Marketing Principles

The Australian Coffee Shop Industry

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Table of Contents
TABLE OF CONTENTS........................................................................................................................................... 2

EXECUTIVE SUMMARY................................................................................................................................ 1

INTRODUCTION............................................................................................................................................. 2

THE AUSTRALIAN COFFEE SHOP INDUSTRY.......................................................................................................... 2

CUSTOMERS................................................................................................................................................... 3

EMPLOYEES........................................................................................................................................................ 4

SUPPLIERS AND DISTRIBUTION CHANNELS.......................................................................................................... 5

COMPETITORS............................................................................................................................................... 6

INVESTORS......................................................................................................................................................... 7

MEDIA.............................................................................................................................................................. 7

CONCLUSION.................................................................................................................................................. 8

REFERENCES..............................................................................................................................................................10

APPENDICES................................................................................................................................................. 11
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Marketing Principles

Executive Summary
The report contains a detailed analysis of the impacts of macroeconomics indicators over the
coffee shop industry of Australia. It evaluates that being a customer oriented industry, the coffee
shop market is highly exposed to the changing priorities and demands of the customers.
Although, customers are the major stakeholders of the industry, but other macroeconomic
indicators like, employees, investors, supply and distribution, media, etc… are also very critical
for the success of a company in such a market and for the long term sustainability and growth of
the industry. The report provides a deep insight of the Australian coffee culture along with a
number of statistics to support the arguments given in the paper and to help the reader of this
report in understating the impact of macroeconomic factors over the microeconomic indicators of
the industry. The report discusses a number of challenges and complexities that the industry
would experience in the next two years, if these macroeconomic factors are not properly
addressed and it is also provided that the government has to play a major role in stabilizing the
market conditions and reducing the negative impacts of these macroeconomic indicators over the
survival of the industry.
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Introduction
Australia is one of the most attractive and profitable destinations of the world for the
establishment of a coffee shop business because of its climate and geographical existence. The
coffee culture in Australia has a long history because the country had started the cultivation of
coffee beans in the mid 19th century, when the Italian started migration to this region. At that
time majority of the Australian population got inspired from the Italian immigrants and started
the consumption of coffee as a major beverage in their lives.Moreover, with the increasing
urbanization, the majority of the Australian population moved from rural areas to the cities in
order to get benefited from the facilities and diversified culture of the cities. This has changed
the priorities of people and they became more consumption oriented. The situation also gave a
boom to the coffee culture in the country and people started to consume coffee as a casual drink
in their routine lives, which was previously considered a party drink. A research study has
evaluated that today about every one out of four city adults visit the coffee shops more than 7
times a week and the adult population in Sydney enjoys more than four cups of coffee in a single
day.Another research has evaluated that more than 75% of the Australian adult population must
visit a coffee shop once in a month. This shows the intensity and popularity of the coffee among
the majority of the population of the country and also exhibits a high market potential in this
industry.

The Australian Coffee Shop Industry

Australia has a well-established and highly concentrated coffee shop market with a number of
competitors, who is actively competing in the industry. Due to the high market potential and
customer base a number of international brands like Starbucks and Gloria Jeans are also
operating in different major cities of the country. The coffee shop industry is a customer
oriented industry and therefore, the success of a company in this industry is highly dependent
upon the changing demands of the customers and just like other customers oriented industries the
critical success factor of this industry also lies in developing such type of strategies that can meet
the customer demands and expectations. However, a number of other macroeconomic factors
also influence the market performance and sustainability of the company and the overall
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microeconomic environment of the industry, i.e. demographics, legal and political environment,
etc…. These factors are discussed in detail as under:

Customers
Customers are the most important macroeconomic stakeholders of any sort of business and
especially in the case of a customer oriented business, where their importance becomes more
critical[ CITATION Sou73 \l 1033 ]. The recent aggressive urbanization in Australia has
dramatically changed the consumption behavior of people and they are now expanding more
upon the luxury goods, which has reduced the risk of failure in investing capital in such type of
businesses that offer luxury goods, i.e. coffee, cold drinks, fast food, etc…. The coffee market is
currently targeting the youth population of the country aging between 16 to 35 because people
belong to this age group have more inclination towards partying out and enjoying gatherings in
bars and cafes[ CITATION Cho14 \l 1033 ].Another reason for targeting this age group is that,
people in this age group are mostly students or energetic professionals who aim to build a
successful career. To encourage this particular target customer, coffee shops usually link their
products with boosting energy levels during exams and high work load.Initially it was considered
as an adult drink, but due to the increasing trends of coffee consumption in the country, it is
observed that children and people below 10 years have also started coffee consumption, which
has increased the percentage of sugar or milk coffee consumption to 65%. However, it is
expected to be increased in the next few years to almost 70 to 80 percent, because most of the
coffee shop companies are trying to target the younger population through their advertisement
due to their larger share in the city’s population, i.e. 38%.New coffee products such as cold
brew, Espresso, cappuccino, latte, white coffee, and ties has also increased the consumption of
coffee in Australia and it is expected that in the coming few years the demand will further rise.

