UK Costa Coffee Company Business Strategy - Example

UK Costa Coffee Company Business Strategy report Table of Contents Table of Contents 2 Executive summary 3 Company Background 3 Competitive Advantage4 Directions of strategic Development 5 Analysis of financial situations of Costa Coffee 8 Implementation 10 Reference list 12 Executive summary Business strategies can be defined as the key framework for operational actions of firms that are helping them in meeting several objectives. It is the extended version of business planning which covers at least 3 to 5 years of the business life. Business strategies are developed in terms of controlling major resource available to the organisation. Mainly strategies are concerned for the main resources like finance and raw materials (Birkinshaw, 2004). Business strategies are playing crucial role in developing the growth and compatibility of firms in the global competitive market. Management can judge the scope or potentials of success. Strategies are developed on the basis of products, service features, geographic locations and different demographic or economic profile. International organisations are developing two types of strategies like generic and competitive strategies. Generic strategies are dealing with the factors like growth, globalisation and reduction of expenditure. On the other hand, competitive strategies are concerned with the sales, products differentiation and features of products (Barei and LePen, 2014). Company Background Costa Coffee is famous UK based multinational coffee beverage producers. The firm is offering high quality coffee based beverage products to the international customers. They are holding the second position in the global coffeehouse chain industry. Their major competitors are Starbucks who is leading the international industry and situated in United Kingdom. Apart from them Cafe Nero and AMT Coffee are other major competitions of Costa Coffee (Costa.co.uk, 2015). Costa Coffee was established in the year 1971, Sergio and Bruno Costa founded it as a small sized coffee shop. The firm started to provide wholesale beverage or coffee bean supplying too the UK based clients. They are specialised is offering roasted coffee and other coffee beverages and Italian coffee beans. Whitbread acquired the firm in the year 1995 for gaining more market share. After that, they have developed various generic and competitive strategies for gaining more compatibility increase the global market share (Costa.co.uk, 2015). Competitive Advantage Costa Coffee enjoys high beverage market share in global section. They are dealing in international market with the products like different types of the Coffee beverages, tea, sandwiches, soft drinks, and baked products through their stores. They are facing the competition from Starbucks, Cafe Nero and AMT Coffee. Thus, they are supposed to develop certain competitive strategies for the competitive advantages. Porters model of generic strategy can be used to justify the rate of the compatibility; it was developed in the year 1980. The model is creating three different dimensions named cost leadership, differentiation and focus or niche marketing policy. The model can be used by the Costa coffee management in order to develop proper competitive strategies (Foss, 2007). Figure 1: Porters (1980) generic strategy model (Source: Jeffs, 2008, pp-125-129) Cost Leadership Strategy Cost Leadership strategy is one of the vital attribute of the Porters generic strategies that suggest the organisations must reduce their cost in order to gain competitive advantage. Costa Coffee can use the strategy to achieve certain advantage on their competitors in the global coffee beverage and fast-food retail industry. Such policy helps the firm in increasing revenue generation by the mean of cost reduction and implementation of industry-average charges on the customers. The beverage producing firm must develop proper pricing policy in order to earning rational profit (Jeyarathnam, 2008). Costa Coffee is using the generic strategy in order to achieve the cost leadership. They are using the capital requirement in order to increase the feasibility of investment they are going to make in the technology up gradation policy. Costs are reduced with the help of the efficient logistics chain. They are using cost efficient labours, raw materials, and operational facilities. All of these factors can help Costa Coffee to win against its competitors (Sun and Wu, 2014). Differentiation Strategy Costa Coffee have huge product range but they are facing strong challenge from its competitors like Starbucks, Cafe Nero and AMT Coffee. According to Porter’s generic model suggests that differentiation strategy can increase compatibility. Such strategy will help the firm in creating special attraction for the products or services offered in the cafes. Cost Coffee need to create certain alteration of the features of their products, usage, strengths, on store support and maintain brand image for their quality food products. Differentiation strategy demands effective market research, development strategies and innovation. Costa Coffee is offering fresh and high-quality Coffee beverages, tea, sandwiches, soft drinks, and baked products and this will be added on as competitive advantage (Williams, 2009). Focus or niche Strategy Focus strategies are gaining popularity in the fast food retail marketing industry. Such firms are give attention to any niche markets. Costa Coffee can create different marketing strategies for different type market segment. This strategy will be helping the food and beverage producers in gaining more insight on the customer demands, expectations and perception regarding the coffee products. Effective market analysis will identify exclusive needs of every individual customer (Foss, 2007). This strategy also leads the organisation in setting up different low-cost products for different economic segment. It worked in the time of economic crisis. UK based beverage market