Competitive Analysis of Caffe Nero Group Ltd

The paper will analyse Caffè Nero Group Ltd In its analysis, various aspects of the company that include Porter’s Five Force, PESTEL, and Value Chain will be evaluated. The paper will provide a vivid explanation why Caffè Nero Group Ltd is one of the most competitive companies in the world with a customer base spreading in the UK and other parts of the world.

Overview of Caffè Nero Group Ltd

Caffè Nero Group Ltd is the UK-based Multinational Corporation that has a network of coffee houses in Cyprus, Poland, the Middle East, Turkey, and the United Kingdom. The organization operates as a subsidiary of Rome Bidco. The firm’s coffee houses offer barista and espresso coffee, cakes, pastries, pastas, and ice drinks among others. It also sells the Italian blend coffee beans, coffee gift cards, and coffee mugs, cups, and T-shirts. The company was established in 1997, and its headquarters are located in the UK. The company has won numerous rewards for being the best in offering the high-quality coffee (Crick, Chaudhry and Crick 2016, p.376).

Market Base

The level of competition in the coffee industry is quite fierce. Caffè Nero Group Ltd owns about 10.8 percent of the entire market behind Allegra that owns about 14.4 percent of the whole sphere, Costa Coffee with a market base of 20.7 percent, and Starbucks with a market share of 25 percent (Duke 2017).

Figure 1

Market Share (Duke 2017)

Porter’s Five Forces Analysis

To establish the company’s competitive advantage, the paper will rely on Porter’s Five Forces analysis. Caffè Nero Group Ltd faces the five forces that have been outlined in Porter’s model. Based on this approach, Caffè Nero Group Ltd must ensure that the appropriate measures are taken to prioritize the threats of the substitution, the bargaining power of customers, and the competitive rivalry.

Threats of New Substitute Services and Products

The company experiences a strong force of substitution in the industry. The market has many substitutes that Caffè Nero Group Ltd’s customers can easily switch to (Abbasi 2017, p. 998). Some of the alternatives available in this industry include the beverages from other restaurants. The bargaining power of the customers is significantly high. If a cup of coffee becomes more expensive than customers cannot afford, the latter are likely to choose other cheaper soft drinks that are present in the market. Another significant threat in this area is the homemade commodities that consumers can easily produce at home. Caffè Nero Group Ltd operates in an environment that is perfectly competitive, meaning that there is the free exit or entry of other firms (Kim 2015). The level of competition in this market is quite fierce because of the numerous sellers offering the same services. Any attempt to raise the level of prices will imply that consumers will shift to other favourable brands (Dait 2016, p. 2521).

Bargaining Power of Suppliers: Low

The suppliers in this industry exert a low pressure on Caffè Nero Group Ltd. The company has its supplier policy that governs the types of distributors of commodities that are selected. Ethical sourcing is one of the criteria that Caffè Nero Group Ltd uses to select the suppliers. The company sources coffee products ethically from most parts of the world. The firm also associates with farmers directly to ensure that the latter produce the high-quality coffee that meets the consumers’ tastes and preferences.

Threats of New Entrants: Moderate

The threat of new entrants for Caffè Nero Group Ltd is slightly high. The initial investment needed to start a coffee brand is achievable while there are no barriers to the entry and the exit. The rate of saturation in this industry is considerably high. The newer entrants can compete with the well-established firms. Caffè Nero Group Ltd has been acquiring a more considerable market share thanks to its products’ quality, efficiency, and well-established infrastructure (Knox 2015, p. 273). The company attracts customers from different income categories, a fact that can be attributed to the flexibility in the pricing policy. An important attribute that gives Caffè Nero Group Ltd a competitive edge in this market is its access to suppliers and raw materials. Based on its ability to pay, scope, and size, Starbucks has access to a larger number of suppliers and coffee of the better quality. The market is dominated by some of the reputable brands such as Starbucks and McDonalds who pose a greater threat to Caffè Nero Group Ltd.

