Introduction
Costa Coffee is a multinational coffee company, founded in 1971 and headquartered in Dunstable, Bedfordshire. Founded by Costa family, the company started as a wholesale operation, working with specialist Italian Coffee shops. In 1995, the organization was acquired by Whitbread, who adopted very aggressive growth strategy, expanding the physical operation of Costa Coffee to over 2,800 shops across 30 countries. With over 1700 stores in the United Kingdom account for a major part of the total revenue of the company. Costa Coffee employs over 45,000 people and serves 25 million customers annually.
Costa Coffee operations are complex,as the organization works with several formats of physical outlets,including Costa Express in the airports, bookstores and hotels as well as complete high-street stores in the UK and other countries. With the acquisition of the Coffee Nation machine company, Whitbread took an executive decision to expand the business into the universities, hospitals and petrol stations and other high public concentration areas. To better understand the market entry options and strategic fit, it is critical to evaluate the operational capacity and capabilities of the company. At the moment, Costa Coffe works with its own roastery and lean distribution operations. At the same time, the organization has a complex global supply chain, working with small and medium coffee producers across the globe. Given the market trends, Corporate Social Responsibility (CSR) is an important part of the medium and the long-term strategy of the organization, which involves compliance in all the area of supply chain operation and demand alignment of the ethical practices from its upstream suppliers.
Costa Coffee follow the Whitbread corporate approach to strategy, focusing on shareholders return and measuring the success of the operation on a multifaceted framework, involving such variables, as sales, underlying basic EPS, profit margin, and market potential. The proposition of Costa Coffee to the customer goes beyond the product, as the organization aims at building customer loyalty based on continuous improvement of customer proposition, sustainable growth to increase accessibility and options, and quality (Whitbread, 2015).
The purpose of this document is to analyze the strategy for Costa Coffee to enter France market, announced by Whitbread. The document will look at the market, present the findings of internal and external analysis as well as outline the recommended market entry mode, adequate for the situation and the timing. Additionally, it will outline the analysis of the core challenges that the organization is likely to face, entering this new market. Based on the identified challenges and potential issues, the report will provide specific recommendations to ensure that the chosen strategy is successful.
Market Analysis
In order to develop the most appropriate market entry strategy and outline the risk management strategy that would offer a robust and coherent approach to business expansion, it is important to understand the internal and external forces that drive the market in France. With that in mind, the decision on the market entry will be accessed from the perspective of suitability, feasibility, and acceptability perspective, based on the data collected from the PESTEL analysis of French coffee shop market.
PEST Analysis
Political environment: As part of European Union, France follows standard EU regulations with regards to the cross-border operations. The government takes the favorable position with regards to the Foreign Direct Investments (FDI) from regulatory as well as financial mechanism perspectives, allowing g for operations based on euro bonds, foreign bonds, and credits. It is evident that industry regulations offer a number of opportunities for the company to enter the market with own operations as well as franchise scheme. Recent events on European political scene outline certain level of political instability, mainly related to the terrorist operations in the country. Domestic consumption, however, will continue to grow at a stable pace with increasing coffee consumption among the 67 million population of the country. This trend and positive political forecasts are determined by the overall strong position of the EU.
Economic environment: France is the second-largest exclusive economic zone in the world and the world´s fifth largest economy by nominal GDP and the seventh in terms of purchasing power. Taxation system of the country is ranked 87 by the ease of paying taxes, outlining certain complexity relative to the same index in the UK, which is ranked 15 in the same list (WB Group, 2015). Based on the findings of the European Speciality Coffee Association, France represents 12% of the total coffee consumption market in Europe, sharing the leading position in this segment with Italy (Wheeler, 2014).
The overall market reached the maturity and it is possible to argue that the economic situation, as well as regulatory base with regards to the coffee distribution in the country, will not suffer significant changes in the nearest and the middle term future. One of the important challenges for the organizations in the industry is the general European and specific for France trend in reduction of retail prices for coffee products in all segments, from direct sales to coffee shops. This can build on significant consideration in choosing the market entry strategy for Costa Coffee.
