Marketing Analysis Report for Cafe Nero
Table of Contents
Analysis Based on the PEST Model 7
Executive Summary
This paper was aimed at conducting a marketing analysis of Cafe Nero. The paper began by providing an introduction including the layout. The paper later provided some historical and background information about Cafe Nero. This section observed that Cafe Nero was formed in 1997 and that its main location is the United Kingdom. Next the paper considered the competitive landscape. In this area it was observed that Cafe Nero occupies third place in the industry in the UK. First and second positions are occupied by Starbucks and Costa Coffee respectively. Next the paper provided and environmental analysis using PEST (political, economic, socio-cultural, and technological) analysis and SWOT (strengths, weaknesses, opportunities, and threats) analysis. It was observed that Caffe Nero has a number of shortcomings as well as strengths with respect to its external environment. Next came an analysis of the marketing mix which considered its products, place, price, promotion, people, process and physical evidence. The paper also considered the companies strategies and tactics. Finally, the paper provided some recommendations and conclusions.
Introduction
The objective of this report is to conduct an analysis of the marketing strategy of Café Nero a U.K based coffee shop. The analysis will be conducted using a number of marketing frameworks such as PEST, Porter’s five forces model, and SWOT). The rest of the paper is organized as follows: section 2 provides an overview of Café Nero; section 3 analysis the competitive position of the firm; section 4 takes a look at the marketing strategy including a discussion of segmentation, targeting and positioning of the company; section 5 looks at the marketing mix taking into consideration the 4 Ps and 7 Ps; section 6 provides and evaluation of the company’s strategies tactics; section 7 provides recommendations for future development and section 8 provides the main conclusions of the report.
Overview of Café Nero
Founded in 1997, Caffé Nero Group Ltd is one of the largest independent coffee retailers in the United Kingdom. (http://www.caffenero.com/). The group has over 360 Caffe Shops spanning from Brigton to Glasgow. (http://www.caffenero.com/). Café Nero’s main objective is to provide a European style coffee house experience by offering premium espresso-based gourmet coffee, authentic Italian food products, as well as a relaxing atmosphere in every coffee shop. (http://www.caffenero.com/). According to Georgina (2006), the company began its operations in London and moved out of London for the first time in the year 1999 when it decided to locate some shops in Manchester. By 2000 the group had 31 stores and had become a national brand. Its good performance enabled it to win the “British Design Award for the best company identity”, meaning the best brand in the UK. (Georgina, 2006). The company listed its shares on the London Stock Exchange in 2001 and became the largest publicly listed house in the UK. In 2002 Cafe Nero acquired 29 Aroma Stores from McDonalds Corporation, a move that made Cafe Nero the largest independent coffee house brand in the UK with a total of 106 coffee houses. (http://www.caffenero.com/). Cafe Nero is a member of the FTSE Small Cap Index of the London Stock Exchange. It had a market capitalization of £141.8million and a share price of 210p as at May 2006 (Altium, 2006).
Competition
Cafe Nero faces competition from other major players in the coffee sector in the UK. The main source of competition is Starbucks and Costa Coffee, which was recently taken over by Whitbread. Reports say that starbucks, Costa Coffee and Cafe Nero account for more than 60% of coffee shops in the UK. Starbucks remains a global player in the industry and its presence in the UK is a cause for concern for other coffee dealers. The company is witnessing a growth spiral. It recently announced plans to open new outlets every two weeks over a 10 year period. Despite concerns that the new openings may cannibalise some of its brands, the company believes that this move will lead to an increase in its market share. In 2006 starbucks designed a customer loyalty scheme by introducing a prepayment card for customers with the capacity of holding between £2 and £150. The objective of the scheme is to build brand loyalty among customers and ultimately increase market share, sales growth and profitability. The second major player is Costa Coffee. Like Starbucks, Costa Coffee opens about 50 new stores a year. The company’s objective is to increase its store portfolio to 800 stores in the UK by 2010. Costa coffee is also focused on building customer loyalty. To achieve this, the company rolled out a loyalty scheme in all its branches in 2006, offering a £2 incentive to customers who signed up to the scheme online. There are reports that approximately 10% (1 out of every 10 customers) have signed up to the loyalty scheme and about 30% of the said 10% make use of the card on a daily basis.