Most of the stores are located in densely populated cities and high traffic areas, which helps them
in utilizing their resources and marketing strategies effectively to generate high figures in
revenues. However, the rural and backward cities are also rapidly converting into modern cities,
which will require the companies to invest heavily in establishing their outlets and franchises in
these areas over the period of next one to two years. The coffee shop industry has recently
experienced a boom in the country and from 2004 onwards about 48% of the new coffee shops
outlets are formed and the number of transactions through an average sized coffee shop has
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increased by 28% and the overall sales grew by 60%. More than 34% of the customers prefer to
drink their coffee at certain premium places like Starbucks, Coffee-bean, Gloria Jean’s, etc…
This percentage is expected to be further increased in the coming years because the coffee
market in Australia is still far away from saturation. It is also observed that more than 70% of the
consumption of coffee occur during breakfast because most of the customers prefer to drink
coffee to make their day active and productive. This shows that the Australian coffee drinking
culture has contributed a lot in the growth of this industry[ CITATION Cho14 \l 1033 ].
However, due to the increasing competition among the local and international brands, the
survival of the companies in the future would be only possible by attracting more customers,
which can be achieved by introducing certain new and innovative products and by employing
highly productive marketing strategies.

Employees
Employees are the second most important stakeholders of any sort of business because it’s a
matter of common sense that businesses are established to serve the needs of markets, but they
cannot execute their responsibilities and achieve their ultimate goal of addressing the needs and
demands of customers without having a proper and competent workforce[ CITATION Peg95 \l
1033 ]. The coffee shop market is highly influenced by the younger workforce because
youngsters can more effectively address the needs and expectations of a younger customer base.
It is estimated that more than 60% of the coffee shop employees comprised upon people under
the 25 age group. Another, reason for such a high proportion of youngsters in the coffee shop
industry in due to the unskilled and part time nature of the job required in this industry and
mostly students prefer to do such jobs during their college days. Research shows that the
increasing number of new coffee shops in the country and the establishment of franchises from
some of the well known global brands will require a high number of employees and this can
negatively affect the overall industry growth trends because the rapidly changing immigration
and especially student immigration policies of the country has reduced the availability of cheap
and part time labor. In the past, a large number of female workers were employed in this industry
and by the end of 2006, their percentage reached to 61%, but due to the negative attitude of
customers towards the female workers and the global financial recession in 2008, this percentage
is reduced to 57.4%, which is expected to be further reduced in the upcoming two to three years.
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The Australian government has recently promulgated the Work Health and Safety Act in 2011,
which has imposed certain minimum requirements over the business owners to ensure a safe and
healthy environment for the workers and also provide them health insurance as a compulsory
package with their salary. However, being a relatively small sized business, most of the local
coffee shop owners deny complying with these rules and as a result employees started protesting
against them.Therefore, in response to these protests it is expected that the government will take
some other initiatives for the safety of employees and establish certain other laws in the future,
which will increase the operating cost of coffee shops and they will become unable to survive as
a low cost leader in the market.These all factors collectively concludes that employees are
expected to exert a high level of pressure in terms of demanding more privileges and benefits
from the coffee shop owners in the coming few years because it is difficult for them to meet the
challenges of the increasing inflation in the economy[ CITATION War77 \l 1033 ].

