy. Therefore, each of their barista have been professionally trained to provide each 11 Bobrowski, CJ,. [online] Torex Retail Holdings Limited. Available at: [Accessed 17 December 2010] 12 Rodenberg, J. , n. d. Costa Coffee vs Starbucks. [online] Templates Wise. Available at: [Accessed 16 December 2010] 13 Trend watching. , 2006. Transumers. [online] Trendwatching. om. Available at: < http://trendwatching. com/trends/transumers. htm> [Accessed 23 December 2010] customer with the best coffee. 14 This is important for no other coffee shop has invested in training academies which makes Costas drinks even more of an experience for consumers. The â€Å"Nintendo Wii Fitness† is increasingly bought which shows consumers’ concern for health. They are especially more t roubled about the amount of fat, saturated fat, salt and sugar in their food. 15 Hence health has become a trend. In order to respond to this, Costa has different techniques. The first is to provide consumers with different types of milk: soya or skimmed for no extra cost. 16However, Costa does not advertise enough this aspect hence many customers are not aware of these options. They need to increase the marketing for this aspect in order to be fully responding to this trend. The second technique is working with the Food Standards Agency to reduce salt and saturated fat and indicate their quantities. 17This way, the products stay the same with less fat and consumers know how many calories they absorb. This is very risky for Costa. Many consumers are not aware of how many calories there are in their beverages and could be 14 The Food and Drink Innovation Network,. 2009. Costa Opens third training academy in Newburry. [online] Food & Drink Innovation Network. Available at: http://www. fdin. org. uk/2009/06/costa-opens-third-training-academy-in-newbury/ [Accessed 17 December 2010] 15 Foods Standard Agency, 2008. Consumer confidence rises around many food issues. [online] Crown copyright. Available at: [Accessed on 16 December 2010] 16 Morgan, J. , 2008. Fast food menu is recipe for obesity. [online] Cambridge Newspaper Ltd. Available at: [Accessed on 15 December 2010] 17 Food Standards Agency, 2010. Healthy catering commitments. [online] Crown Copyright. Available at: [Accessed on 14 December 2010] shocked like Rebecca: â€Å"It's lethal! I don't want it now [†¦] I know there's a lot of fat in them too. â€Å"18 By observing the trends and adapting to them despite possible negative consequences, Costa proves that â€Å"[great] insight into trends [helps costa] to stay ahead of competition in a crowded marketplace. 19 Costa has been able to â€Å"make it through† the â€Å"rough patches† despite the increase of coffee beans price and its ability to identify and adapt to consumer’s trends. However will they have to increase their prices soon? With such sales growing 33% year on year20 will this firm be able to be at the top of the coffee shop list? 18 Sky News HD, 2009. Cancer Fear Of Calorie-Laden Iced Co ffees. [online] BskyB. Available at: [Accessed on 14 December 2010] 19 Bobrowski, CJ,. [online] Torex Retail Holdings Limited. Available at: [Accessed 17 December 2010] 20 Hospitability And Catering News. , 2010. Costa Coffee has wins „Best Branded Coffee Shop Chain?. [online] Available at: [Accessed on 23 December 2010] MARKETING: 2. Analyse Costa’s Marketing; and then reflect on how it compares to the marketing of Starbucks. Deborah Dougherty, professor of Management and Global Business at Rutgers Business School, and Cynthia Hardy, professor of Management and Marketing at the University of Melbourne, agree that it is difficult for old organisations with a big history to innovate due to the challenges of new technology and global competitors. 1 Costa Coffee being a new organisation hence should not have many problems innovating its products and processes. Being part of the young rising coffee shop industry, Costa Coffee’s number one competitor is Starbucks. Dr. Robert G. Cooper, expert in the field of innovation, published The Invisible Success Factors in Product Innovation in which he establishes â€Å"Eight Actionable Critical Success Factors† for innovation. 22 In this essay we will only use certain factors to explain how Costa’s service and product innovations are better than Starbucks but how, despite this; Costa is still a little behind for the future. In order to be competitive in today’s UK coffee shop industry, service innovation is vital. Costa and Starbucks have therefore launched a new loyalty card because as Jeffery Young, managing director of Allegra Strategies notices: â€Å"Electronic loyalty cards provide an 21 Dougherty, D and Hardy C,. 