The market in the segment is extremely competitive with large chain competing alongside niche and local coffee shops and retailers. The open market competition places additional pressure on the new market entrants due to the high number of small business, operating as traditional outlets, building on customer loyalty through accessibility and reputation of their breweries.
Social environment: France is one of the largest European countries in terms of population with widely dispersed urban and rural profiles of the coffee consumers. Based on the same study, France demonstrates one of the most stable consumption patterns among Western European countries throughout the last decade with the changes noticeable only in the types of coffee, preferred by the population. Per capita consumption of coffee in France have remained stable at a level of 5.5 cups per day, while the same index in the United Kindom shows only 2.4. Coffee consumption in France is part of the national culture and the reality of the competitive market environment and high consumptions levels of traditional coffee types serve as evidence to this trend.With the stabilization of the economic situation, it is evident that a large number of the population continue consuming coffee outside their homes and more than one time a day, offering a number of opportunities for coffee retailers.
Technological environment: technological advancements and innovation in information technology outline the direction in which the businesses will develop in the nearest future. France demonstrates the high level of technology adoption, where the larger percentage of the population has access to mobile devices and the internet. This determines the common for Europe trend of increasing online sales and customer desire for innovative solutions for building brand loyalty. This builds on a good potential for the Costa Coffee Club as one of the effective marketing and customer retention tools. Additionally, latest technology in upstream storage and transportation logistics allows for more effective and cost-efficient European distribution channels for the organization. Such IT systems as demand forecasting and cloud-based information technology, which underlines the Costa Coffee operation, make the company even more efficient in customer psychology analysis and helps to build internal capacity and knowledge for diversity management.
Additionally, Costa Coffee is recognized for its innovative culture, where the company aims at improving its internal customer experience through more advanced bean-to-cup technology, supporting back office operation. This technological capacity can be extended to France operations at a low cost for the company and offering easy training solutions for employees at new locations.
Financial Position of the Company
Financial performance of the company indicates sustainable market position and growth potential. The company declared total revenue of 2,600 billion pounds in 2015, outlining 6.5% increase in sales. At the same time, Costa Coffee has a healthy debt to equity ratio of 3.2, which outlines 0.3 improvements from the same period 2014 and allows the organization certain flexibility in investment and market expansion decisions.
Financial report, presented to the shareholders in 2015 demonstrates that the company managed to increase its cash reserves from 606.4 to 714,2 million pounds, 17% increase within one year. Capital expenditures, on the other hand, remain stable relative to the previous year with 41% of the freehold property on the pipeline, relative to only 25% in 2014. The above gives the company strong expansion position and argument for the shareholders.
SWOT Analysis
The SWOT frameworks give a snapshot of the major forces that the organization faces externally and outline the key strengths and weaknesses. This analysis allows building on specific strategies, which demonstrate the right fit between the environment and the industry and the company´s internal capabilities.
Internal Factors Analysis (IFE)
Based on the information outlined in the general SWOT analysis, it is possible to build on a more specific measure for the suitability, feasibility and acceptability perspectives. Internal Factors Efficiency (IFE) bellow is based on the findings from SWOT:
The weighted average score for the IFE Costa Coffee in France is 2.68, which outlines that the organizational strengths and capabilities are adequate for execution of the entry strategy to France market. While there are several concerns about the right fit and the appropriate strategic approach to leverage the internal weaknesses, Costa Coffee strategic choice from the internal perspective is justified.
External Factors Analysis (EFA)
Similarly to the IFE, the below table outlines a quantitative score for external factor, based on the SWOT findings.
The score in this category is 2.91, which indicates that the opportunities of the France market are aligned with the organizational capabilities and Costa Coffee will be able to leverage the threat and challenges of an external environment through already built internal knowledge and expertise by choosing an appropriate strategy to enter the market.
YIP’s Framework
An analysis presented in SWOT and IFE and EFE matrixes, along with the findings of the PEST evaluation, gives sufficient ground for YIP’s Framework for Costa Coffee.
Market Globalization Drivers for Costa Coffee include the common customer needs and similarity of the consumer profile in the major markets, the UK and Western Europe in general. France coffee consumption market has a great potential for the company. Additionally, with the increased international mobility in Europe, it is possible to argue that expansion of the second largest coffee market in Europe will build not only on the domestic consumer but will bring brand recognition through the tourism industry.