Suppliers and Distribution Channels

It is evaluated the coffee is one of the highest product in terms of volume of global trading
because there coffee shop industry in very fragmented. This has prompted a combination process
where coffee is given off from rancher to authority, gatherer to mill operator, mill operator to a
broker or exporter, lastly to the shipper[ CITATION Peg95 \l 1033 ].The shipper or intermediary
then offers the coffee to vast mass-market of coffee manufacturers and roasters (See
Appendices). It is evaluated that companies have adopted different distribution and supply chain
models according to their size and operational capacity. Most of the multinational brands have
employed a hybrid distribution model for the distribution of their products, which means that
they do not depends upon a single distribution channels, i.e. Starbucks had established its fully
owned retail stores in different regions of the world and manage the overall process of coffee
manufacturing, i.e. get the coffee beans from importers and the process it into different products
and sell it to the other companies and ultimate customers through their unique retail stores and
also use it internally at its cafes for maximizing its wealth and control[ CITATION Cha10 \l
1033 ]. Whereas, on the other hand majority of the local companies do not have their own supply
chain management and distribution channels or facilities, therefore, they have to depend upon
other large sized companies or distribution and marketing agents for the distribution of their
products. They also prefer to receive secondary supply from other companies because of their
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limited resources and exposure to the market. However, due to the increasing competition, the
demand for the establishment of certain new and innovative distribution channels and supply
chain management will also increase, which would automatically boost up the suppliers
bargaining power. It is expected that in the coming few years suppliers and distributors will take
over the industry control and they would achieve the ultimate decision making power to shape
the structure of the overall industry, however, the shift may affect the business models of some
well-known and established coffee shops in Australia[ CITATION The96 \l 1033 ].

Competitors
The level of competition in an industry has also a huge impact over its economic survival
because the large number of competitors’ means that the available resources would need to be
distributed among more members of the industry, which will increase the risk of shortage of that
particular resource. Although, competition can also bring a number of positive impacts over the
industry, i.e. it can increase the motivation among different players for finding certain new and
innovative methods of production and it may also be helpful in the development of new products.
It is also beneficial for customers because every player in the industry try to attract more and
more customers from a same niche and as a result customer get an opportunity to access quality
products at competitive prices. Increasing competition has a very good impact on the economic
condition of a country that further enhances the world economy. However, the negative impacts
of increasing competition over an economy and industry are more destructive as compared to the
positive outcomes that could be achieved by it[ CITATION Sta52 \l 1033 ]. It is evaluated that
due to the strong coffee culture in Australia, there is still a huge market potential in the coffee
shop business and most of the national and international players are willing to enter into the
Australian coffee shop market to get the benefits of the available potential.The competition in the
Australian coffee shop industry has been experiencing a 5% annual growth since 2004, but
during the last 4 years the percentage has increased to 9% annually, which means that in the
coming few years it is expected to be more increased and the increasing competition in the
Australian coffee shop market would cause serious threats to its long term survival.Although, in
the current situation, the Australian market is more lucrative and attractive for new
entrepreneurs, however, it is recommended to all the potential entrepreneurs who are seriously
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thinking about starting a coffee shop business in Australia to thoroughly analyze the market
potential in the long run.

Investors
Investors are the key stakeholders of any sort of industry or market because they are the people
who contributed to establish a market and enjoy a number of privileges in terms of exercising
control over the norms and practices of an industry. Establishing a coffee shop requires very low
investment and therefore, the entry barriers in this industry are also very low. The research report
of Euromonitor International evaluated that about $437 million investment has been done in the
coffee shop industry of Australia during 2013, which ranked second to the Singapore. This
shows that the local and international investors are taking a huge interest in investing their
capital in this industry due to its high potential forgrowth[ CITATION Kim13 \l 1033 ].The
report of Ibisworld shows that the coffee shop industry of Australia will drastically grow in the
next five to six years with an annual growth rate of 2.6%, which shows that investors can greatly
influence the growth and market trends of the coffee shop industry. On the other hand the
Australian government has also provided a number of attractive opportunities in terms of tax
relaxation and FDI exemption to attract the potential investors towards the Australian coffee
shop industry[ CITATION Att12 \l 1033 ]. It is also expected that in the next few years’
investors would also contribute in the overall development of this industry because the
competition is expected to grow drastically and investors would be required to incorporate
certain productive and innovative ideas into their investing strategies to cope with the
competition and changing trends of the market.

Media
In today’s technologically advanced and digital era, the progress of an industry solely depends
upon its advertisement and marketing strategies because there is a high competition in the market
and a business can only survive by persuading customers through different advertisement
techniques. Therefore, media plays a vital role in the success of a business and especially in a
customer oriented business its role becomes more important because a business can only create
awareness about its products and services through advertising it on certain media. The evolution
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of mass media communication channels has transformed the traditional business and marketing
models into more media centric models because business can get an easy access to a wide range
of customers through this platform[ CITATION Cha10 \l 1033 ]. However, media not only work
for the advertisement and marketing of a business, but it can also provide a platform to the
customers to share their experiences about a particular product or enterprise with the other
stakeholders.Recently, most of the companies run a campaign over different media channels, i.e.
television, internet, radio, etc… to increase awareness among the people about certain health
benefits associated with the consumption of coffee, i.e. resist against diabetes and liver related
diseases, etc… A number of recreational events are going to be held in the next two years in
Australia, i.e. adventure travel expo, Singapore and Malaysia trade workshop, 2015 infinity
holidays, etc…. which can be only captured with the collaboration and assistance of an effective
mass media communication campaign[ CITATION Kim13 \l 1033 ]. The growth of social media
has also opened some new doors for the marketers because through social media channels,
marketers can directly stay in touch with their customers. Social media pushed advertisement to
a next level because marketers can immediately get a feedback about their actions and can adopt
more appropriate ways.Therefore, modern media would also greatly affect the growth and
microeconomic indicators of the industry in the next two years.

