Coffee production in Nepal might not be a profitable business opportunity as the market is in its growth spurt. There is a huge demand for coffee within and outside the borders of Nepal. Given the fact that a company would be able to establish a solid brand image, it is possible to aim at the international market later, during the process of expansion. However, using Porter’s Five Forces framework as the tool for screening the Nepalese market, it is evident that the introduction of the new brand names could be complicated or highly resource-heavy. This paper would conduct a detailed review of the prospects of opening a new Nepalese coffee-selling café – Kaffeine and the potential industry threats defined by Michael E. Porter and his five forces analysis framework.
Strategic Advantages and Disadvantages of Entering the Nepalese Market
The location of the company could be considered both strategically attractive and a deterrent. The tallest mountain in the world, which is based in Nepal, is a great tourist attraction, but the low GDP of the country may refer to the low buying ability of internal customers. Furthermore, considering the increase in the coffee-producing activity of the local farmers, the land’s cost-effectiveness is on the verge of decline. The study by Arun et al. (2019) demonstrates that despite the increase in farming ability, the productivity of the farms is significantly lower in comparison. There is also a potential threat within the political borderlines of Nepal due to the bordering countries such as China and India. The unsuccessful cooperation with neighbors can limit the expansion and control over the market. Their resources may allow an invasion into the market as foreign investors and control the trade opportunities through political pressure.
The threat of New Entrants
The threat of new entrants in the service industry, similar to the case of Kaffeine, is low. Active focus on the development of tourism creates numerous business opportunities in the service and entertainment industries, but local coffee retailers and producers are working in a tight community. Coffee farms are creating co-operatives to meet the growing customer demands and increase the production line while maintaining a mutual relationship with buyers. The government holds favorable conditions for direct foreign investments (DFI). Currently, over 40% of DFI aims at the service industry of Nepal (Thapa, 2018). Therefore, high competition with foreign and local brands is inevitable. Moreover, some the cafes, such as Machhapuchhre Organic café, have integrated coffee processing and roasting technology into their business model and created a firm group of loyal customers while maintaining great ratings on TripAdvisor (Transcend, 2018). It is possible to deduce that existing companies have created an exclusive relationship between suppliers and retailers.
Bargaining Power of Suppliers
As a result, the introduction of Kaffeine into the market of Nepal might be difficult or inaccessible. The suppliers consist of primarily local small-scale resource-poor farms. Thus, it is possible to infer that due to the limited number of suppliers, their bargaining power is high. Moreover, part of the farmers exploits coffee plants as a means towards the control of erosion in marginal and sloppy areas, which further limits the actual number of suppliers (Arun et al., 2019). The suppliers are primarily targeting the foreign market as the high-quality products are exported into such regions as Japan, Korea, Germany, Australia, Taiwan, and the U.K (Karki & Karki, 2016).
At the same time, the domestic market retains observably low and medium-quality coffee. Although, governmental support in the form of the Coffee Promotional Program aids in the development of the local farms and coffee-producing regions in general (Gautam, 2017). The number of local suppliers remains considerably low, and coffee accounts for a significant portion of their farms’ profit (Karki & Karki, 2016). This fact leads to the question of the high costs of switching a supplier.
Bargaining Power of Buyers, Detailed Analysis of Customers
In contrast to the bargaining power of suppliers,’ the influence of customers or buyers over the coffee market in Nepal is low to medium level. Nepal is undergoing a period of rising urbanization. It grew from 17.1% in 2011 to 37% of the population in 2016 and continues to grow (Pradhan-Salike et al., 2017).
The most densely populated area remains the capital city of Nepal – Kathmandu, with over 29 166 people per square kilometer and an overall city population of 1 471 867 (United Nations, 2021). It holds a large number of potential customers, which is the primary reason for low buyer power. However, it is essential to take into consideration the individual GDP, which according to the research provided by the United Nations organization is very low, only 1071 US dollars per capita (World Bank, 2019). This fact puts a high constraint on the case of Kaffeine because there is a need to adjust the price following the salary of the population. In addition, there are many existing establishments with similar products or services to that of a coffee shop which may increase the bargaining power to the medium level.
