Caribou Coffe Strategic Options

Introduction

Caribou, a company owned gourmet coffee house operator in the United States was founded in Minnesota in 1992 and rose to become the second largest in the provision of quality gourmet coffee and espresso-based beverages. In addition to that, it also offers specialty teas, baked beans, whole bean coffee, branded merchandise and other related products. These products are then distributed to college campuses, entertainment venues, grocery stores, hotels, airlines and to other commercial customers.

With a total of 442 owned, 8 franchised stores in the United States and 25 international coffee houses, this company has coffee houses spread in a total of 17 states and the District of Columbia. Changing consumer demands, stiff competition posed by the largest gourmet coffee house, Star bucks and other smaller coffee houses has forced the management of this company to redesign their operations.

“Higher degree in the breath and depth of executive experience within this company has made it experience a period of accelerated growth, more so by the arrival of the Chief Executive Officer and President, Michael J. Coles in January 2003” (Caribou Coffee, 2007). Measures undertaken by this company to improve in its operations, leverage on competition and raise profit levels include delivering excellent customer service, strengthening measures and training of coffeehouse personnel, strengthening site selection procedures for coffeehouses, increasing the number of coffeehouses and venturing into strategic partnerships and developing new and innovative products.

Even though the above overview of the company indicates strategic measures that have made it to record growth on coffeehouses, experience accelerated growths and successfully enter into strategic partnerships with respected brands, a number of challenges still pose threat to achievement of central goal of a business entity. The greatest of which is stiff competition posed by Star bucks, the brand name in coffeehouse and provision of related products.

Locating the Company in its environment

The coffee industry is characterized by continuous growth and competition. “In 1999 there were 108,000,000 coffee consumers in the United States spending an approximated 9.2 billion dollars in the retail sector and 8.7 billion dollars in the foodservice sector every year” (Coffeeresearch. 2006). “Americans drank a record amount of coffee at home, in the office and at trendy cafes last year, lifting green coffee roastings to a 30-year high, industry research found out” (Bnet, 2006).Top 100 espresso (2009) concludes by stating that “Coffee statistics show that coffee is the most popular beverage worldwide with over 400 billion cups consumed each year and coffee consumption statistics show that coffee represents 75% of all the caffeine consumed in the United States”.

This case study seeks to provide a deep analysis into the effectiveness of the strategies employed by the company in achieving its objectives and recommendations that should be adopted to further improve its modes of operations. Sales of ground coffee are highly concentrated among the big companies (Dick, 2003) (United Kingdom Competition Commission, 1991) (Peel, 1997) and thus caribou forms part of this highly competitive structure. As indicated in the overview, caribou is an international company therefore must come across a number of environmental opportunities and experience a list of constrains under which it operates.

The identification of the environment and the constants is a tool for competitive advantage (Azzam, 1999). A number of previous studies on the opportunities available to the new and emerging coffee companies have analyzed the coffee industry. Gomez and Koerner (2002), Frey and Manera (2005), Aguiar and Santana (2002), Krivonos (2004), Lewin, Daniele and Panos (2004), Shepherd (2004), and Durevall (2003) all conclude that while the business opportunities in the coffee industry remain large, a number of challenges are likely to deter development and the growth of this volatile and highly competitive beverage industry.

This basically implies that the business has the opportunity to move and stay ahead of the competitors and thus increases its market share if it underlines the relevant business environment opportunities under which it operates. In the application of PESTEL tool in the analysis of the environmental opportunities and constrains, there arise a stiff competitive environment posed by Star bucks.

Goldberg and Campa (1989) supports this fact by stating that “it is likely that Starbucks took an aggressive approach and strategically focused on setting up their coffee shops in large metropolitan areas and this is why we see a larger density around the coastlines of the US – where trade and transportation have encouraged growth”. It is therefore obvious that these areas are ideal positions for businesses and as such would definitely attract competing firms.