reported that the Costa Coffee is having strong brand loyalty. Focus strategy helped the firm to explore various market segments that are not explored by the competitors (CastroTanzi et al., 2012). Directions of strategic Development Figure 2: Ansoffs Matrix (Source: Kipley, Lewis and Jewe, 2012, pp. 257) The firms can use Ansoff’s Matrix in order to analyse the feasibility of the strategic directions and obtaining required growth and sustainability. Ansoffs matrix is outlining firms with four different quadrants, which are outlining growth strategies. Costa Coffee can use any of these four strategies in order to gain higher growth and sustainability. Market Penetration: These strategic factors are dealing with the existing products which can be used in the existing market segments so that the firms can be able to grow. Market Development: firms are able to achieve growth by targeting new market area with the help of their existing products (Kipley, Lewis and Jeng, 2012). Product Development: food or beverage processing firms can be developing new products for their existing market section. Diversification: beverage producing firms might use the diversification strategy which is using new businesses opportunity with the help of completely new products that are promoted in entirely new market (Jeyarathnam, 2008). Selection of the product-market growth strategy for the Costa Coffee is crucial one that helps in increasing the market share and achieving effective growth in international drinks and cafe market. Market Penetration Product Development E-commerce system, Online orders and online payments Promotion of the Generic food products, desserts Cold coffee beverage products Container coffee products Sweet items Snacks items Market Development Diversification Market development in the south east Asian countries like Malaysia, Singapore and Myanmar. African and Latin American countries are also booming with potentials Develop entertainment arena, with facilities like Spa treatment, free health check up and adjusting food diets. Strategic alliance with different local hospitality firms to exchange food products and cafe arena. Market penetration strategy can be used by Costa coffee with its existing products ranges like Full Fat Café Latte and Skinny Cappuccino. Actually the firm is having high brand value thus, they can enjoy lower risk in penetrating into the existing market of UK. They can use their extensive resources in order to serve quality food and beverage products. UK based fast food industry is growing rapidly so exploring the existing opportunities will aid Costa Coffee in generating increased market share and development (Kipley, Lewis and Jewe, 2012). Market development strategy on the other hand aids the Costa Coffee group by options exploring international market rather than UK. Various markets of rest of Europe, America and Asia are explored with the existing product range so that they can use goodwill and brands value to attract the new customers. This strategy will increase the opportunity for Costa Coffee. However, this strategy is more risky than penetration strategy (Barei and LePen, 2014). Costa Coffee can use the product development policy in order to increase range of the products as per the requirements of international customers. It helps the firm to use their strengths of offering specific beverage or fast food products. New products will be helping Costa Coffee in attracting existing customers and gradually increase revenue generation. They can develop organic products, different fast food cuisine and using various spicy categories for the international segment. New product development is another risky strategy that helps the firms in enhancing market share (BBC News, 2015). On the other hand, diversification strategy can be used by Costa Coffee in order to expand customer’s choice. It is the most risky strategy among the other factors as it involves product and market development. However, diversification strategies are having higher potentials of earning revenue. Mainly firms like Costa Coffee can be diversifying products range by non coffee beverage products. They can offer the customers with the services like free health check up, small sort of entertaining packages and diet checkups are the additional products and services for international clients. Costa Coffee can ensure proper execution of high risk which can be rewarded with high return from the new strategies (Birkinshaw, 2004). Analysis of financial situations of Costa Coffee Costa Coffee is the second largest coffee beverage producers after Starbucks. They are enjoying the highest position in the UK market. Financial situational analysis will be providing the best insight on position of the firms (Schmidgall and DeFranco, 2004). Financial evaluation will be based on the suitability, acceptability and viability of the various financial strategies of the firms. Ratio analysis of the firms is developing idea on return on capitals, profitability, asset utilisation rate, and liquidity concepts (Houmes and Chira, 2015). Ratio contrast with other firms will be providing more feasible analysis of financial performance. In the current segment contrast of the major ratios of Costa Coffee and Starbucks will be providing highest in depth knowledge on the financial performance. Following table will be helping in obtaining the statistical figures of fiscal year of 2014 (BBC News, 2015). Ratio implication Costa Coffee 2014 Starbucks 2014 Return on Capital Employed (ROCE) = {Profit before interest and tax or operating profit / (Employed or Total assets – current liabilities)} 16.24 32.21 Operating Profit Margin = (Operating Profit/ Sales Revenue) * 100 16.96 18.73 Gross Profit Margin = (Gross Profit/ Sales) * 100 87.06 57.3 Net Profit Margin = (Net Profit/ Sales Revenue) × 100 14.29 12.57 Current Ratio = Current Assets / Current Liabilities 0.41 1.37 Quick Ratio = (Current Assets – Inventory) / Current Liabilities 0.35 0.71 Asset Turnover = Sales Revenue/ Capital