Business Strategy of Peet's Coffee and Tea - Case Study Example

Business Strategic report of Peet’s Coffee and Tea TABLE OF CONTENT Contents 1.Business model 3 1.1Business segment 3 1.1.2 Retail store 3 1.1.3 Specialty 4 2.Business and growth strategies 4 3.SWOT analysis 6 Strengths 6 Weaknesses 6 Opportunities 7 Threats 7 4.Financial standing 7 5.References 8 Executive Summary Peet’s coffee is a San Francisco-based coffee company that roasts and retails coffee and tea. The company is known for its introduction of dark roasted coffee appropriate for espresso drinks in the US market (Linton 600). The dark roasted coffee is sold through multiple distribution channels that include grocery shops, office and home delivery, restaurant, and in the company food outlets located in six US states. Reports indicate that by 2008, Peet’s coffee ran 200 retail stores, and its coffee product was available in over 8000 groceries stores across the country. Its total sales represent 34% of the country’s sales and 70% of the total profit. In 2008, the company sought to expand its multiples channels of distribution in the United States. Its primary focus was West Coast market where it had a huge presence. The expansion efforts included the opening of 20 new retail outlets and expanding its products to over 2000 new grocery stores in the East Coast. The US has a vast coffee industry that is worth approximately $30 billion (Obermiller 160). The industry generates most its revenues from coffeehouses that are currently over 20,000 across the country. Starbuck Corporation dominates the coffee specialty domain, which is highly competitive. Peet’s coffee competes with smaller coffeehouses such as Tully’s and Caribou Coffee. For it to gain an upper hand, Peet’s coffee should differentiate its products from those of its competitors. It can achieve this by selling itself to the consumers as a memorable experience. Moreover, it should focus its coffee business to a single distribution channel, for instance, the grocery (Obermiller 163). As a result, this would enhance the company brand awareness in those areas. The current recession in the US economy could severely affect Peet business since sales revenue based on luxurious coffee brand depends entirely on consumer confidence. 1. Business model Peet coffee focuses on the production of high-quality coffee products. It is known for its introduction of dark roasted Arabica coffee in the US market. The company has one of the finest group of roasters who are considered to have great mastery in their craft after undergoing three of training (Linton 601). Peet runs its roasting activities in a recently opened facility in California. The facility was developed in a design that conserved energy and had minimal environmental impact. The company has managed to attract and maintain a large group of loyal consumers who call themselves the “Peetnicks” although the term as evolved to include consumers that adore quality coffee and tea. Peet coffee has a wide variety of signature blends such as French Roast, Espresso Forte, Fair Trade Blend, and Arabian Mocha-Java. Its stores located in most parts of the country offer 2-hour free wireless internet for its customers. Most of Peet’s groceries stores are located in the State of Calfornia. Its specialty segment controls 46% of the market share in the Bay Area. Recently, the company has managed to expand its product to other grocery location in New York, Carolina, and Florida. 1.1 Business segment 1.1.2 Retail store The retail segments accounted for 68% of total sales; the remaining 32% represented the specialty segment. As at 2010, the company operated 190 retail stores located in six different states through which Peet sell whole coffee bean, pastries and beverages (Obermiller 160). The company retail stores are designed to enhance the sale of fresh coffee beans and to encourage customers to try out coffee varieties through its beverages. Reports indicate that the net sales in the retail segment increased by 2% in 2010 compared to the previous year. The increase was due to an increase in sales level in the stores. 1.1.3 Specialty Grocery: Sales revenue in the grocery stores comprised of 23% of the net revenue in the year ending December 2010. Peet coffee sells most of its merchandise through various groceries, and club stores. To boost these sales, the company has a developed a merchandising system that has enhanced its competitiveness in the specialty segment. Currently, the growth rate of the company in the grocery is estimated at 22%. Home delivery: In 2010, home deliveries contributed 5% of the net sales revenue. The home delivery channel provides access to fresh-roasted coffee to the customers. The home delivery services are offered through the company’s website. Foodservice and office: the segment is responsible for 10.7% of the net sales. The sales and account managers under this segment conduct sales by making calls to potential accounts and audit the existing accounts. Peet coffee has two models that service the accounts known as “We Proudly Brew”. Equipment and products are made available to these accounts to brew coffee and resell. 