“To help make decisions and to plan for future events, organizations need to understand the wider ‘meso-economic’ and ‘macro-economic’ environments in which they operate (the meso-economic environment is the one in which we operate and have limited influence or impact, the macro-environment includes all factors that influence an organization but are out of its direct control)” (Robert & Miron,1989).

The environmental opportunities available to Caribou include the ability to identify suitable coffeehouse locations with the assistance of its staff. The constraint on the other hand is the fact that most of these suitable locations already have the presence of a competitor. Other environmental constraint that poses challenges to the company includes operating under environmentally friendly conditions by embracing the green technology. This definitely has an impact on the buy the cup (BTC) specialty coffee segment.

The characteristics of the industry under which caribou operates is very complex. This industry demands the best of Arabica coffee beans to maintain customer loyalty. Consisting of two distinct business segments; whole bean that includes ground coffee and coffee beverage sale. Industry Life Cycle Analysis on Caribou illustrates that this industry consists of two distinct characteristics that include stiff competition and constant growth. In this view, the demand and consumption of coffee and its related product are ever on the rise. “Some 80 percent of U.S. adults drink coffee regularly, and over half drink coffee every day, at a rate of 18.6cgallons per capita per year (Brazil Information Center, 2002) (Borenstein, Colin, and Richard, 1991).

Market segmentation analysis provides a complete examination on coffee market and identifies the roles played by the various sectors with particular reference to consumer demands. The five forces analysis approach underlines the marketer to understand the market. (Grundy, 2006), (Breitung & Pesaran, 2005) and (Barsky, Robert, & Miron, 1989) illustrates that “Five Forces Analysis helps the marketer to contrast a competitive environment”. The threat of entry posed by small coffee houses venturing into the market is real. Caribou must remain distinctive to ward off challenges posed by these smaller firms. The ease of channel in the distribution chain is of advantage to Caribou than the smaller new entrants. In this analysis, the power of buyers is best explored when the business is situated with in areas with high populations.

The ability to carry out a thorough examination on site selection makes it possible for Caribou to exploit this strategy. Consumption of coffee takes place internationally and as such there is need to have the capacity to explore offshore markets. The power of suppliers is a reversal of the power of buyers (Frey & Manera, 2005) (Wohlgenant, 1989). It is true that the power of suppliers is high where the brand is powerful (Schultz & Yang, 1997).

Caribou has a fairly large market segment and ability to enter into partnerships with big names indicates the possession of a strong brand. The threat of substitutes such as tea and ice cream is real to Caribou. Better tea tastes generally reduces the demand for whatever type of coffee. Finally, competitive rivalry due to the entry of new coffeehouses is real in that this market has recorded a large number of new entrants from 500 in 1991 to slightly over 24,000 in 2006 (Mintel International Reports,2007), (Philip, Siegfried & Howell, (1999), (Seattle Times December 7, 1999). In addition to that, the number is likely to increase in the future with Specialty Coffee Association of America predicting that 5000 new coffee bars are likely to open their doors every year.

A business has the capacity to create opportunities by taking the advantages of its strengths and reigning on its threats (Schultz &Yang,1997). For example, Caribou’s key strengths is its strategic aim and focus on the customer. In SWOT analysis, strengths and weaknesses consist of the internal aspects of the company and as such are under the control of the company. (John & Nelson, 1989, 1992).

The strengths of Caribou include a strong global brand that has the capacity to attract consumer groups and has the same taste and quality in all its outlets. Its vision and strong concepts that places the customer at its central nerve of its operations and its experienced top management constitute to its strengths. These strengths contribute greatly to caribou’s ability to maintain its large market share. On the other hand, a SWOT analysis reveal a number of weaknesses such as its size and global location in comparison to Star bucks and the need to produce highly quality products at low cost. This involves all the processes to the customer destination.

An Internal Analysis of Caribou

In efforts to turn around the face of the company, Caribou has exhaustively applied generic strategies in their best clear forms. This includes strategies that enhance the levels of customer service. In regard to this generic strategy, a belief between personal and close interaction between its staff and customers that involves the identification of each and every customers needs has raised the levels of customer service delivery. The pay for performance philosophy initiated by Caribou that involves rewards to team members who meet specific targets in customer service raises performance levels.