Employed 0.81 4.9 Cost Coffee is one of the leading UK based global coffeehouse organisation. In the global segment of the firm is able to maintain second position in the industry and facing the highest challenge from the leading coffee brand Starbucks (Schmidgall and DeFranco, 2004). Currently they are using various innovative strategies in order to increase revenue generation and developing market share (Whitbread.co.uk, 2015). It is observed that profits generation of the 1,755 chain based reported an increase of the 22% in UK and Ireland area. Nearly rise of £110m is observed during the year 2014. It also observed that the financial reports of the newly opened stores outlining a hike of 5.7%. Thus, it can be said that Costa coffee is implementing highly effective strategies that will be aiding in meeting higher profitability and organisational success (Whitbread.co.uk, 2015). In comparison to the leaders Starbucks they are having lower financial efficiency. From the above mentioned table financial performance of firms can be explored. Various ratios are justifying the compatibility of the firms. Return on capital employed ratio is outlining the profitability or revenue on the basis of the invested capital. Costa Coffee reported with 16.24 where as Starbucks reported with 32.21. It can be said that the Starbucks is generating twice as much as return Costa Coffee is generating in terms of investment (BBC News, 2015). Operating Profit Margin of Costa Coffee reported as 16.96% where Starbucks reported with 18.73%. Gross Profit Margin of the Costa Coffee reported with 87.06% and Starbucks of 57.3%. on the other hand, Net profit margin ratio of Costa Coffee recorded as 14.29% and Starbucks reported 12.57%. Therefore, it can be said that Starbucks is enjoying higher profitability than Costa Coffee. They are leading the market by proper cost effective strategies (Whitbread.co.uk, 2015). On the other hand, liquidity status of the firms is obtained from the current ratio which suggests that Costa Coffee is having 0.41 and Starbucks reported 1.37. Costa Coffee is having higher current liability than the current assets, which signifies they are having more risk of facing debt. Quick ratio also stating that the Costa Coffee is having 0.35 and Starbucks reported 0.71. Starbucks is more financially liquid and they are having lower risk of liquidity (BBC News, 2015). Asset turnover ratio is suggesting that Costa Coffee is unable to recover the money they invested in the assets purchasing. On the contrary, Starbucks is highly efficient in converting assets investment in profitability (Whitbread.co.uk, 2015). Costa Coffee group is able to improve the condition by innovative strategies. They are also increasing the brand values and cost effective promotional policies. Increasing popularity and sales of the Costa Coffee is increasing the profits by 16.5% during the year 2014 (Whitbread.co.uk, 2015). They reported with a profit of £412m during the year 2014 whereas the financial analysts forecasted of £402m (BBC News, 2015). Implementation Costa Coffee recently got huge growth as they recorded with more than 2,900 stores in 30 countries. Currently Costa Coffee is operating more than 1,755 restaurants in England area, over 4200 Costa Express self-serve centres and more than 1100 outlets in the international set up (BBC News, 2015). They are opting effective strategies for optimising operational resources. In addition, proper sales and marketing strategies are adopted for the promoting the newly developed products. It helps global beverage and fast food market customers in gaining insight on features, quality and prices of the products. Costa Coffee is using the differentiated offering technique in order to attract various customers (BBC News, 2015). Product and market development strategy also helping Costa Coffee in reducing financial crisis related challenge. The organisation is also developing proper HR policies that are helping them recruit and retain skilful staffs, which will be producing the quality and tasteful food products. On the other hand, Costa Coffee is holding the leading position in the UK area and second position in the global market. Financial reports outlined that the firm is facing intense competition from Starbucks. Recently they are using new strategic direction like introduction of more than 180 new outlets in Britain area which offered in serving nearly 400 million coffee orders. Global sales of the firm reported with £1.2bn during the fiscal year 2014. Financial management is concerned about challenge of the Starbucks and they are developing many precaution strategies like setting up sales target of £2bn during the fiscal year 2018 (BBC News, 2015). They are also targeting to develop nearly 2,200 UK based stores. In addition, they are also planning to expand in various booming foreign markets. They targeted Chinese market as they established more than 73 new shops during 2014 (BBC News, 2015). Thus, it can be said that the proper strategic development will help the Costa Coffee to retain their brand image. They are able to meet the challenge from Starbucks and many other local firms retaining their market share, profitability and position (Whitbread.co.uk, 2015). Reference list Barei, F. and LePen, C., 2014. Refocusing on R&D model or redefining marketing strategy? Anticipating sustainability for generic pharmaceutical industry. Journal of Medical Marketing: Device, Diagnostic and Pharmaceutical Marketing, 14(2-3), pp.81-90. BBC News, 2015. Whitbread plans to expand Costa coffee chain in China - BBC News. [online] Available at:< http://www.bbc.com/news/business-32492608> [Accessed 20 May 2015]. Birkinshaw, J., 2004. Strategic management. Cheltenham, UK: Edward Elgar Pub. CastroTanzi, S., Dietsch, T., Urena, N., Vindas, L. and Chandler, M., 2012. Analysis of management and site factors to improve the sustainability of smallholder coffee production in Tarrazú, Costa Rica. 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