2. Business and growth strategies The specialty market is highly competitive and controlled by Starbuck Corporation that is larger in terms of financial and marketing resources compared to its competitors. Currently, there are over 19,000 coffeehouses in the US. Peet’s Coffee major competitors include Starbucks Corporation, mountain coffee roasters, and Procter & Gamble company. Peet’s market share in the specialty segment is enhanced by the quality of its. The quality differentiation is achieved through the Peet’s artisan-roasting techniques, coffee bean selectivity as well as the bean freshness standards. The vertical integration of the Peet’s coffee operation has made it possible for the company to control the quality of its product at each production stage. The company sources its coffee beans from Brazil, which is globally renowned exporter of high-quality Arabica coffee beans. Peet’s employs its artisan-roasting techniques to reveal the unique flavors in their coffee. Peet inventory management system is founded on the premise of Just in Time production; no stock of roasted coffee is kept in the warehouse since they are perishable (Seaford, Bryan, Robert and Bradley Brooks 39). Coffee shipment is received on a daily basis in the company and thus has enabled Peet to maintain their pledge to the freshness of coffee beans. Moreover, it is cost effective since the company does not incur inventory holding cost and thus increasing Peet’s profit margin. According to Peet management, there are growth opportunities in the company’s multiple distribution channels. The company can expand its specialty segment in the region where Peet coffee does not have a retail presence. As mentioned earlier, the priority of the company expansion plan should be the western region of the US market where the company enjoys brand recognition. Currently, the US economy is experiencing recession that has severely affected the disposable income of the American households. The company recognizes this threat and instead of targeting consumer who buys their product from food joints, Peet focuses on consumers seeking an experience with their product. Peet coffee revenue solely depends on the consumer spending patterns and confidence. Reviewing the per capita, the disposable income of households is integral in highlighting this threat. Economists define disposable income as the amounts of money available to the household after tax deduction are made. 3. SWOT analysis Strengths Peet coffee offers a broad range of product that includes Pastries, coffee, tea, and beverages. Its brand is highly recognized particularly in the West Coast of the United States and Pacific Northwest where most of its retail and groceries stores are located. It has successfully managed to differentiate its products in the coffee market Peet coffee has been operational for over 40 years; thus, it has a great deal of experience particularly in the coffee industry. Peet coffee has a highly competitive management that has steered the company to its current glory. The company stresses on social responsibility that has enhanced its appeal to coffee enthusiasts with parallel social consciousness. The company has a large group of loyal followers referred to as “Peetnicker.” The company does not have any long-term debts and has managed to finance their expansion efforts through marketable securities and other liquid assets. Weaknesses Peet coffee is a small single-product company that operates in a highly competitive market. Therefore, this a disadvantage to the company as it bargains with retail stores for a favorable shelf space. The company brand is not well recognized as compared to some of its competitors such as Starbucks. It has a significantly smaller resources (financial and marketing) compared to Starbucks and other major coffeehouses The company has a single roasting facility that is based in California. A system failure in this facility would affect the entire supply chain of the company Opportunities Peet coffee has managed to penetrate the coffee market of only six states located in the West coast. Only a few coffee companies dominate the mid-West and East Coast markets. The company produces pricey quality products that are mainly demanded by the affluent members of the society (Altmann 55). Therefore, this gives Peet coffee room to compete on two fronts price and quality. The company has the potential to replace Starbuck as the provider of premium coffee. Threats The recent recession in the US and global economy has affected the sales growth of premium coffee significantly. The recession has led to the fall in the household income and lowering the consumer spending on luxurious goods. The US coffee market is currently experiencing a fall in consumer interest in premium coffee. As a result, this has led to the slowdown in the sale growth of quality coffee. The rising price of quality coffee beans as increased the cost of producing premium coffee. The growing competition in the coffee industry as major coffeehouses such as Starbuck dominates the distribution channels. 4. Financial standing In 2009, Peet coffee reported an after-tax profit of approximately $250 million; this represented a 19% increase from the previous year. In the same year, the company had a profit earnings ratio of 27.7, earnings per share of 7.5 and a profit margin of 6.2%. A major concern is a recent recession in the US economy that significantly affected its sales revenue. Additionally, the increase in the price of coffee beans has affected the entire coffee industry. Comparing the financial statement of the company and that of its competitors reveals that Peet’s is doing much in term of profitability. In 2009, Starbuck profit margin stood at 5.3% compared to 6.2% of Peet’s coffee. The company is also doing better in the stock market. Recent statistics shows an increase of Peet’s share values from $17.8 to $29.8 within duration of one year. On other hand, Starbuck has experienced a decline in the value of its shares values. The decline is attributed to the slowdown in its sales growth over the recent years. 5. References Altmann, Michaela. "Coffee Shop Industry-A Strategic Analysis." (2007). Linton, April. "Partnering for sustainability: business–NGO alliances in the coffee industry." Development in Practice 15.3-4 (2005): 600-614. Obermiller, Carl, et al. "‘Taste great or more fulfilling’: the effect of brand reputation on consumer social responsibility advertising for fair trade coffee." Corporate Reputation Review 12.2 (2009): 159-176. Seaford, Bryan C., Robert C. Culp, and Bradley W. Brooks. "Starbucks: maintaining a clear position." Journal of the International Academy for Case Studies 18.3 (2012): 39. Read More