Business Analysis of Coffee Shop – Five Forces and SWOT
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Published: Wed, 13 Sep 2017
When engaging in business it important for a company to determine what they have to offer, compared to what their competitors have to offer (Competition, BUS 340). An analysis can be conducted to determine how environments and activities impact a business’ strategy. Several tools can be used to analyze a company’s competitive environment, environments faced by the organization, and steps to take to address limitations within the company’s business model.
Five Forces Model
Michael Porter identified several forces in the environment that are potential threats to a company. It is important to pay attention to these forces as they are the major threats the organization will encounter and have to respond to in order to generate profits (Five Forces, BUS 340). The current industry Mystic Monk can be categorized into is specialty coffee.
Level of Rivalry – High
Level of Rivalry refers to the amount of competition within the industry. It can be said that the more competition within the industry, the hard it will be generate profits. There are many competitors within the industry who have fierce loyalty among consumers. The coffee industry has high industry concentration ratios, low levels of product differentiation, relatively low production cost, and high strategic stake. What reduces the rivalry a little in specialty coffee is that it has fast market growth, low inventory storage cost, and offers low exit barriers.
Entry Potential – High
Potential for Entry refers to the ease of access to entering a market or industry. The easier it is to enter, the lower the prices will have to be making it harder to generate a profit. Due to many consumers brewing their own coffee and purchasing package coffee for home brewing, threat for new entrants is high.
Power of Suppliers – Very High
Power of suppliers refers to how many suppliers are in the market. The more suppliers in the market, the lower the supply costs will be. Mystic Monk deals with one broker who is not able to secure low prices for the long run, but overall the industry has had explosive growth, allowing suppliers to be able to control the market.
Power of Customer – High
Power of customers indicates how many buyers there are and the size of them. It can be said that if there are only a few large buyers, that customers can bargain down prices. Due to many suppliers being able to meet the demand, buying power is high.
Substitute Products – High
Substitute products refer to the ability to purchase other products that are similar and can replace the item. The more substitutes available in a market, the lower the prices will be making it harder to generate a profit. There are many different competitors that offer warm/hot liquids (i.e. – tea, hot cocoa, cider), creating a large threat. Also, the majority of coffee drinkers brew their own coffee with packaged coffee for home brewing, creating a high threat for substitutes.
The five forces model analysis shows that Mystic Monk is part of a highly competitive industry where supply and rivalry power is high. The company has the potential to grow and expand its operations as a whole tapping into product differentiation and customer loyalty characteristics.
The SWOT analysis looks at both the internal and external environments faced by an organization. This analysis allows a company to focus on their strengths, minimize threats, and take advantage of opportunities that are available (SWOT Analysis, BUS 130).
As can be seen below, Mystic Monk has many strengths. Mystic Monk has a specialized niche market, Catholics, which they market their products to. The company is known to have the lowest prices compared to their competitors, $2.99 or their sample bags and $9.95 for their 12-ounce bags online. Through online sales, the company offers free shipping with the purchase of at least 3 bags and the option monthly delivery of six bags, to provide special treatment to their frequent customers. Along with selling their coffee online, Mystic also offers other products like shirts, gift cards, CDs, and coffee mugs. Mystic hand makes their coffee with organic Arabica beans, providing superior quality with lower overhead expenses.
Mystic Monk also faces several weaknesses. The majority of the weaknesses the company faces comes from their religious followings. Since they live in a monastery, they face a sheltered environment, where they may not be as knowledgeable to what all happens within the coffee industry. The company also does not have any business background, therefore have not set any goals or objectives to help them reach their mission of purchasing the new facility. Due to living the Catholic Monk style, there are several limitations the company faces. The first one is the limitation on labor hours due to praying, meditation, and worship. Another limitation is capital as the get the majority of their money for business expansion from donations. There is also a limitation on capacity as the current location only allows production of 540 pounds per day. Mystic currently uses organic beans which can lead to a weakness if organic is just a trend. They also purchase their beans instead of growing them which has an impact on their expenses. These Arabica beans that are being used have a high level of caffeine which can create an addiction within their consumers.
