Opening A Coffee Shop - Part 1: Competitive Advantageby Michael Cleland
Opening A Coffee Shop And What To Watch Out For
Imagine all the people who routinely drink coffee in London. Let us not categorise them into segments based on, postcodes, ages, lifestyles or other such criteria. Consider them as one whole group of consumers who collectively are the ‘market’ for coffee beverages. This is the broad coffee market and it includes any consumer drinking a beverage extracted from coffee beans.
Hoping to capitalise on the daily demand for coffee beverages, shops, cafés and carts open every day and trade coffee all over the city. Customers however, who form this market, are not distributed evenly between businesses. There are some businesses, which seem overflowing with customers, some with very few and every increment in between. What then explains why some businesses are busier than others? The basis for understanding why some cafés have a greater share of the market, while others struggle for theirs, is the theory of competitive advantage.
Businesses serving coffee compete with one another for a share of the market and when one business acquires or develops unique attributes, which are valuable to consumers, it results in a position of competitive superiority and greater market share. Simply put, when a business offers a valuable point of difference, that business can expect to attract a greater share of the consumers. This is known as a competitive advantage. It is important to note that for the commercial potential of a competitive advantage to be realised, it must not only be unique and valuable but also perceived accurately by consumers.
In 1980, in his book, ‘Competitive Strategy; Techniques for Analysing Industries and Competitors,’ Michael Porter proposed three alternatives, which businesses across all industries adopt as a means of creating a competitive advantage. The three generic strategies proposed by Porter were: Cost Leadership, Differentiation and Segmentation.
On a broad market scale, businesses pursuing a Cost Leadership strategy seek to gain their advantage by offering a good or service at a lower cost than competitors. This could mean charging a lower price than other businesses, or competing on the basis of other factors contributing to the customer’s perception of cost, such as time or convenience.
A business, which exemplifies this approach for achieving a competitive advantage, is the Swedish furniture manufacturer, Ikea. Ikea structures its business around minimising costs, thus enabling them to function viably while passing on savings to consumers. In this manner they have secured their competitive position and are perceived as the low-cost choice by consumers. In the context of coffee shops, a traditional Cost Leadership strategy could involve choosing a lower price point for products, minimising service time or using location to create greater convenience for customers.
Rather than compete to offer something at the lowest cost, businesses can also attain a share of the broad market by offering a product/service with unique benefits, thus distinguishing themselves as an alternative to competitors. This is known as a Differentiation strategy and could mean having a higher quality product, a more valuable brand image or additional services.
In the competitive high street fashion market Zara is a success story. By focusing resources on developing efficiency on the supply side of their business, Zara are able to: respond to emerging trends faster, update stock more frequently and execute sales with greater proficiency than competitors. By finding differences, which are valuable to consumers, Zara has gained a substantial share of the broad fashion market and has grown to become one of the most successful businesses in Spanish history. Differentiation strategies in the coffee industry could potentially include, a higher standard of beverage, a higher level of social responsibility or a unique café experience/better service.
The two aforementioned strategies relate to the broad market; meaning that the target audience (consumers in the market for product ‘x’) is everyone within that market (e.g all coffee drinkers). The third approach is called Segmentation, and refers to dividing the broad market into smaller groups based on identified common needs. Examples of this may include segmenting a market based on income bracket, geographic location or age. Successful segmentation strategies rely on criteria such as, sufficient market size, being measurable and stability in the market being satisfied.
The rapid growth of music television channel MTV is proof of the potential of segmentation strategies. MTV began by segmenting the broad music television audience on the basis of age and isolated the adolescent sector as being sufficient and stable. They then built a brand around providing programmes targeted specifically towards the needs of this audience. A café, which only serves soy beverages would be viewed as following a Segmentation strategy, as it involves targeting the segment of the broader market where there is demand for soy products only.
Based on the assumption that in highly competitive markets, businesses do not have sufficient resources to simultaneously pursue more than one generic strategy, Porter proposed a fourth outcome, referred to as Stuck in the Middle. While this assumption has recently come under debate, ample examples exist throughout the coffee industry, to warrant the consideration of businesses developing a ‘stuck in the middle’ position. When businesses do not wholly commit resources to the pursuit of a generic strategy, whether it be due to lack of vision or the concurrent pursuit of more than one strategy, they are at risk of ‘confusing’ the market. In this case, from the consumer’s perspective, a business is neither the low cost preference, nor differentiated enough to be a unique and valuable alternative. Ultimately this results in failure to secure a share of the market. Take a rowing boat for example – Imagine two opposite points on the shore of a lake and several boats in the middle. Aboard one of the boats, half the oars row towards one point, while the other half propel in the opposite direction. Ultimately the boat stays ‘stuck’ and cannot keep up with competing boats in which all oars are engaged in reaching either of the two points on the shore. To apply this to the coffee industry, consider a coffee shop which simultaneously serves the highest standard of coffee while offering only basic service typical of a cost leader. When applied to this theory, this coffee shop will not realise its market potential, as consumers will fail to see the inherent value of the coffee served, due to both the lack of Differentiation and the absence of Cost Leadership.
The target market’s (e.g coffee consumers) perception of a business in terms of how it creates value relative to competitors is known as its market position. In efficient businesses, this results from the effective communication of deliberate positioning. A café’s position, for example, may be that it is perceived by consumers as the low cost option. Alternatively, a café may successfully position itself as the business which sells the highest quality of coffee. In each case, the commercial success of respective strategies hinges on two factors: the value inherent in a business' offering relative to its competitors, and the extent to which this value is perceived by the market.