Moreover, due to the late spurge of the pandemic worldwide, the borders of Nepal were not available for tourists. The sector of tourism in Nepal suffered immense damage leaving over a million jobs unattained (Thapa Magar et al., 2021). Foreigners attributed to the significant amount of coffee consumers in Nepal. Their buying power is higher, thus making them preferable customers for the coffee sellers such as Kaffeine. However, in terms of coffee preference, a study from the Journal of Management and Development Studies demonstrated that the majority of tourists or non-local consumers prefer foreign coffee brands (Karki & Karki, 2016). This detail is essential as, to a certain extent, it may mitigate the high bargaining power of local suppliers.
Kathmandu is considered the gateway towards the local tourist attractions such as old and historically significant temples, and the Himalayan Mountain will inevitably lead to an increase in the flow of tourists from developed countries and bordering neighbors. Nevertheless, currently, until the situation with a pandemic is completely resolved and tourism revitalized, it would not be a recommended business strategy to focus on international coffee suppliers. The opposite would be a more lucrative opportunity as the local population is experiencing an increase in coffee consumption and find Nepalese coffee a more attractive product choice (Karki & Karki, 2016). Nonetheless, the expectations of tourism revitalization can play a decisive role in the company’s future.
On the other hand, globally, there is a growing awareness of the sustainability and environmental impact of coffee production. It may lead to a decrease in the popularity of coffee among eco-friendly customers and a growing preference for substitutes such as tea or soft drinks. However, product-wise, in the case of Kaffeine, it may point to the need for expansion of the menu by including a variety of beverages. Nevertheless, the product switching costs are minimal for the customer because the price of alternatives is significantly lower than coffee.
Furthermore, in terms of business alternatives large variety of restaurants, and fast-food chains combined with the popularity of agro-tourism may act as an industry deterrent because coffee is a drink available in many forms and places. Agro-tourism allows consumers to visit the farms directly and try specialty products while experiencing farm life (Kaini, 2019). This way, suppliers (coffee farms) may overtake part of the expected customers by appealing to their tastes through agro-tourism. Therefore, as a substitute product is readily available to customers, it is presumed as a high threat.
The Intensity of Rivalry
The intensity of competition or rivalry in the Nepalese market is difficult to define but it seems to be closer to the medium level. The number of alternatives to the Kaffeine café is large in Nepal but demonstrates varying degrees in size and specialization. The coffee niche market in Nepal is growing and incurs high fixed costs due to the prevalence of existing businesses such as Himalayan Java Coffee or Machhapuchhre Organic café.
Himalayan Java Coffee is one of the greatest coffee houses in Nepal, with over 20 local branches and four franchise stores outside of its borders (Himalayan Java Limited). It can be regarded as the dominant brand as it operates on a level similar to that of Starbucks because it has exclusive manufacturing contracts, and its brand name extends to coffee machines and baristas, and bakery training. Moreover, fixed costs on rent and maintenance are not high, and small-scale take-out coffee shops may account for intense rivalry. Nevertheless, due to the variables mentioned, the intensity of rivalry can be seen as middle strength.
In summary, the case of Kaffeine would not be a viable opportunity for entrepreneurs. The project’s entry into the market requires access to the chain of local suppliers. Although it is possible to acquire the materials (coffee beans) in the processed and raw form from retailers such as supermarkets or small niche shops, it will mean higher costs of production and smaller profits in comparison to the competitors such as Himalayan Java Coffee. Thus, making the market difficult for new entrants. In terms of the bargaining power of suppliers and buyers, the former prevails and limits the terms for negotiation to establish a deal favorable for Kaffeine.
At any rate, the limited bargaining power of buyers allows room for a favorable end price of the products sold. However, the problem with alternatives is dire as numerous types of beverages and establishments are available for the customer to choose from and relatively high competitiveness in the market limits the potential for the development of a solid and recognizable brand name. Moreover, various potential threats in the form of foreign intervention and raising environmental concerns for coffee production.
The recommendations to mitigate or solve some of the industrial problems depend on various factors. Primarily, the establishment of fair trade with local coffee farms with sustainable coffee-growing technology is necessary. In combination with the usage of eco-friendly cutlery, the acts towards sustainability will be an attractive point for the buyers. Secondly, high-quality marketing strategies to create a lucrative and strong brand name would be an effective way to establish brand loyalty.
Finally, proper consideration should be given to the size of a coffee shop and its menu. There are qualitative and quantitative ways to approach this problem that will mitigate the influence of alternative businesses. A large amount of small and easily accessible takeaway coffee shops will result in small profits per product sold, but the benefits of quantity will help to establish good branding. At the same time, large-scale shops with exclusive services would contribute to building brand loyalty.
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