There are a few opportunities that are available to Mystic that would help them to achieve their perceived goals. Mystic has the opportunity to expand in other related markets and integrate new products. These markets to focus on other hot beverages like tea and cider, or cold coffee beverages. Although the company does most of its sales through online, the have the ability to start franchising. This would create the opportunity to have small shops setup that sell the bags of coffee, and potentially new products. They could also collaborate with large companies like Folgers or Starbucks in order to get their products out there. One major opportunity Mystic has is to increase their marketing and advertising efforts in order to increase their sales and revenue. The final opportunity available to Mystic is to have their products offered in grocery stores.
Mystic Monk faces several threats that must be overcome in order to best achieve their goal. The major threat is other brands and the availability of many substitutes. The economy can also be a threat for Mystic as there is currently a recession. This recession has impact consumer demands and decisions to start brewing their coffee at home or turn towards other beverages. In the overall coffee market there is a great deal of price variability which has a lasting impact on Mystic.
A TOWS analysis goes beyond the SWOT analysis. This analysis involves a systematic and comprehensive assessment of external and internal factors that determine current competitive position and growth potential of the company (TOWS Analysis, BUS 340).
These strategies look to use strengths to maximize opportunities. Due to Mystic’s niche market targeting Catholics, it would be best for them to expand into markets in churches. This would include having their products being brought into churches to sell. Another strategy, based on their strong online presence, would be to create an online marketing and advertising plan. This plan would help Mystic increased consumers’ knowledge on their brand and product offering.
These strategies look to minimize weaknesses by taking advantage of opportunities. Mystic has the opportunity to expand into franchises and collaborate to decrease their limitations. Mystic would be able to find individuals who are knowledgeable in business aspects. They would also be able to increase their working hours, capacity, marketing, and capital by having access to a more diverse set of individuals.
These strategies use strengths to minimize threats. Mystic already has preferential treatment to frequent customers, but could implement a program in which customers earn so many points for each dollar spent and can use these points towards coffee or other products in their online store. They can also increase their marketing and advertising to promote their brand and show why they are the best. In order to maintain and/or increase customer base it is important that Mystic watches the economy and provides the best prices when available to their customers.
These strategies minimize weaknesses and avoid threats. Mystic should increase workers, worker knowledge, and their capacity and other resources. These actions will help to build brand loyalty along with a stronger business.
STRENGTHS – S
10. Online shopping and shipping
WEAKNESSES – W
OPPORTUNITIES – O
1. Expand into church setting markets
2. Create online marketing and advertising plan
1. Expand to franchises with workers who are not as limited
2. Collaborate to increase capacity
3. Franchise to increase business knowledge
THREATS – T
1. Provide other loyalty programs
2. Increase knowledge to Catholics why Mystic is best
3. Provide best prices available
1. Increase worker knowledge
2. Invest in more capacity and other workers
It is important to understand where Mystic lies within its competitors to craft a strategy to meet their objectives. Several tools can be used in order to assist in this analysis.
Strategic Group Map
When engaging in a competitive market, it is important to understand a company’s position within its competitors (Competition, BUS 376). In order to assess different competitive positions of rival firms, a strategic group map may be completed (Group map, BUS 485). These group mappings reveal close and distant rivals in order to identify the attractiveness of the firm in the industry, and help to analyze entry barriers a firm may face (Entry barriers, BUS 376).
As can be seen below in the first group map, based on geographic location and product line, Mystic Monk has a few rivals. These rivals include, but are not limited to, Folgers and Maxwell House. These three firms all offer a narrow product line, but differ in their geographic locations.
As can be seen in the second group map, based on quality and marketing efforts, Mystic appears to have some distant competitors. These rivals include, but are not limited to: Starbucks and Dunkin Donuts. These competitors offer high quality specialty coffees along with higher use of marketing efforts. Mystic is the only one within its rivals that offers a high quality product with low marketing efforts. These differences and distinctions will help to decide Mystic’s place in the market and how they can go about attaining their goals.