Government globalization drivers are favorable for the development of the local market, especially through franchise network due to specific benefits of tax legislation and facilitating policy for euro-loan credit lines and euro bonds, available for the organization and its partners.
Competitive globalization drivers outline that Costa Coffee will enter an extremely competitive market with low entry barriers and a high number of competitors on niche, local and international levels. Some of the major rivals in the industry include Segafredo Zanetti, Starbucks, but the strongest competition comes from smaller local coffee shops, whose customers are loyal to tradition and experience of these companies.
Market Entry Strategy
There is a great variety of market entry strategies, available to the companies. At the same time, the type of the products, industry specifics, and competitive environment outline the choices that the companies have when considering entering the new country. Given the analysis, conducted with regards to the current operations, financial position and competencies of Whitbread and the Costa Coffee specifically, it is possible, at this stage, to limit the options of entering the market in France to the following two alternatives: direct export and franchising. In order to ensure that the choice of the strategy is grounded in the in-depth understanding of the market and external forces, this chapter will outline the considerations, based on the six considerations for taking the decisions on international market entry strategies: speed, cost, flexibility, risk factor, payback and long-term objectives.
Speed of Entrance
Direct export is one the fastest ways to enter the European market. Given the fact that Costa Coffee already has set-up operations within the European Union, it is expected that the process of licensing and an opening of the own operations will be simplified due to the common agreements between the countries and the conditions of the exclusive trade zone. Similarly to the direct export option, the franchise offers fast entry opportunity. With that in mind, both options meet the first criteria. Costa Coffee adopted aggressive market expansion and growth strategy and, thus, both franchising and direct export methods are appropriate for the timeline of this entry.
Cost of Entrance
When it comes to the analysis of the costs, it is evident that both, franchise and direct export outline higher investment spendings than potential alternatives, such as partnerships and licensing. Given the strategic fit, however, Costa Coffee's financial position allows adopting more investment intensive option. While the costs associated with an opening of the new outlets under the organizational management are higher, a franchising option allows to re-allocate part of the fixed costs to a franchise.At the same time, franchising strategy generates additional costs of creating a patent product. Given the fact that the company already has expertise in both modes of operation, cost element suggests that mixed mode of entry is the most suitable alternative.
Flexibility
Direct export and franchising are some of the options, where the question of flexibility should be considered from internal and external perspective. On on side, these options will allow the organizations better standardization of the upstream and downstream operations as well as offer higher control over governance structure and employment relationships. Franchise option, however, will demand higher levels of on-going control and challenge with regards to the franchise compliance with the internal regulations and culture of Costa Coffee. Taking into account that Costa Coffee already has developed franchise contract and scheme of an entrance to the market, the challenges in this area can be significantly reduced (Schwartz, 2001). On the other side, the company is significantly more limited with regards to the leaving the market alternatives under the franchise operations, than direct export due to the limitations of the contracts and commitments that the organization makes with its franchisees.
Risks
The analysis of political risks associated with the market entry was conducted in the PEST analysis in the previous section of this work. The findings of this review outline stable political and economic situation in the country create the favorable environment for both, the franchise as well as direct export strategies.
Payback
Given the size of the investment and fixed asset acquisition under the direct export strategy, it is possible t argue that the payback period for direct export mode will be longer than under the alternative of the franchise. At the same time, the investment will be limited to the opening of the downstream facilities, as the existing distribution network will be able to serve the expansion purposes. Under the both alternatives, it is possible to expect the return within the 2-3 years of operations. But the specific analysis on financial options, including types of the financing, will prove better overview.
Long-term objectives
France is an important market in the European Union. One of the long-term objectives of the company is to diversify the business geographically and reduces the dependence on the domestic UK market. With that in mind, own outlets will ensure that the organization is well established on the market and will offer better flexibility in terms of types of outlets, decisions on the product line and service options. At the same time, in order to grow fast in a new market and gain the specific expertise and local diversity awareness, Costa Coffee should look for alternatives to direct sales. Franchise options offer this possibility through providing franchise licensing to experienced local entrepreneurs, who will be able to contribute to collective knowledge and expertise of the company in a long term. This indicates that the mixed strategy is the best option in the long term.