Other generic strategies effectively employed by Caribou include a selection of highly trained managers and coffeehouse employees and a thorough evaluation of site selection, design and atmosphere. In employee selection, Caribou aimed at achieving operational excellence by recruiting, training and providing best of support to high quality managers. In the belief that excellence can only be achieved by hard work, Caribou valued a special experience for their customers. The process of selection and continuous improvement in enhancing performance as a generic strategy allowed Caribou to give to the customer a true quality service. In developing specific certification and training that fits into its business environment, Caribou ensured their licensees were equipped with necessary skills to remain on top in the service delivery.

While an analysis of its market has been done extensively, the response to the strengths and weaknesses has been slow. An acceptance by the president that challenging Star bucks is no mean task indicates that Caribou’s lack of preparedness in challenging Starbucks to have a bigger share of the market and lacks the needed techniques and resources to mount an aggressive competitive campaign for a larger market share. The company has acquired a number of strengths through its many years of operation.

Its core competencies include its ability to raise additional capital for expansion due to its strong balance sheet, a vision embodied on the ability to provide a lasting experience to the customer, the capacity to draw within itself a competent and highly experienced top management and finally, the ability to engage into partnerships with popular brands names such as Coca-Cola in the distribution of its products.

Value adding activities in enhancing its presence in the market has not been fully explored and utilized. Value added activities such as the production of tea and ice-cream to suit the other demands of the customer and an active role in the social responsibility has not taken notable root in the culture of the company’s management. While there has been plans to develop a new line of premium ready to drink iced coffee in association with Coca-Cola North America, the overall effect of such initiatives have not been clearly documented and as such their impacts are hard to ascertain.

It is imperative that such value adding activities and initiatives aim at increasing the volume of sales of the other products, making Caribou’s presence more notable and thus having an increased share of the market. In addition to that, its role in the social responsibility and environmental conservation especially efforts towards green technology cannot be detailed. Customers have developed a deep sense on the need to conserve the environment and as such are likely to shun companies that do not entrench the theme of environmental conservation in their mission and vision statements (Turner, 2002), (Pierce, 2001).

Caribou is a registered business entity that does not form part of a larger corporation. Specializing in the production of high quality coffee from the sweet Arabica coffee leaves and other related beverages with a large presence in the United States and the District of Columbia. This implies that it cannot benefit from the economies of scale and as such has to seek strategic partnerships with other companies to achieve its objectives and compete effectively with other recognized brand names. The process of diversification of its products to satisfy the diverse and complex consumer demands has been carried out in a good manner.

In an analysis through the Ansoff Matrix, product diversification such as the production of iced coffee for the “go” customer and tea that efforts have been given to this sector that includes the production of specialty teas, baked beans, whole bean coffee, branded merchandise and other related products. Caribou has initiated strategic expansion programme thereby increasing its geographical presence in a number of states from 2002 to 2006. Louisiana, Texas, and California were the States with the largest shipments of roasted coffee in 1992 and 1997 (U.S. Census Bureau, Survey of Manufacturers, 1997).

Caribou has coffeehouses in a number of states while Star-bucks has three roasting plants—in Seattle and Kent, WA, and in York, PA. During the period of 2002 t0 2006 alone, Caribou increased the number of coffeehouses in Minnesota from 105 to 246. The Porter Diamond and The Expansion Methods Matrix indicate that the company has managed to strategically increase its presence through a disciplined rollout strategy.

Strategic Options over the foreseeable future

Faced with a number of challenges and strong competitors, Caribou still has a number of strategic options and concepts that it can adopt to remain competitive. These include;

• An adoption of strategic marketing concepts that aim at challenging the top market leaders and making caribou products a household name.
• instituting an aggressive public relations strategy that includes an active in social responsibility issues.
• employing the concepts of strategic planning and resource management that maximizes opportunity while identifying loopholes in the market.

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