Business Report on Real Coffee Ltd
Business Report on Real Coffee Ltd
Introduction
The number of people who consume coffee in the United Kingdom has been on a rising trend over the years. Consequently, coffee outlets have become a very prominent business. The many companies that operate coffee shops stand to profit from this market. There are large companies which operate chains of many coffee shops while there are also small companies which operate relatively small number of coffee shops. Regardless, both compete for the same customers. It is therefore very important for coffee shop companies to ensure that they improve the efficiency of operating their business. This will lead to attainment of high profitability and growth.
Analysis of the macro environment
Coffee shops continuously face rising prices for commodities. However these coffee shops risk losing most of their customers if they decide to pass these increases on to their consumers. This is particularly due to the availability of lower-cost substitutes from new competitors over recent times. However, frugal habits learnt during the recession are likely to linger for some time amongst consumers. Therefore the onus is on coffee shops to reinvigorate consumers’ willingness to spend on this area of leisure in order to translate this uplift in confidence into sales.
The big players in the market have already invested heavily in new product launches such as iced beverages to capitalize on this ‘want to buy’ mentality so the next step may be to explore how the stores are used or develop the reasons to visit to inspire more regular purchases.
Industry analysis
Real coffee limited operates its chain of coffee shops as a small company amongst other competitors both small and large players in the industry such as Starbuck and Costa. Strong growth has been observed in the consumption of in-home coffee. The coffee industry has also registered growth due to the persistent decline of tea consumption which is a close substitute. Irrespective, there was growth in health-oriented segments in the tea industry with green and decaffeinated tea showing rapid growth during the 2010-2012 period in the United Kingdom. Both in-home and out-of-home brands continue to experiment with soft drinks ranges with new areas of interest emerging such as tea/fruit juice hybrids.
Increased competition from cheaper substitutes is affecting the growth of many coffee shops especially the smaller ones in the industry. Supermarkets, retail stores and fast food restaurants are increasingly offering products that are possible alternatives to coffee drinking. It is observed that the number of customers who visit coffee outlets falls when customers get over 55 years of age or when they lose their jobs. The specialist coffees aiming to replicate the coffee shop experience at home continue to pose competition for the coffee shop market. Rising consumer confidence in 2013 bodes well for the coffee shop market but coffee shops may need to evolve further to increase their relevancy to consumers’ wider lifestyles and reduce their vulnerability to competition from non-specialist alternatives.
Trends in the retail market already demonstrate manufacturers’ attempts to foster a greater sense of emotional connection between consumer and coffee producer in order to gain market share. Developing the leisure elements of their offering should also help coffee shops to attract younger consumers, especially in the face of cheaper alternatives such as fast food venues. This could be events such as coffee tastings/coffee making master classes, wine tasting or hosting other ‘skills’ sessions such as arts and crafts. Adding these elements on a regularly changing ‘pop-up’ basis would add a sense of urgency to visit and enable the venues to cover a wide range of interests.
Internal analysis-current issues and potential solutions
This report used the SWOT analysis to understand the operation and control systems of the business. The business enjoyed from commitment on the part of the family members (who are also the owners) to make the business grow. The growth of the business is closely tied to the good relationship that exists within the family members. However, lack of active involvement in decision making is a loophole for poor decision making. This leads to increased risk of business failure. High employee turnover is also not good for the business as good employees may be lost in the process. The company needs to obtain a steady workforce.
Marketing issues
Coffee shop usage declines significantly as consumers age and leave employment, with those consumers who are over 55 years of age the most likely to reveal that they do not take hot drinks out of home. Elevating the experience of drinking coffee out of home should help operators to gain relevancy among this demographic, as these consumers tend to eat out less frequently, and therefore are looking for more ‘special’ experiences when they do. Improving the interiors of venues would go some way to increasing the appeal to these consumers as cleanliness and comfortable seating areas tend to be most important to over-55s when deciding where to buy coffee from out of home. To achieve this, operators may benefit by tailoring individual outlets further to meet the needs of specific consumer groups.
However, older consumers’ use of coffee shops may rise going forward with the growth in specialist coffee bars increasing their in-store presence. More operators are creating partnerships with other retailers such as garden centers and department stores, which older consumers are more likely to frequent.
Segments such as green and decaffeinated tea have experienced the fastest growth in the retail market over 2010-12 as health concerns continue to permeate certain aspects of the hot drink market. However, other similar categories such as herbal teas, which are also seen as healthy, are being held back by perceptions of blandness/tastelessness according to consumer research for Mintel’s Tea and Other Hot Drinks – UK, June 2013.
