Caribou coffee company inc.

Introduction

This assignment presents an analysis on Caribou Coffee Company Inc. (Case study 28 – Dess, Lumpkin and Eisner, 2008.) An overview of the industry, in which the company operates, is provided, with an analysis of the company itself. From the outset, an overview of Caribou Coffee Company Inc. is presented; a business segment analysis, and identification of the company’s major competitors.

The assignment comments on the Company’s financial outlook, to year ending September 2009. Whilst some discussion is made in text, for the purposes of the word limit of this assignment, this analysis will appear in the appendices. The assignment concludes with recommendations as to the future direction of Caribou Coffee Company Inc.

The work is sourced from existing literature and referenced throughout.

Company Overview

Caribou Coffee Company Inc., (Caribou) is a specialty retailer of coffees, teas, bakery goods, and related merchandise. As of September, 2009, Caribou Coffee had 525 coffeehouses, which includes 112 franchised and licensed locations, predominantly in the US as well as international expansion to Asia, the Middle East and the United Arab Emirates (UAE.) Caribou targets its customers by offering gourmet coffee and espresso based beverages in addition to specialty teas, baked goods, whole bean coffee, branded merchandise and related products. Furthermore, it sells whole bean and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, university campuses and online customers. Caribou focuses on creating a unique experience for customers through a combination of high-quality products, a comfortable and welcoming coffeehouse environment, in ski-lodge style, and a unique style of customer service (Caribou Coffee Company, Inc., 2009.)

The company presents its mission statement as follows:

“Our mission at Caribou Coffee is to provide a total

experience that makes the day better.”

(Caribou Coffee Company, Inc., 2009)

Market competition includes Starbucks, local and regional coffeehouses, restaurants, coffee shops and to some extent, Dunkin Donuts and McDonalds (See also: Dess, Lumpkin and Eisner, 2008.)

The Company is a majority-owned subsidiary of Caribou Holding Company Limited and trades on the NASDAQ under the ticker (CBOU) (NASDQ, 2009) (Web-link provided.)

Industry Definition

Caribou operates in the fast food industry; the fast food market can be defined as the sale of food and drinks for immediate consumption either on the premises or in designated food areas which may be shared with other foodservice operators, or for consumption elsewhere; this definition excludes sales through vending machines and is restricted to sales in specific foodservice channels (Data Monitor, 2008) (Web-link provided.) All market values are given in operator buying prices – that is the amount spent by foodservice operators on the food and drink that they serve and not the amount the consumers spend on food and drinks. The difference is the increase various companies add to cover their costs and generate a profit. Consequently, this values the market in terms of the amount of money for which food and drink manufacturers are competing.

In terms of market segmentation, Caribou belongs to one of four: Quick service restaurants, take-away, mobile and street vendors, and leisure locations. However, in terms of the coffee industry, this comprises two business segments – whole bean coffee and coffee beverages sales (see also: Dess et al, 2008.) Caribou has three reportable operating segments these being: retail, commercial and franchise. Arcapita Bank (Arcapita) based in Bahrain, has been the majority shareholder of the company, since 2000, with 60.6% holdings (NASDAQ, 2009) (Web-link provided.)

For Caribou, however, the competitive market, along with a potential class-action lawsuit involving store managers, has caused some serious issues, including increasingly high net losses and decreasing stock price over the past few years (Caribou Coffee Company Inc., 2009.) By providing “an experience that will make the day better,” Caribou Coffee has created competitive advantage in their store operations, but the question remains whether they can maintain this and use it to sustain their growth strategy. Creating strong human capital is the foundation for the company’s differentiation strategy (see also: Dess, Lumpkin and Eisner, 2008; Shultz, 1961.) One of the issues that will be analysed in this case is whether or not Caribou’s attempts in developing human capital, will enable them to achieve

Case Study: Caribou Coffee Company, Inc – A Strategic Analysis

a sustainable competitive advantage given the competition and threats they are facing. In order for Caribou to maintain its competitive advantage it must continue to create differentiation in its coffeehouses through their human capital. The company has developed strong capabilities in recruiting, developing, and retaining their employees (Caribou Coffee Company Inc., 2009) but this can be easily copied by competitors however, this is not enough to sustain their advantages. To continue to expand they must maintain their strong focus on human capital, in addition to developing their other strengths to create a bundle of resources as the basis of differentiation.