Environmental Analysis
The environmental analysis will be conducted using 2 analytical frameworks including SWOT, PEST.
SWOT Analysis
SWOT (“strengths, weaknesses, opportunities and threats”) analysis enables and organisation to determine its internal strengths and weaknesses, as well as its external opportunities and strengths (Houben et al., 1999).
Strengths
Caffe Nero has a good management team. It has a strong brand name in the UK which provides it with brand equity. Its coffee shops are clean, and comfortable, providing customer with a unique place for relaxation after a busy day.
Weaknesses
–Located only in the UK: Cafe Nero is located only in the UK. Its market share is therefore limited only to the UK. It makes it difficult for the company to compete for customers with its competitors. Moreover, the company has only 225 stores as opposed to Starbucks and Costa Coffee. This also limits its ability to increase its market share and compete with other competitors.
Pays the minimum wage to employees who are 22 years old or younger and has a very high staff turnover. Starbucks pays employees who are 22 years and younger only £5.5/hour. This is somehow de-motivating as most jobs pay something above the minimum wage. The company is therefore unlikely to attract qualified staff who can provide better services. In addition, the company has a high staff turnover a situation that can be very costly for a company.
Opportunities
Cafe Nero is a high growth company with the opportunity of expanding its operations out of the U.K. (Altium, 2006; Collins Stewart, 2006). According to Altium (2006) the company was yet to formalise plans to franchise the concept in the Middle East and Europe. It is obvious that the Middle East is a potential success area with a wide customer base judging from the success of Costa Coffee in the Middle East. (Atium Securities, 2006). Thus far, Caffe Nero’s only location outside the UK is in Turkey (http://www.caffenero.com/CompanyInfo.asp?Section=International). The company is therefore yet to exploit its expansion opportunities in other parts of Europe and the Middle East. In addition, in the UK Caffe Nero is located only in England, Scotland and Wales. (http://www.caffenero.com/CompanyInfo.asp?Section=International). It is yet to exploit Northern Ireland. The Directors of Caffe Nero are confident that their brand and product offering will continually improve on their placement in a bid to take advantage of anticipated growth in the UK gourmet coffee market. Caffe Nero therefore has both growth and expansion opportunities to exploit.
The Directors believe that Caffè Nero’s brand and product offering will be well placed
to take advantage of the anticipated rapid growth in the UK gourmet coffee market
and look forward to the future and the roll out of the brand with confidence.
Threats
Like any other company, Caffe Nero faces competition from both existing coffee shops such as Starbucks and Costa Coffee, as well as other coffee shops in the U.K. It also faces competition that new competitors may enter the market as well as that substitute products may be introduced by other businesses. Caffe Nero also runs the risk that economic variables such as interest rates, exchange rates, GDP, inflation, balance of trade, money supply, oil prices, etc may have an impact on its business. For example, the recent global financial crisis has changed the dynamics of the macroeconomic environment, which has in turn lead to significant adverse effects on companies operating in the UK.
Analysis Based on the PEST Model
PEST stands for the political/legal forces; economic forces, socio-cultural forces; and technological forces that are exerted on an organisation (Healey, 1994; http://www.marketingteacher.com/Lessons/lesson_PEST.htm). The PEST framework for Caffe Nero can be depicted as follows:
Figure 1: PEST framework for Caffe Nero
Political/legal forces: Caffe Nero runs the risk that its business may be affected by changes in the political landscape of the U.K. However, the political climate of the UK is quite business friendly and this is really not a problem. Moreover, new legislation on tax may come into force. This may have a direct impact on Caffe Nero. Value added tax recently witnessed a decline. This is good news for Caffe Nero as it means that more customers can now shop for coffee given that they will be paying less tax on consumption. Moreover, there has been a renewed increase in environmental protection. This may lead to new environmental legislation that may have a direct or indirect material adverse impact on the operations of Caffe Nero.