Justification of the Choice
Based on the above findings and criteria analysis, the situation and strategic options that Costa Coffee has outlined that direct export, as well as franchise modes of entry, are possible alternatives for France market. Costa Coffee, at the same time, is looking for a long-term commitment, which will enable better geographical coverage and brand recognition outside the local market. With that in mind, the combination of franchise and direct export strategies will be the right solution, aligned with the organizational goals.
Core Challenges for French Market Operation
International expansion and entrance into new markets, especially in the situation, where the country has very specific and complex consumer profile, is challenging for any organization. Some of the major issues, that should be taken into consideration by Costa Coffee and its head company Whitbread in this strategic expansion option are the following:
Cultural diversity;
Acquisition of specific expertise and knowledge of the market;
Building on know-how and unique customer experience, which makes Costa Coffee competitive in this highly diverse market;
Development of the strategy to face competition from substitute products;
Building on customer loyalty as the bargaining power of buyers is high and the coffee market is at its maturity in France.
Operations in contemporary international business environment demand from organizations more focus on addressing the issues of diversity. This diversity is seen as a twofold element of the organizational strategy. First of all, the company has to possess and adapt to the changing demands of the clients and differences in customer psychology, based on the geography. Secondly, the growth of the company inevitably adds complexity to the internal operations, as it builds on human capabilities through increasing cultural and professional background of its employees.
When it comes to organic growth and expansion of the business, leveraging the competency and knowledge gap is the key. By entering France, Costa Coffee commits to provide service and quality, which is expected from the Brand globally. In order to leverage the risks associated with the lack of experience on the market, Costa Coffee should develop a comprehensive expertise acquisition strategy through external hiring and franchise.
Based on the identified difficulties with regards to existing market competition and substitute products, it is essential that Costa Coffee increased the investment in breakthrough innovation in customer service. Some of the possible solutions could be to enhance the Costa Coffee Club proposition to mobile purchase and reward system, which gives the higher return. Additionally, the company could look at building on special tea menu to combat the competition from substitutes. Furthermore, Costa Coffee has a strong international brand, which would allow developing an international program for the customers, differentiating from competition and creating an additional bond for loyalty. Such middle term customer loyalty programs address innovation and competitive advantage and could build on the effective plan to address current and future challenges.
Given the size and scale of the operations of the company globally and the diverse business models, used in domestic and European markets, Costa Coffee has sufficient knowledge and expertise among its top management team to build on comprehensive risk mitigation strategy and address the above challenges. Some specific recommendations to improve the mitigation practices should be based upon cultural diversity management and employment practice enhancement. With that in mind, it is recommended that Costa Coffee enters the market only with traditional Coffee Stores format to test the acceptance at the high street locations. Secondly, it is important that the company starts working through franchise mode with the first outlets and plan to open the second store 2-3 months at the beginning of the operations of the first franchise location.
References
Sadler Ph (2003). Strategic Management. 2nd Edition. London: Kogan Page Limited
Schwartz M.S. (2011). Corporate Social Responsibility: An Ethical Approach. Journal f Economic Studies. 283(3), 202-215.
Whitbread (2015). Whitbread Annual Report 2015. Whitbread Official Website [Online]. Retrieved 02 June 2016, https://www.whitbread.co.uk/content/dam/whitbread/download_centre/reports_and_results/2015/Interactive-Annual-Report-2015.pdf
WB Group (2016). Doing Business 2016. Measuring Regulatory Quality and Efficiency. Economy Profile France. Retrieved 02 June 2016, http://www.doingbusiness.org/data/exploreeconomies/france/~/media/giawb/doing%20business/documents/profiles/country/FRA.pdf
Wheeler M. (2014). European Coffee Market Situation. Speciality Coffee Association of Europe [Online]. Retrieved 02 June 2016, http://www.sintercafe.com/uploads/File/2010/presentations/1._European_Coffee_Market_Situation.pdf
