Out of This World Coffee
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.
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.
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.
52 (weeks in a year) = 52 coffees per year
52 x 2.25m = 117m ≈ 115m coffees bought by non-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.
We see that the market is fragmented, with eight major players as well as local coffee shops controlling 20% of the coffee sales.
The candidate should now look to understand the client’s company and attempt to formulate an entry strategy.
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
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