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Case

Out of This World Coffee


Case prompt

Our client is a US-based chain of coffee houses called Out of This World Coffee (OTWC). They pride themselves on their high-quality blend made from beans sourced from the best Columbian producers. They have experienced significant profits over the past 5 years in the US market and are looking to expand operations to Europe.  


OTWC is looking to make an organic entry and is primarily interested in the Austrian market at the moment. They have hired us to determine whether and how to go ahead with their growth plans.  


Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Identify the problem 


The client wants to know whether they should enter the Austrian coffee market. The candidate should ask more questions to determine OTWC’s exact objective as well as to understand the company’s profile and offering, and how this fits with the proposed market. 


The candidate can be provided with the following information:


OWTC has two main products. A regular blend, sold for $3 per cup and a premium “Columbian” blend sold for $6.


The company would like to achieve a revenue of $50m in the first year.


Lead the analysis 


Since the client has not provided any information, the candidate will first have to estimate the total market size in Austria as well as advise the client on potential entry strategies.  


In order to determine the total market size, the candidate can start by approximating the total population of Austria to 9m, then divide it into coffee drinkers and non-coffee drinkers. Coffee drinkers can then be subdivided into regular drinkers (three times per week or more) and occasional drinkers (two times per week or less).  


The candidate can assume that half the population will be coffee drinkers, and that half of those drinking coffee will do so regularly.  


The calculations will be as follows: 


9m/2 = 4.5m coffee drinkers 


4.5/2 = 2.25m regular coffee drinkers  


The candidate can then calculate the total volume of coffee sales, taking a conservative approach by assuming occasional drinkers will have 1 coffee/week and regulars 3 coffees/week. 


The candidate can make any other reasonable assumptions about coffee consumption habits


Non-Regulars:
52 (weeks in a year) = 52 coffees per year

52 x 2.25m = 117m ≈ 115m coffees bought by non-regulars


Regulars:

52 x 3 = 156 coffees per year

156 x 2.25m = 351m  350m coffees bought by regulars


Total number of coffees bought in a year = 465m 


The candidate can assume the average price of coffee at $3 per cup, which means the total market is 3x465m = 1.395bn ≈ $1.4bn  


The candidate should ask about competitors on the market and the market shares they hold.


They can then be presented with Exhibit 1


We see that the market is fragmented, with eight major players as well as local coffee shops controlling 20% of the coffee sales.  


Upon asking, the candidate can be told that the market is expected to grow by 10% in the following year.


The candidate should now look to understand the client’s company and attempt to formulate an entry strategy.  


The candidate can be provided the following data about the company’s revenues:


80% of the company’s revenues come from sales of premium coffee and 20% come from sales of regular coffee


Both the company’s profile and its sales point to a potential strategy around premium products. The candidate can then further segment the market to understand what the potential market for premium coffee would be.  


One strategy would be to target those drinking coffees priced at $6 regularly. Thus, we conservatively assume that 30% of regular coffee drinkers prefer a high-quality blend. 


The total market size can then be calculated as follows: 


2.25m x 0.3 = 675.000 customers  


675.000 x 156  105m coffees per year 


105 x $6 = $630m total market


This value would only be captured as revenue with a 100% penetration rate 


The client would like a revenue of $50m in the first year so to get to the needed penetration rate we would calculate 


50m/630m  8% penetration rate. However, the candidate needs to adjust for growth rates in the following year   


630 x 1.1  690m


50/690 ≈ 7% penetration rate 


The candidate can ask for further information on competitors in the current segment and be provided with Exhibit 2


Deliver the recommendation 


The candidate can deliver a recommendation along the following lines: 


We recommend that OTWC enter the Austrian market. The reasons for this are threefold: 


The market is fragmented and requires no additional investment to enter. 


The company would fit very well with the premium coffee segment of the market. 


The penetration rate required to reach the company’s target is quite low and in line with other competitors for the desired segment. 


Potential risk: any preference of Austrians for local coffee shops as opposed to bigger chains 

 

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