1996. Sustained Product Innovation in large, mature Organisations: overcoming innovation-to-organization problems. Academy of Management Journal, 39(9, pp. 1120. 22 Cooper, R,. n. d. From Experience: The Invisible Success Factors in Product Innovation. [online] Product Development Institute Inc. Available at: [Accessed on 17 December 2010] opportunity to engage in rich dialogue with customers and track their behavior. †23 Hence this card will not only improve the dialogue between customers and firm but also will enable the companies to innovate their manufacturing process or services in order to adapt to the changing behavior. 24 Although the service is the same, are the reasons behind this innovation the same? One of Cooper’s critical innovation success factors is the justification of the project. 25 For Costa, this new card is a positive sign; its use is to replace the successful old card. According to a year-long trial in Scotland, one in three transactions was using the old card26. Hence in order to thank the customer’s loyalty, Costa wanted to add â€Å"rewards† and innovate the card so that one no longer had to top-up money on the card in order to purchase but would simply pay with money and then receive points that would transform into rewards. 27 The justification for Starbucks’s loyalty card is not for the same positive reasons. For them, with â€Å"sales decline and customers brew at home or visit competitors†, this new loyalty card is a 23 Thomas, J,. 2010. Costa Coffee rolls out customer loyalty card. online] Haymarket Business Media. Available at : [Accessed on 15 December 2010] 24 Thomas, J,. 2010. Costa Coffee rolls out customer loyalty card. [online] Haymarket Business Media. Available at : [Accessed on 15 December 2010] 25 Cooper, R,. n. d. From Experience: The Invisible Success Factors in Product Innovation. [online] Product Development Institute Inc. Available at: [Accessed on 17 December 2010] 26 EatOut,. 2010. Costa Launches New Coffee Club. [online] Available at: [Accessed 15 December 2010] 27 EatOut,. 2010. Costa Launches New Coffee Club. [online] Available at: [Accessed 15 December 2010] echnique to hopefully rebound profits by attracting customers back to the store for its benefits with the card. 28 Therefore, this innovation shows that although both companies propose the same service through their loyalty cards, the reasons behind this same service differs which shows that Costa is raising compared to Starbucks who is struggling against its competitors. Another example that shows that Costa’s innovation is better than Starbucks’s is the launch of a new drink: The Flat White. Although Starbucks is the first to have inaugurated this drink, Costa is the one who has the biggest impact in the UK29. Costa Coffe is the only one to have followed Cooper’s fifth critical innovation success factor : â€Å"A well-planned, adequately-resourced and proficiently-executed launch. †30 Indeed, Starbucks only launched the drink in London whereas Costa, several weeks after, launched it nationally. By launching nationally, Costa was able to sell its new product everywhere whereas Starbucks, only in London31. Hence out-of-London people could believe Costa is the â€Å"founder† of the Flat White, which could therefore lead them to a competitive advantage. Starbucks is the perfect example for Cooper’s statement: â€Å"In some businesses, it’s almost as though the launch is an 28 Startz, S,. 2009. Starbucks Boosts â€Å"Rewards† With Revamped Loyalty Program. [online] 2001-2010 brandchannel. Available at : [Accessed 14 December 2010] 29 Westfield London. n. d. Costa Coffee. [online] 2008 Westfield Group. Available at : [Accessed on 15 December 2010] 30 Cooper, R,. n. d. From Experience: The Invisible Success Factors in Product Innovation. [online] Product Development Institute Inc. Available at: [Accessed on 17 December 2010] 31 Boughton, I,. 2010. Costa Coffee launches the „flat white? ationwide. [online] Reed Business Information. Available at: [Accessed 23 December 2010] after-thought – something to worry about after the product is fully developed. †32Moreover, Costa says to have invested â€Å"more than twelve months’ research, involving the training of 6,000 baristas, at a cost of ov er one million pounds. †33This also shows they followed Cooper’s fifth factor. However, Starbucks says that their baristas had trained themselves due to customers’ requests and that the â€Å"education in the making of the drink was anyway already readily available from a number of barista trainers†. 