There are indications that Costa may be moving towards a more community-minded marketing strategy in order to improve its image in terms of corporate responsibility and distance itself from the risk of being seen as a faceless corporation. For example, in September 2013 Costa launched Costa for Schools in collaboration with the Rainforest Alliance. This involved an online educational pack to help UK teachers and secondary school students (aged 11-14) learn more about the coffee trade such as about communities and economies in coffee- growing countries.
Marketing campaigns in the coffee shops market have largely moved away from the previous approach of comparative marketing that was more common a few years ago. In their stead is an increased emphasis on marketing widening product ranges such as an ever rising number of iced drinks and chocolate flavors as operators look to further prompt regular treat purchasing. There are also examples of operators in this field aiming to re-invigorate their images of being cool and innovative through interactive and experiential marketing techniques.
No promotional budget exists for the business. According to Adam, promotion of the business can best be done by word of mouth. He relies on the notion that customers will keep on visiting their coffee shops provided the coffee is of good quality. Since the company cannot compete with major companies such as Starbucks and Costa in terms of promotional spending, Adam says it’s probably better to avoid head on conflict.
Human Resource Issues
Adam handles all matters relating to employees. The staff of the company is employed on a temporary basis and they all exit from their jobs annually. This is illustrated by the staff turnover rate which stands at 100%. This in turn implies that the company does not have any permanent employees. Most employees feel that they are not actively involved in the decision-making process of the business. There are no replacement procedures for vacant positions. Promotion, demotion, recruitment or firing decisions are all made by Adam who considers advertising for staff an unnecessary incurrence of costs. Senior management positions are given to Adam’s close friends. This shows that most of these positions seem to be awarded on the basis of friendship and trust rather than competence and results. The rate of turnover of staff at the business is high at over 100% per year. The company considers this to be unavoidable because a significant part of its employees work part time basis and are thus temporary.
Operations Issues
Real Coffee Limited is a family-owned and run company. It operates a chain of six coffee shops. The business is operated by Adam with the assistance of his two children Alice and Ross. The two are allowed to offer advice and come up with proposals regarding growth of the business but Adam remains the sole decision maker. Adam decides on the all matters affecting the performance of the business. While he assumes all credit when his decisions lead to a favorable outcome, he also bears all the risks that lead to failure.
Financial Issues
Financial information provided by the company revealed some important details about the business performance. The current ratio was recorded at 2.0. This implied that the company’s current assets were twice the level of its current liabilities. This implied the business had no problem dealing with their current obligations such as creditors such as suppliers. The stock turn over stood at three times per annum.
ROCE, net profit margin, gearing stood at 0.5%, 2%, 4% respectively. These financial performance indicators are relatively low compared to other players in the industry. The company also has a very low promotional budget (0.05% of the previous year’s turnover). This percentage is relatively low compared to what other companies spend on promotions. The company can significantly improve its profit and sales levels by incurring advertising expenditure.
Conclusions and Proposals
Although Real Coffee Company Limited is a family owned-business, its operation should be put in the hands of more competent people.
Proposed strategy set
The company should adopt a community-based marketing strategy. This will uphold the image of the company in relation to corporate social responsibility. The company will also gain an indelible reputation in the eyes of its customers. Advertising is essential in boosting the sales of a business. Significant increase in advertising for the business can lead to a remarkable increase in profit margins. Real Coffee Company should spend on advertising since verbal promotion of the business alone is not effective. This type of advertising will help counter competition from non-specialists such as supermarkets, retail stores etc
Proposals for the strategic direction of the business
The company should employ staff on merit business rather than mutual relationships. This will instill the culture of performance amongst the company’s employees and this will lead to productivity in the workplace.
The staff employees should be more involved in the decisions of the business. The staff is are important stakeholders of the business and need to be given avenues of presenting their suggestions since they can impact on the growth of the business significantly.
The coffee shops should be better furnished to attract more customers. This will help in luring the over 55s who remain relatively low consumers of coffee. Improving the interiors of coffee shops would go some extent in increasing the appeal to these consumers. This is because hygienic and relaxing seating venues tend to be most important to these consumers when choosing where to purchase out of home coffee. To attain this, operators may gain by niching individual coffee shops to further meet the expectations of particular consumer groups.
Proposed implementation set
This involves how the changes in the company should be prioritized and introduced. To start with, the business needs to allow for inclusion in its operation. Currently, the business is operated on the basis of one person’s monopoly in decision making. Since the company operates a chain of six coffee shops in five different locations, it would be prudent to delegate the management of some of these duties to other qualified people. The company should also use merit-based approach to employee recruitment exercises and their overall human resource management.
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