Economic Forces: The main economic forces that may affect Caffe Nero include fluctuations in interest rates, which has been the case in the UK recently. Interest rates have fallen significantly recently inducing consumers to spend more. Higher inflation means that the cost of inputs will be rising. Exchange rate fluctuations indicate that cash flows denominated in foreign currency are unstable. Prices of inputs sourced from abroad will be unstable as well. The Great British Pound has depreciated significantly against major currencies such as the euro and the dollar. On the one hand, this is good news for Caffe Nero given that tourists from abroad can spend more on coffee in the UK. On the contrary it is bad news to Caffe Nero in that the prices of foreign inputs in terms of Great British Pounds will be higher. Fluctuations in GDP have an impact on consumer spending. Increasing GDP indicates that consumers can spend more, while decreasing GDP indicates that aggregate demand will drop which will reduce consumption of coffee. Combined with the global financial crisis, the UK has been witnessing a recession and macroeconomic instability. This has affected the demand for Caffe Nero’s products.
Socio-Cultural Forces: The UK is a multicultural society including Caucasians, Asian Minorities, African Minorities, other black backgrounds, etc. These different cultures indicate different consumer tastes and behaviours. Caffe Nero needs to understand the different cultural backgrounds and behaviours to be able to better satisfy the needs of each group. Moreover, the different cultural groups speak different languages. This may make communication with customers who can’t speak English difficult for Caffe Nero. Different religious backgrounds also pose problems in that religion has an impact on people’s life styles, which in turn affects their tastes.
Technological Forces: Technology is changing at a very fast rate. This may affect the manner in which Caffe Nero communicates with customers. It may also affect the manner in which Caffe Nero distributes in products to customers as well as the manner in which it prepares its coffee. Financial innovation promoted by technology is also changing the manner in which customers can pay for their coffee. For convenience most people prefer paying with a credit card. Caffe Nero must therefore put in place the necessary technology to accept payment through credit card.
Marketing Mix
There are four main marketing mix variables. Product, Place, Price and Promotion. These variables are commonly referred to as the 4Ps of marketing. The marketing mix has been extended by adding 3Ps to the original 7Ps. These include People, Process and Physical evidence. People include all those who are directly or indirectly involved in the consumption of a service (Booms and Bitner, 2009). People also include those involved with the running of the business such as knowledge workers, employees, management and other consumers. Process includes the procedure, flow of activities and mechanism by which services are consumed. Physical evidence refers to the ability and environment in which the service is delivered as well as tangible goods that help to communicate and perform the service. It also includes the intangible experience of existing customers and the ability of the business to relay that customer satisfaction to potential customers (Booms and Bitner, 2009).
Caffe Nero’s products include Nero Coffee, Nero food, and Nero Music (http://www.caffenero.com/). Nero Coffee comes in two categories including “hot coffee drinks” and “cold coffee drinks” (http://www.caffenero.com/NeroCoffee.asp?Section=CoffeeAndRecipes). Hot coffee drinks include Espresso; Espresso Ristretto, Espresso Machiatto, Cappuccino, Caffe Latte and Mocha; Cold coffee drinks include Iced Latte, Iced Mocha, and Frappelatte. (http://www.caffenero.com/NeroCoffee.asp?Section=CoffeeAndRecipes). Nero Food includes cold drinks, Caffe Nero Sandwiches, Italian Wraps, Panini, The Alchemy of Soup, Pastries, and Recipes.
As concerns place, Caffe Nero is located in three parts of the UK including, England, Wales and Scotland. It is making efforts to locate as many stores out of London to avoid competition from major coffee giants such as Starbucks and Costa Coffee. Caffe Nero ensures that all its sales outlets are clean. Tables and chairs are clean and comfortable and there is a toilet facility. Moreover, the company provides wifi broadband internet access. (http://travel.ciao.co.uk/Caffe_Nero__12104). As part of its promotion strategy, Caffe Nero works in collaboration with Progress design. Appendix 1 contains a picture which depicts one of Caffe Nero’s promotions done by Progression Design. According to a review by a customer, Caffe Nero offer buy 9 get 1 free. (http://travel.ciao.co.uk/Caffe_Nero__12104). That is after 9 purchases, 1 item is offered for free. The prices of its products are as follows: Coffee £1.90 for latte, normal samies around £2.50, Panini – £3.50, Pasta – £3.50, Danishes start at £1.20. Cold drinks start from £1 but prices vary depending on size and flavour. (http://travel.ciao.co.uk/Caffe_Nero__12104). Caffe Nero’s people include its employees and management staff. As earlier mentioned the company has a high employee turnover and pays the minimum wage to employees aged 22 and below. (Georgina, 2006). Its processes comprises the machines used to produce the coffee and other products and services. Physical evidence is the coffee itself, as well as its other products and the satisfaction derived by customers from consuming the products. This satisfaction is easily communicated to potential customers through Word of Mouth (WOM).