Brief Profile of the Industry

The global fast food market has exhibited strong growth over the past five years; however, it is predicted to decline in the years leading up to 2015 (Dess et al, 2008.) The market generated total revenues of $154.7 billion in 2008 which represented a Compound Annual Growth Rate (CAGR) of 6.6% for the period 2004-2008. By comparison, the European and Asia-Pacific markets grew with CAGR’s of 4.4% and 10.3% respectively over the same period and reached values of $26.5 billion and $47.1 billion in 2008 (Data Monitor, 2008.) The number of transactions increased with a CAGR of 2.2%, during the period 2004-2008, to attain a total of 85.8 billion, in 2008. The number of transactions is predicted to rise to 97.0 billion transactions by the end of 2013 thus, representing a CAGR of 2% for the period 2008-2013 (Data Monitor, 2008.)

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External Analysis – PESTEL

Political

Caribou, like the rest of the food industry is directly concerned with public health and, as such government legislation is in place. Caribou, like all fast food manufacturers must strictly adhere to the regulations of the market in which it supplies its products. For example, frozen food must not be kept above -15C for longer than two hours over a 24 hour period. Furthermore, heating and cooling commercial buildings requires roughly six times more electricity. Since the government in several countries regulates electricity, then Caribou is highly vulnerable to government legislation.

Economic

A number of positive and negative factors can affect Caribou’s market growth, as well as the industry. For example, the increases in the price of coffee beans, milk as well as the worldwide economic

recession and decreased globalisation of the economy and culture. The latter is evident by the introduction of products from Asia, Latin America and Eastern Europe. Furthermore, demographic changes have increased the demand for, and consumption of fast foods and, for Caribou, this has impacted on their product performance, business profitability, production costs and firm’s overheads. In 2007-2008 Caribou reported that their production costs significantly increased as a result of higher wage demands due to global economic difficulties. In addition to being the majority shareholder, Arcapita also has two seats on the Board of Directors but its controlling interest could represent an overhang on the stock. Arcapita requires Caribou to operate in accordance with Islamic principles which may limit financial flexibility and impact the perception of the brand.

Social

Over the past 10-15 years, women have become more financially independent and entered the workforce, and the number of single households and single parents has increased, which has further increased the average disposable income. All of these factors favour fast foods.

Specialty coffee is a strong and growing industry in the US. Specialty coffee consumption increased by more than 48% from 2001 to 2006 and the market is estimated to be over $11 billion annually (Dess et al, 2008.) The number of coffeehouses grew from only 500 units in 1991 to 24,000 units in 2006, but the industry remains highly fragmented (with the exception of market leader Starbucks) (Dess et al, 2008.) The reason for such growth is the consumer trend to specialty and traditional products such as micro brewed beer, single malt liquor, and organic foods. Coffee is seen as a new quality beverage, there is an expanding menu, and coffeehouses have become the “third place” for social consumption. However, the demand for coffee could fall as a result of changes in consumer preferences or concerns about caffeine.

Technological

Caribou has tapped into the market with their dedicated website. The site is interactive in style and content, with imagery or promotions based on business rules or consumer preferences. This provides the site visitor with more relevant information on coffee types or coffeehouses. Caribou’s marketing team can also update the site to keep the content fresh for site visitors. Caribou can also monitor consumer responses therefore, looking at new initiatives to meet consumer needs.

Environmental

As demonstrated, Caribou has many outlets throughout the US and its expansion to the Middle East, Asia and UAE. This means that the company could be affected by regional and national weather which may impact upon consumer preferences and needs. In terms of Corporate Social Responsibility and sustainability, Caribou actively supports sustainable coffee production; for every pound of coffee the company purchases, a significant proportion of money is granted to sustain socially responsible initiatives in coffee-producing communities.

Legal

Caribou is not without exposure to the potential legal institutions of regional states within the US and those governing the countries outside of the US, where the company has its units. In 2008, Caribou faced legal proceedings, which was filed by three of its former employees, regarding overtime payments. The case was financially settled however, this left an element of disdain amongst other employees and, to a certain extent, consumers (Dayton Business Journal, 2008.) (Web-link provided.)

Five Forces Analysis (Porter)

Rivalry, Threat of Substitutes, Buyer Power, Supplier Power, Barriers to Entry

Rivalry among competitors is quite commonplace in the coffee industry consequently, Caribou must maintain its differentiation to maintain their customer’s loyalty.