Traditionally the strategies detailed above have been implemented as a source for creating unique value for the consumer, and in doing so acquiring a share of the market. The success of such strategies is evident across a broad range of industries, on a global scale.
By either committing wholly to reducing costs, increasing benefits or segmenting the broad market, businesses have the potential to compare favourably against their competitors. This can result in attracting a disproportionate share of the consumers within their market. The respective success of these strategies correlates directly with two variables: the value created in comparison to competitors, and the extent to which this value is perceived by consumers. This can be expanded as, the degree of value is created, how unique that value is is, and how effectively a business communicates the value to its market. The sustainability of a competitive advantage is determined by the degree to which it is inimitable, with businesses combining, developing and recombining resources to form complicated ‘value packages,’ thus proving more difficult for competitors to replicate.
The Independent coffee industry and competitive advantage
Now let us consider briefly, within the framework of Porter’s Generic Strategies, what basis the Independent/Specialty coffee industry creates for competitive advantage. In other words, which features of independent cafés are simultaneously unique and valuable to consumers.
Whether as result of a deliberate strategy or not, Independent/Specialty cafés generally increase benefits in order to create value for consumers and in doing so, fall within the definition of Differentiation strategists. An array of attributes can be developed within businesses to achieve this. These may include more valuable service, engaging personnel, or offering a unique experience. From a strategic view however, there are two valuable characteristics which are ubiquitously shared, and provide a source of competitive advantage in comparison to franchise alternatives. These are, a higher quality product, and a greater commitment to social responsibility. The finer details of the relationship between the independent industry and social responsibility warrants separate and further discussion. Generally speaking however, an interdependent relationship exists between selling a higher quality of product and a business model which exhibits a greater commitment to responsibility for all stakeholders in its operating environment. This includes all participants from the ‘farm to the cup.’
The purchase of coffee beans from different independent roasters and the standard to which they are prepared determines the level of inherent value created by businesses through these two methods of differentiation, and ultimately the potential gained for competitive superiority.
At every interval between commodity traded coffee and the absolute quality frontier of the industry, a difference exists in the level of culinary appreciation for the beverage resulting from the impact of varietal, provenance, processing and preparation. Each progressing level corresponds to a higher level of appreciation and increases the quality of the product. Coffee which is sourced and prepared to the highest standards, results in a product of superior quality and therefore, inherent value.
Emerging social pressure dating back as far as the late 1960s has spawned the emergence of higher levels of accountability on the behalf of businesses – known as Corporate Social Responsibility (CSR). Traditionally the responsibility of a business was solely to financial stakeholders. CSR is the movement towards accountability and having a positive impact on any stakeholders in a business’ environment. This includes, consideration for communities, the environment, consumers and all members of the public sphere.
Increasing adeptness, by the media and regulatory bodies, has been successful in holding businesses accountable for their activities. This has been mirrored by the increasing awareness of consumers, who now favour and see value in purchases which have a broader, positive, social impact. This means there is now potential to create value for consumers and subsequently gain competitive advantage for business which commit to more accountable business practices. Once an obligatory adherence to rules and guidelines, CSR is now a legitimate source of competitive advantage, applied across all industries.
Businesses such as The Body Shop illustrate the competitive potential of CSR. With a philosophy embodying principles such as sustainability and care for the environment, The Body Shop have succeeded in occupying their market position, as the socially responsible alternative in the global cosmetics market. The commitment to social responsibility exemplified by The Body Shop has lead them to be perceived as a more valuable alternative by many consumers. This ultimately has contributed to both their competitive and therefore, commercial success.
A plethora of examples exist across all industries as evidence of how unique value, created by increasing social responsibility, leads to competitive and commercial gains. Naturally the higher the level of social responsibility, the greater the value created and the greater the potential for competitive advantage. Within the independent industry of coffee, commitment to higher prices for farmers, sustainable relationships and ‘green guides,’ are but a few of the initiatives, which given its capabilities, reflect an industry with greater commitment to accountable business. The level of commitment to social responsibility of the independent coffee industry is therefore a legitimate source of competitive advantage.
To conclude, in any industry, businesses are in competition for a share of the consumers within that market. When a business acquires or is able to develop attributes which are simultaneously valuable and unique, then that business is said to have gained a competitive advantage. This potentially results in the obtaining of a larger share of the market, but depends on the extent to which the unique and valuable attributes are perceived by consumers. In other words, the success of a business within a competitive environment hinges on the level of value created, the degree to which this value is unique, and the accuracy with which the business communicates this value to the market. The potential of a competitive advantage therefore, is realised when inherent value is perceived accurately by consumers. Michael Porters’ Generic Strategies of Cost Leader, Differentiation and Segmentation have traditionally been implemented successfully as a means of creating value, by either the minimisation of costs, or addition of benefits.
Coffee shops, cafés and carts which operate within the independent industry mostly fall within the definition of Differentiation strategists. This is characterised by a business model which seeks to create value based on increasing benefits for all consumers in the market for coffee. In comparison to franchise alternatives, there are two unique and valuable attributes which exist throughout the industry. These are a higher quality product, and a greater commitment to social responsibility. Higher levels of each correlate to greater competitive advantage. It follows finally that the extent to which the competitive value of these attributes is realised, relies on the accuracy with which they are perceived by consumers. Greater understanding of this process requires consideration of perceived value.