Strategies and Tactics
Business strategies are the procedures put in place by top management to enable the organisation achieve its strategic goals. Tactics represent the procedures put in place by middle level management to achieve tactical goals. Caffe Nero’s main strategy is its expansion to many parts of the UK and its plans to extend manufacturing abroad. By so doing the company expects to achieve its main goal of “providing a European style coffee house experience offering espresso-based gourmet coffee” (http://www.caffenero.com/default.asp). As part of its tactics the company invests in marketing and improving its brand name. It also employs promotion campaigns that help communicate its brand to potential and existing customers.
Recommendations
Caffe Nero is better placed to expand and witness growth in both sales and profitability. To achieve this, the company needs to expand its operations to other parts of Europe and the Middle East. It also needs to step up to the completion with major competitors such as Starbucks and Costa Coffee. Caffe Nero currently occupies third place in the UK market but it can overtake Starbucks and Costa Coffee if its steps up a bit. It needs to seek out for customer reviews, determine their problems and find solutions to these problems. Caffe Nero should also seek out and analyse information about competitors to determine their strengths and weaknesses.
Conclusions
Based on the above analysis, this paper draws a number of conclusions. Firstly, Caffe Nero is the third largest coffee shop in the UK. The company has a number of growth opportunities that it can capitalise on. One of such opportunities is expanding to other parts of Europe and the Middle East and why not Africa? Despite these strengths, Caffe Nero is has a high employee turnover which may be detrimental to its business.
References
Caffe Nero Group PLC (2001), “Placing of 18 million Ordinary Shares of 0.5p each at a price of 50p per share and Full Listing on the London Stock Exchange.
Collins Stewart (2006). Caffe Nero – Interim results – yet another strong performance – further upgrade to forecasts; Small Company Daily Update.
PEST Analysis, What is PEST Analysis? Available online at: http://www.marketingteacher.com/Lessons/lesson_PEST.htm
Caffe Nero, available online at: http://www.caffenero.com/default.asp
Caffe Nero and International Expansion. Available online at: http://www.caffenero.com/CompanyInfo.asp?Section=International
Houben, G., Lenie, K., Vanhoof, K. (1999), “ A knowledge-based SWOT-analysis system as an instrument for strategic planning in small and medium sized enterprises”
Decision Support Systems, Volume 26, Issue 2, August, Pages 125-135
Healey, N. M. (1994) “The transition economic of central and eastern Europe : A political, economic, social and technological analysis” The Columbia Journal of World Business, Volume 29, Issue 1, Spring, Pages 62-70
Booms, B. H., Bitner, M. J. (2009), “7-Ps – Extended Marketing Mix”, Available online at: http://www.valuebasedmanagement.net/methods_booms_bitner_7Ps.html
Coffee And Recipes: available online at: http://www.caffenero.com/NeroCoffee.asp?Section=CoffeeAndRecipes
Nero Food: available online at: http://www.caffenero.com/NeroFood.asp
Georgina, F. (2006), “Coffee Beings” Personel Today; 5/2/2006, pp. 20-22.
Altium Securities (2006), “Caffe Nero (CFN)” www.altiumsecurities.com
http://www.progressiondesign.co.uk/pdf/ProgIntro_GENsm.pdf
Appendices
Appendix 1
Source: http://www.progressiondesign.co.uk/pdf/ProgIntro_GENsm.pdf