There is strong competition in the coffeehouse industry, which is characterised by not only from the industry leader, but also from the threat of new entrants and substitutes attracted by such huge growth (see also Porter.) Caribou’s position is under threat from emerging and current competitors who have a differentiated approach to the provision of coffee. Caribou competes with specialty coffeehouses; including Starbucks, doughnut shops, bakery-cafés, and traditional quick-service restaurants therefore it must maintain a differentiated concept to continue building on its market share. Caribou is under threat from Starbucks because they have increased their long-term store goals from 30,000 to a target of 40,000 (Starbucks, 2009; web-link provided.) As industry leader, Starbucks is committed to maintaining its domination of the industry, which gives them an overwhelming advantage which means that Caribou, and all the others, struggle to become the recognised second-place coffee house. In this

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instance, the buyer power is very high due to the many choices and the switching costs for going from one coffeehouse to another being so low. In order to create a good quality beverage suppliers need to provide quality coffee beans and, since these are an essential commodity, suppliers are unable to place controlling price demands. Caribou’s position in the coffeehouse industry is encouraging; when one examines the conditions and different forces that are present in the industry, as well as taking into account its incremental expansion over the years, however, strong competition and buyer power limits profit potential.

Partial SWOT Analysis – Opportunities and Threats

Opportunities

Caribou recognises the long-term potential to invest in 2,500 locations which the company believes is achievable based upon limited penetration across markets outside of Minnesota. The company has already increased market penetration by company and franchises in the Middle East and Asia. Furthermore, the company intends to build upon and increase its broader licensing strategy including more franchised stores in the US (see also: Dess, Lumpkin and Eisner, 2008.) This should lead to more profitability for Caribou.

Threats

A too aggressive growth plan requires Caribou to execute an active development schedule whilst managing existing operations across a range of markets. Consistent performance depends upon suitable locations as well as the recruitment and retention of staff. Consumers in the new markets may not embrace Caribou’s concept to the same extent as in the core markets such as Minnesota.

Inflation for key inputs, for example coffee labour, could impact, as the company may not be able to pass through sizeable price increases and the demand for coffee could diminish as a result of consumer preferences or health concerns about core products for example, caffeinated drinks.

Internal Analysis

Caribou has been able to achieve a competitive advantage by fulfilling customers’ needs by placing emphasis on its human and social capital; however, the company is at risk of being compromised as a result of recent events. Developing human capital is embedded within Caribou’s strategic initiatives, to improve operations by improving their selection and training of coffeehouse personnel (Caribou Coffee Company, 2009.) Through the creation of human capital Caribou has been able to create domination between the individual capabilities, skills, knowledge, and experiences of the company’s employees. Shultz, (1961) discusses human capital in more detail. At Caribou, the human capital is built through the extensive training procedures that help create customer satisfaction; social capital is created through the network of relationships that the employees have throughout the company (Caribou Coffee Company, 2009.)

Three main interdependent activities of creating human capital i.e., attracting, developing, and retaining, are an organisation’s main focus (Shultz, 1961.) Caribou attracts human capital by implementing very selective hiring practices. The most important part of Caribou’s human capital is their focus on creating operational excellence through extensive training procedures; the training at Caribou is very important and continuous, as they believe it is the employees who create the great products or customer service that differentiated the company. The training of employees was believed to be central to fulfilling the mission of creating “an experience that makes the day better” (Caribou Coffee Company Inc., 2009.) The company implemented this into all of their training practices as one of the company’s core competencies that would create strong commitment in their employees. All new employees were given instructions to become ‘drink certified’, in-store Certified Instructor Trainers provided ongoing instruction in presentation and service, and courses were offered through Caribou College to improve career skills (Caribou Coffee Company, 2009.)

The company also retained their human capital by implementing rewards that are both tangible and intangible. Shultz (1961) discusses reward mechanisms in more detail. Caribou follows a pay-for-performance philosophy which enables the company to identify and reward team members whom achieve high performance standards. Employees would work harder to make their coffeehouse the best since the bonuses for managers and the coffeehouse was based on sales, profit, and customer service. The company has a belief that excellence is a product of hard work; this sounds good to consumers because they will get the best, but may be a negative for the employees and will make it harder to have employees contributing to human capital. These factors are what created effective human capital for only a certain time, but other issues is not allowing them to sustain that advantage.

Caribou has a culture that allowed a place “Where Entrepreneurial Spirit Roams Free” (see also: Dess et al, 2008.) The company is not overly structured, which is why employees are able to work on a variety of different projects and take on an extensive range of responsibility; moreover, Caribou has a culture which includes a strong belief in promoting from within the company, which creates a future to work toward for employees. The company is more on the personal or relaxed side where they would communicate in person rather than through emails and they would have a dress code that was business casual. These different aspects of company culture, creates social capital that gains employee loyalty for Caribou; it has a strong belief that customer service is led by their employees and that their selective hiring practices, extensive training, and low turnover created superior employees (Caribou Coffee Company, 2009.)