Conclusion
On the basis of the above discussion and macroeconomic analysis of the Australian coffee shop
industry, it has been concluded that due to the high coffee culture and long history of coffee
consumption in Australia, there is a huge market potential for growth and investment. It is also
evaluated that the Australian coffee shop industry ranked second to Singapore in the world due
to its effective strategies and the support of government agencies. Majority of the companies
reduces their operating cost in the coffee shop industry by employing students and other part
time employees on low wages because working in a coffee shop outlet do not require a person to
have certain professional qualification or skill and due to the high percentage of foreign students
in the Australian universities, the country enjoys a premium position in the global market in this
regard[ CITATION Sta75 \l 1033 ].It is observed that the majority of the targeted customers in
this industry belongs to an age group between 16 – 35 years because these people are more likely
to visit bars and coffee shops regularly.Moreover, these people are more willing to take drinks to
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boost their energy levels and coffee is known as a leading energy booster.However, the recent
study shows that about 65% of the Australian population consume milk or sugar coffee and this
also includes children under 10 years[ CITATION Cho14 \l 1033 ]. This exhibits the high coffee
culture in Australia and that is the sole point of attraction for investors to make investment in this
industry. It is also evaluated that due to the increasing competition and entry of certain highly
established global brands in the Australian market, the local players will find it difficult to
survive and it will also increase the power of suppliers and distributors, which will in turn limits
the growth and sustainability of the overall industry. If the investment in this industry continues
to grow in the same manner, then it will soon achieve the market saturation phase and start
declining. However, the government has recently taken certain initiatives to ensure the long term
survival and sustainability of the Australian coffee shop industry and it also expected to
promulgate a number of regulations in this regard[ CITATION Tur77 \l 1033 ].
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References
Anon., 1852. Statistics of Coffee. Sci Am, 7(25), pp.195-95.

Anon., 1975. Statistics of Coffee Drinking and Myocardial Infarction. New England Journal of
Medicine, 292(5), pp.265-66.

Anon., 1996. The coffee shop. Choice Reviews Online, 33(08), pp.33-4387-33-4387.

Anon., 2012. Attractiveness of Coffee and the Elements for Building a Attractive Coffee Shop.
JCIT, 7(20), pp.47-55.

Chapman, G. & Hodges, G., 2010. Coffee. South Yarra, Vic.: Macmillan Education Australia.

Cho, M., 2014. Segmentation of Coffee Shop Customers based on Organic Coffee Choice
Motives. Journal of the East Asian Society of Dietary Life, 24(6), pp.33-65.

Kim, y.s., 2013. Impact of Design Elements on Boosting Brand Image and Intention to Buy Food
and Beverages -With focus on coffee shops-. journalofkoreadesignknowledge, (28), pp.327-38.

Pegler, M.M., 1995. Cafes & coffee shops. 1st ed. New York: Retail Reporting Corp.

Southern, R.J., 1973. Marketing crisis in the New Guinea highlands Arabica coffee industry.
Australian Geographer, 12(3), pp.268-70.

Turnovsky, S.J., 1977. Macroeconomic analysis and stabilization policies. 1st ed. Cambridge:
Cambridge University Press.

Warhurst, J., 1977. The Australian Labor Party (Anti-Communist) in South Australia,
November-December, 1955: 'Molotov' Labor versus 'Coffee-shop' Labor. Labour History, (32),
p.66.
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Appendices
Coffee Distribution Structure

Beverages Manufacturers and

coffee roasters

Master Distributors Distributors and Suppliers Food and

Beverages Brokers
Products purchased directly from
manufacturers

Distributors and Suppliers Cash and Carry

Products purchased through master Wholesale stores

distributors and brokers

Drive Inner-Retail Coffee and Tea Restaurants Bars Retail

Through Espresso Houses and Cafes Grocery
Espresso Stands
Stands