The Bargaining Power of Buyers: Moderate

The bargaining power of buyers in this industry is moderate. The consumers in this industry only purchase a smaller portion of the products offered, meaning that they do not hold any significant influence. Most of Caffè Nero Group Ltd’s customers are quality sensitive, implying that they are always willing to pay a higher price so that they receive the high-quality coffee. The company cannot set the prices excessively high because people can switch to other reputable brands such as Starbucks. Besides, the product mix for Caffè Nero Group Ltd is diverse.

Competitive Rivalry

The competitive rivalry in this industry is significantly high due to the fact that the market is a perfect competition; there are no restrictions on the entry and the exit. The stronger competitive force also arises from the low switching costs, which means that customers can easily switch to other brands if they wish. Caffè Nero Group Ltd has the diversified business by opening branches in other countries, such as the United States, to increase the market share and also reduce the level of competition. The consumer consumption of the coffee products is not dependent on the price of the commodities but rather on the personal tastes as well as the differentiation between each product’s image of the company, the brand recognition, and the quality of customer service. Caffè Nero Group Ltd is a market leader in the roasting of the specialty coffee around the globe.

PESTEL Analysis

The PESTEL analysis measures the business’ ability to understand the market decline or growth. This model can also measure the company’s market potential, particularly showing a decline or growth, the market’s suitability of access and attractiveness as well as the business’ potential.

Political

The primary political imperative that Caffè Nero Group Ltd faces is the political concern over the sourcing of raw materials that has raised questions in West, especially regarding the issue of where the products are sourced from. It is one of the leading reasons why Caffè Nero Group Ltd has been keen on adhering to the environmental and social norms and following the sourcing strategies that are have been agreed upon by various political leaders in numerous countries (Lynn 2017). The company must comply with the rules and the regulations in the states where it operates and sources raw materials. Some of the countries where Caffè Nero Group Ltd functions experience various levels of the political tension. The company must always be cautious when operating in such an environment.

Economic

Caffè Nero Group Ltd is permanently affected by various economic events such as the 2007- 2009 recession. The latter dented the company’s profit and almost pushed it out of business. Costumers, instead of reducing the quantity of coffee consumed, shifted to lower alternatives available in the market. Caffè Nero Group Ltd has to contend with the rising labour while operational costs as the falling profitability and the inflationary macroeconomic environment are squeezing the firm from both ends of the spectrum. The increasing cost of raw materials, especially the coffee beans, has had an adverse implication on the firm’s general profits. The impacts of economic factors on Starbucks general revenue are usually paramount and direct. The customer purchasing power as a reflection of the overall economy is one of the significant factors that determine Caffè Nero Group Ltd’s profitability. The presence of the firm in various countries means that it will always be affected by the exchange rate. A decline in the foreign exchange rate always diminishes the total revenue (Yu and Shunko 2017).

Social

Despite the fact that Caffè Nero Group Ltd can offer cheaper coffee its customers, it has to reconsider the quality. It is one of the significant socio-economic factors that the firm faces even as it attempts to aim at increasing the consumer base to incorporate people from the middle and lower tiers of the income pyramid. The culture posed a significant challenge for the entity. The mix in the traditional tea drinking population and the differences in the society make it challenging for the company to operate effectively in certain nations.

Technological

Caffè Nero Group Ltd is a globally recognized brand. The company is well-positioned to reap the maximum benefits from the globally increasing wave of technology. Some of the firm’s outlets have Wi-Fi capabilities; thus, consumers can surf the Internet as they take their drinks. The presence of free Wi-Fi improves the consumers’ experience.

Environmental Factors

The various environmental factors must be considered while making internal policies. The company must produce its commodities but leave the surrounding as clean as possible, preferably trying to protect it (Saffar 2016 p. 162).

Legal

Caffè Nero Group Ltd has to operate within the legal framework in the countries where it has established a business. The company must always understand social and cultural changes. Because of adhering to the laws in various countries, the firm has maintained its brands, and it is expected that it will remain sustainable in the long run.

Value Chain Analysis

Caffè Nero Group Ltd’s value chain is an analytical framework that assists in identifying the competitive advantage and the value to the business.

Figure 2

Value Chain Diagram (Yu and Shunko 2017)

Inbound Logistics

The company selects the finest coffee from various parts of the world. Some of the unroasted and green beans are procured directly from farmers. The products are transported to the company’s warehouses where they are roasted and packaged (Skilton 2014, p. 82). Once the commodities have been packaged, they are transported to various distribution centres. The company does not outsource the procurement to ensure that the quality of the products is retained from the point of selection of the beans.

Operation Management

The company has over 600 stores and employs more than 3000 workers. Caffè Nero Group Ltd provides the best customer experience in the region. The company aims at providing the fresh, quality, and excellent coffee in the best atmosphere served by caring and friendly workers. The company reported the total revenue of £257.6 million in 2017, which showed an 8.5 percent increase (Terhorst and Erkuş-Öztürk 2017, p. 144).

Outbound Logistics

The company hardly relies on intermediaries in the distribution and the sales of its coffee products. The majority of the commodities are sold in the firm’s outlets. Another reason for such a practice is to keep the profit margin that would have gone to resellers and wholesalers.

Starbucks Marketing and Sales

In the past, the company has not invested in marketing because of the strong brand. The high level of consumers’ spending and the high-quality products have been the leading channels of promoting the brand. Because of the increasing level of competition, Caffè Nero Group Ltd is feeling the pressure to invest in the media and print advertising, the sales promotion, the experiences, the events, the direct marketing, and the public relations.

Services

Better customer experience is the core source of Caffè Nero Group Ltd’s competitive advantage, and this positively contributes to the value of the brand image. The company’s baristas always greet regular customers by their name and are always polite. The firm is dedicated to identifying better ways of improving the customer’s experience.

Conclusion

The situation analysis indicates that Caffè Nero Group Ltd has a high potential for the successful growth and expansion globally. The company should maintain the strong brand image even as it strives to open more branches globally; brand positioning is critical to the firm’s business model. Regarding internalization, it is critical that the company finds investors who will boost its growth. The firm should permanently consider the fast-changing global business environment. The company must price its commodities competitively if it aims at remaining a market leader in the industry.

References

Abbasi, H., 2017. Porter’s industry analysis and value chain model. International Journal of Advanced Research, 5(5), pp. 990-1003.

Crick, D., Chaudhry, S. and Crick, J., 2016. Trading in a competitive environment: South-Asian restaurants in the UK. Strategic Change, 25(4), pp. 371-382.

Dait, J. M., 2016. Trends and issues of the coffee industry of Ifugao: an empirical analysis. (2016). International Journal of Science and Research (IJSR), 5(6), pp. 2518-2521.

Duke, D., 2017. Porter’s five forces and the coffee industry. [Online]. Management Teaching Review. Available at: [Accessed Jan. 30, 2018].

Kim, J., 2015. Convergence strategies for spatial data industry based on industry value chain analysis. Indian Journal of Science and Technology, 8(19).

Knox, A., 2015. Coffee nation: an analysis of jobs in Australia’s café industry. Asia Pacific Journal of Human Resources, 54(3), pp. 369-387.

Lynn, M., 2017. The effects of tipping on consumers’ satisfaction with restaurants. Journal of Consumer Affairs.

Saffar, A., 2016. Effect of environment, colour and music on customer loyalty in restaurants and coffee shops. International Journal of Business Excellence, 10(2), p. 162.

Skilton, P., 2014. value creation, value capture and supply chain structure: understanding resource-based advantage in a project-based industry. Journal of Supply Chain Management, 50(3), p. 74-93.

Terhorst, P. and Erkuş-Öztürk, H., 2017. Carriers of change and continuity: new restaurants in Amsterdam. Tijdschrift Voor Economische en Sociale Geografie, 109(1), pp. 144-160.

Yu, Q. and Shunko, M., 2017. A quality value chain network: linking supply chain quality to customer lifetime value. SSRN Electronic Journal.