Caribou has created differentiation by implementing a strategy dedicated to creating human capital as a way to better meet consumer needs, but in the changing and rapidly growing industry it will be very difficult to create a sustainable competitive advantage. This strategy has been successful in creating competitive advantage at the business level however; it is arguable whether this is a source of sustainable advantage since this advantage is based on resources and capabilities that can be too easily imitated by competitors.

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Having dedicated employees creates a value for Caribou, which differentiates them from other coffeehouses; the company’s culture has created a value that creates a common purpose for the employees and the company, which creates an effective outcome when presenting service or products to consumers. The challenges that Caribou is facing through the stock declines, company losses, or even the manager demands for overtime pay can possibly weaken their human capital as a source of competitive advantage. Also, the effects of the external environment can significantly impact upon the company if they remain on the same path. The changes that Caribou is facing will send them into a decline of their human capital as a source of competitive advantage, if they do not do anything to add to or change their strategy.

SWOT Analysis – Strengths and Weaknesses

Strengths

Specialty coffee sales in the US are on the increase; the factors that are driving growth are a greater awareness of the quality differences between specialty brands and commercial grades. Caribou sells it appeal as their coffee houses are an ideal gathering place, especially amongst teenagers and young adults. Caribou recognises there is a high demand for the variety of their beverages and these can be customised to cater for individual consumer preference. Penetration for coffee consumption is low (16% daily consumption by US population) relative to overall coffee consumption (57%); this is indicative of a major opportunity for growth; Caribou is performing well compared to other competitors and is set to take advantage of the booming industry.

Caribou has created a distinctive position through providing high quality coffee in comfortable, ski-lodge like atmosphere, which distinguishes itself from the chic, upmarket approach used by its competitors, in the main, Starbucks. This concept is good; as it enables the company to capitalise on favourable trends in the specialty coffee market. The quality of Caribou’s custom roasted coffee has been the key to its success, with taste tests demonstrating that consumers prefer Caribou coffee by a significant margin over other competitors (Caribou Coffee Company Inc, 2009.)

In terms of Caribou’s financial position, the last quarter to year ending September 2009, demonstrated a fourth consecutive quarter of positive earnings. These results are driven by strong implementation at every level of the Caribou with a fundamental focus on expansion and diversification, which is a key component of Caribou’s future growth strategy. Caribou focuses on maintaining its position as a branded coffee company and are making the necessary investments to expand the brand. Financially, Caribou is in a good position to secure further expansion in the future.

Weaknesses

Caribou competes with specialty coffeehouses, with its main competitor being Starbucks. Caribou must maintain a differentiated concept to continue building its share of the market. During the financial year 2003-2008, Caribou announced net operating losses and negative free cash flow (Caribou Coffee Company Inc., 2009.) Hence, the company needs to improve profitability and operating cash flow in order to sustain growth and achieve a health long term financial position.

In terms of geographic concentration, Caribou is predisposed to local economic, meteorological factors and political issues.

Conclusion and Recommendations

With the industry leader creating new goals that target to make them almost a monopoly in the world of coffee, Caribou is in danger of losing its competitive advantage. This source of social and human capital is a key source of Caribou’s competitive advantage, but even that is in decline. In order to compete in the industry and even possibly surpass the industry leader, Starbucks, Caribou must have a sustainable competitive advantage. After conducting an internal analysis of the firm, it is clear that Caribou needs to maintain or better its human capital; it needs to implement the same practices, but the company must also consider implementing a way to satisfy overtime pay because the fact that manager’s work overtime shows dedication like an owner, but maintaining that belief is important for the company. Caribou has created a coffeehouse that is seen as an escape for consumers that helps the company maintain its differentiation from other coffeehouses, but the company is in its stages of decline if no changes are implemented (Caribou Coffee Company, 2009.)

Although Caribou’s focus on human and social capital has created a temporary competitive advantage, in the current competitive environment these are likely to become necessary success factors, not valuable, rare, inimitable, and non-substitutable core competencies. It is more likely that their human and social capital, superior product quality, store design and atmosphere provide a collection of resources that can create sustainable competitive advantage. Porter (1985.) As Caribou continue to shift their strategies to meet politico-economic and socio-cultural demands, like most in this industry sector, the company is not able to predict the economic and social challenges to which consumers and businesses will be exposed. However, the company believes that it is in a very good position to enable it to react and respond to these challenges because of their remarkable customer loyalty, their unique product brand and its attractive price-value position. As it places emphasis on coffee, and combination beverages, the company will, undoubtedly, innovate by creating new products and experiences which complement the coffeehouse experience and drive transactions.

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