Key Success Factors
Key success factors are activities or business practices, defined by the market and viewed by the customer, that are critical to the vendor/customer relationship (Key Success Factors, BUS 485). There are several factors that Mystic must avert their attention to including: differentiation, distribution channels, recognition, and customer service. Mystic needs to find a way to separate their products from the Starbucks and Dunkin Donuts that are located on almost every corner. Simply selling on their website and on location will not help them to achieve growth, so they will need to expand their channels of distribution. Mystic also needs to find a way to make their brand known and stand out among the top competitors. The factor that Mystic is the best at is customer service. They provide several loyalty programs and are in a niche market that brings out their loyal customer base.
Michael Porter has argued that a firm’s strengths ultimately fall into two categories: cost advantage and differentiation (Porter, BUS 130). A differentiation strategy allows a business to develop a product that offers unique attributes that are valued by customers and that the customers perceive to be better than or different from the competition (Differentiation, BUS 340). Mystic Monk focus on its market niche of focusing on Catholics plays a factor to their competitive advantage. Mystic provides specialty coffee to the customers that is made with fair trade/organic Arabica beans. They also provide a variety of blends and roasts to satisfy different tastes and preferences. They also have their free shipping when purchasing three bags of coffee and their monthly six randomly selected bags delivery. Their most important benefit is the monastic relationship between them and Catholic customers. Although Mystic has a strong customer value proposition, they do not have a cost advantage. This would help them to have access to cheaper inputs, efficient processes, favorable, location, skilled workers, and superior technology.
It is important for a company to analyze their expenses and revenues in order to make a profit (Expenses, Revenues, Profits, ACT 161). Based on Mystic’s current sales and 11 percent net profit margin, they will have difficulties generating the $8.9 million in earnings fast enough to purchase the property that they want. Even if Father Daniel secured a loan, assuming the loan would be for $8.9 million less the $250,000 donation at a 5% rate for 30 years, profits would not be enough to make the monthly payment. The purchase of the new roaster would increase daily production, but it would still be limited since each monk can only work up to 6 hours daily. Based on current figures, Mystic makes an average net profit margin of $6,215 per month, which is much less than their competitors. If the workers could reach max production with the current machine profits could rise to $13,500 per month (540 pounds per day / 12 ounce bags = 45 bags of coffee per day * $9.95 selling price = $448 per day).
The purchase of the new roaster would increase the production to 780 pounds per day based on the 6 hour work day (130 pounds per hour). This level of production would allow Mystic Monk to increase its sales by a factor of 6. Since their current annual profit is $75,000, once multiplied by factor of 6, an annual profit of $450,000 is projected providing demand could increase to match production capacity. This increase in production would allow Mystic to be able to negotiate with suppliers, shippers, and coffee brokers to get the cost of goods sold to decrease from 52 percent to about 48 percent based on the volume increase. Economies of scale will play a role in decreasing operating expenses from 37 percent to about 33 percent since overall cost per unit will be decreasing with the new production rate.
This increase in production would cause the net profit margin to increase from 11 percent to anywhere between 15 and 19 percent, resulting in an annual income of about $566,000 to $717,500. It would be beneficial for Mystic to either stop doing business with the affiliate websites charging 18 percent commission or negotiate a lower commission percentage paid.
In order for a company to succeed, it is important to discuss significant areas of opportunity and concern that must be addressed in order to continue or begin to grow and develop (Issues, BUS 130). Mystic Monk faces multiple problems in being able to produce enough to attain the profit needed to absorb the cost of the ranch.
The most noticeable problem for Mystic is their current capacity. This capacity along with current sales levels creating an 11% net profit margin are insufficient to generate the $8.9 million needed to purchase the ranch, even if Father Daniel was to secure a loan.
Mystic Monk operates under a cloistered monastic constraint that allow the monks to work only 6 hours daily. Under the current business model this does not allow the company to fully explore possibilities. Even though Mystic generate revenues of 11%, it does not have the resources to operate a prosperous coffee roasting and sales business. Mystic was only reason for current profit is that they do not face taxes or labor costs.
Mystic Monk currently targets a Catholic market. This is a good way to make profits for now, but in order to reach their goal the operation will need to expand. They currently sell online and through occasional phone calls, but will need to make decisions to further grow their business.
Mystic Monk has many decision they will need to make in order to attain their goal of purchasing the ranch that they are looking at.
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