4 Perhaps Starbucks is right, but according to an independent survey by Tangible Branding Limited consumers prefer Costa’s Flat White to Starbucks’s. 35 This could be explained by the twelve months research and training of 6,000 baristas with a cost of one million pounds. Furthermore, both companies follow Cooper’s second innovation success factor: â€Å"the voice of the customer†. According to Costa's core skills trainer Tim Douglas the Flat White â€Å"will attract some of our latte drinkers who are looking for a milky drink with a broad strength of flavour, and cappuccino drinkers who want a milkier drink with a much richer coff ee 2 Cooper, R,. n. d. From Experience: The Invisible Success Factors in Product Innovation. [online] Product Development Institute Inc. Available at: [Accessed on 17 December 2010] 33 Boughton, I,. 2010. Costa Coffee launches the „flat white? nationwide. [online] Reed Business Information. Available at: [Accessed 23 December 2010] 34 Boughton, I,. 2010. Costa Coffee launches the „flat white? nationwide. [online] Reed Business Information. Available at: [Accessed 23 December 2010] 35 Westfield London. n. d. Costa Coffee. [online] 2008 Westfield Group. Available at : [Accessed on 15 December 2010] flavor. 36 Hence this drink will be able to satisfy the gap between lattes and cappuccinos. Costa is purely reacting to the customers’ need for this â€Å"gap-filling-space†. On the other hand, Starbucks is innovating this drink due to their very negative â€Å"customer’s voice†. Their consumers find their coffees â€Å"too bland and milky†37 w hich is why, the Flat White is the perfect drink to launch because it is â€Å"Stronger, smaller and less milky† than most of their drinks. 38 Therefore, although Costa and Starbucks are using the same product innovation, they have different reasons which show that Costa is becoming more competitive than Starbucks. Although this essay has proved that presently, Costa is innovating for more positive reasons than Starbucks, this state might change in the near future. During a period of recession it is important that firms react to this economical problem. Starbucks, as opposed to Costa, has seemed to understand this and has innovated in â€Å"at-home† machines. The Starbucks Barista Espresso Machine39 or the Barsita Aroma Grande coffee machine enable consumers who do not necessarily want to go out to have a Starbucks coffee to stay at home 36 Williams, A,. 2010. Great White Hope. online] William Reed Business Media Ltd 2010. Available at: [Accessed 23 December 2010] 37 Wallop, H,. 2009. Starbucks to sell ‘flat white' for those fed up with milky coffee. [online] Copyright of Telegraph Media Group Limited 2010. Available at : [Accessed 17 December 2010] 38 Wallop, H,. 2009. Starbucks to sell ‘flat white' for those fed up with milky coffee. [online] Copyright of Telegraph Media Gr oup Limited 2010. Available at : [Accessed 17 December 2010] 39 Justin,. n. d. Starbucks Barista Espresso Marchine. [online] Coffee-Mker-Review. net. Available at: [Accessed 17 December 2010] and make one. Costa should look into this innovation for the future, especially with this economic crisis that continues to worsen. However, Costa may not want to produce these machines because consumers drink their coffees not only for the beverage itself but also for the environment Costa provides, for the â€Å"experience† and unique touch each Barista has when they make one. Hence, perhaps selling these machines would not be of great utility for them. Starbucks is a great competitor for new and rising coffee shops such as Costa. But through this essay we have seen that Costa Coffee is becoming the â€Å"number one† competitor with Starbucks due to its respect to Cooper’s â€Å"Eight Actionable critical success factors†. However, Costa must not forget that Starbucks may be a little weak in the UK but is very strong internationally and that Costa’s next step to compete with Starbucks could perhaps be to have a bigger and stronger position internationally. Referencing List: Bobrowski, CJ,. [online] Torex Retail Holdings Limited. Available at: [Accessed 17 December 2010] Bottonwood,. 2010. Productivity and Coffee Shops. [online] The Economist Newspaper Limited 2010. Available at: [Accessed 13 December 2010] Boughton, I,. 2010. Costa Coffee launches the „flat white? nationwide. [online] Reed Business Information. 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