A Context for Competition

By Tracy Ging

Competition within the coffee industry is intensifying. At least that is what some roasters and retailers (21 percent) are reporting, according to the most recent SCAA sector report. Interestingly enough, this is the first time that comment has popped up. While it seems likely that the pressure has been building for a few years, only now does the data reflect the echoing sentiment, which essentially amounts to, “Yeah, it’s rough out there.”

While specialty coffee companies undoubtedly have an acute understanding of their specific competitors, there are likely more and bigger forces at play that are important to comprehend. One of the most commonly referenced models for assessing competition was developed by Michael E. Porter, a leading authority on competitive strategy and professor at Harvard Business School. In Porter’s Five Forces model, he provides a framework that identifies five major influences over the context in which an organization operates:

1. Intensity of rivalry amongst existing competitors
2. Threat of entry by new competitors
3. Pressure from substitute products
4. Bargaining power of buyers (customers)
5. Bargaining power of suppliers

Generally speaking, the first of these—rivalry among existing competitors—is where people put the majority of their focus. Direct competitors have the distinct advantage of knowing your business fairly well because they’re already out there, selling against you. These are the guys that go up and down the street, making life a little more difficult—picking off one account at a time. You know the ones—regardless of what you offer, they find a way to offer just a little more (or for a little less). This is also the kind of competition that intensifies when the industry fragments, which we’ve seen clearly in the past decade. High rates of growth have attracted hundreds of new entrants, so there is simply more competition now than ever before.

There is some bad news and good news here. On the bad news side, this kind of competition leads to changing prices as more companies compete for the same customers and resources. The good news comes into play when companies take the opposite track, reinvesting and refocusing on product differentiation and new channels of distribution.

Entry by new competitors is an influence that presents a slightly bigger threat over the long-term for specialty coffee, not because specialty coffee can’t compete or doesn’t have something of great value to offer, but because in this case, new entrants are large enough and are more equipped from a resource standpoint to invest in advertising and public relations in a way that can define the norms. As specialty coffee is out there promoting what is good, they’re out there promoting “good enough” and like or not, some coffee drinkers will accept that proposition. That may not feel like an immediate threat, but there is always a danger when someone else controls the message.

The next threat is based on supplier power. Historically, it’s been quite rare to look at that as the biggest cause of concern, but shortages of washed Arabica coffee, rising differentials, and a host of other issues (such as land, labor, genetic base, and climate changes), are elevating this force as a priority. That said, even with current market conditions, specialty players seem willing and able to bear the conditions and forge ahead.

There is more hopeful news as far as buyer power and the threat of substitutes is concerned. Coffee consumption remains strong, customers continue to demand quality, and thus far, it looks as if coffee will maintain its label as recession resistant so price sensitivity hasn’t proven to be as big of an issue as some predicted. Despite significant investment (as in the “ad wars” among Starbucks, McDonalds and Dunkin Donuts), no real preference has been established. Essentially every user makes an independent buying decision. Without a consolidation of preference, there are still many, many market niches to explore.

The threat of substitutes is also relatively low, with the exception of some emerging demographics. The data suggests coffee consumption lags behind in the youngest demographic of 18–25 year olds, but there are many examples where specialty coffee has made inroads by capitalizing on trendiness. More integrated concepts are emerging as well, such as combining coffee with club culture, that show clear promise and potential for creating lifelong customers.

Looking at the five forces, there are concerns on three fronts: supplier power, buyer power, and threat of substitutes, but the actual competitive pressure from those areas is relatively low when compared with rivalry among existing competitors and the threat of new entrants. So, the question is: do we fight among ourselves or do we work together to defend against new entrants? I’m certainly not suggesting that individual companies should not do something against their own best interest, but at times, individual best interest may be aligned with the greater good. There are themes and examples of strategies around differentiation and focus that can create competitive advantage individually and collectively. Some of those examples are highlighted in this issue, as a starting place and to hopefully provide some insight into what can happen longer-term through collaboration. It is possible to achieve differentiation through product quality and presentation. Connectivity through the supply chain remains a viable strategy for the independent specialty players. These strategies can work, we pick the right battle.

With more than 15 years of marketing experience, Tracy Ging has spent the bulk of her career in the coffee industry, where she has worked on both sides of the supply-chain, developing a deep understanding of the market and the trends driving it. Tracy currently serves as Deputy Executive Director of SCAA.

Recommended Reading
Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors