Koots Tea Case Study

Case study: Koots Tea

International American University

MGT 590 Business Strategies

Professor Giang Biscan

Submitted by:

Nishambhava Shakya

MBA ‘V’ Trimester

Opportunity

There are three main components that should be considered with any entrepreneurial opportunity: (a) market demand component, (b) market size and structure, and (c) margin analysis (cf. Timmons & Spinelli, 2007).

Market demand component. Timmons’ model states that entrepreneurs should seek opportunities that promise a 20 percent market share, produce annual growth rates of 20 percent, and become a sustainable competitive advantage over time.

Applying these concepts to the KGT case:

• Kouta evidently recognized the opportunity to capture at least a share of a rapid growth market for coffee stores, and try to find coffee retail locations that Starbucks and Doutor/Excelsior had not yet entered, a “hit-’em-where-they-ain’t” approach.^[1] This has resulted in unit growth as shown in Case Exhibit 3 and sales growth as shown in Case Exhibit 1. His diversification into the Japanese green tea retail shop was also a location-driven strategy to attempt to occupy a niche that rivals had not yet or chose not to enter.

• Kouta saw his opportunity to replicate some of Starbucks’ strategies, i.e.,

• Develop a [green tea] store concept and brand in a segment growing at an estimated 20% rate from 2005-2010
• Build a green tea culture and specialized environment for the enjoyment of the product (green tea lattés, in this instance), and
• Begin international expansion.

• Strategic insight, or serendipity — the ability to make fortunate discoveries through accident — surely played a role for Kouta in terms of providing him with opportunities to realize his vision:

• He was able to meet an influential customer, Suga-san, at the right time in the right place in order to convince him to fund coffee shop development, and
• He was subsequently able to capitalize on his trial-and-error development of the green tea latté drinks.

Market size and structure. Despite the increasing size and scope of Starbucks’ operations and the worldwide recognition of its brand, the coffeehouse and teashop retail industry in 2006 remains highly fragmented. The geographic scope is global, with numerous buyers and sellers. This is a large, addressable market, and KGT is not alone: tea sales in 2005 represented a $13.9 billion industry globally and $6.2 billion in the U.S. While there are varying rates of growth in developed nations versus the rapid diffusion of new chain stores in developing nations, the number of tea shops is growing at a 20 percent compound rate per annum in the U.S. New entrants into the coffee and tea retail face the challenges of competing with an increasing proliferation of Ready-to-Drink (RTD) products in supermarkets and convenience stores, as well as with substitutes, [shown in case Exhibit 2]. A new entrant has to surmount several major challenges in order to succeed:

• Choosing the best location
• Building the most superior and service set
• Providing education about the product mix
• Having the right business model for an increasingly demanding investment climate

Margin analysis. Timmons and Spinelli generally look for a 40 percent gross margin for strong opportunities. FoodxGlobe as already attained gross margins in the 54% – 55% range, as will be analyzed and discussed in discussion question #3.

 Porter’s Five Forces Model (1990, 2008) should reveal that:

Rivalry among competing sellers is moderately high.

In the specialty coffee and tea retail industry, rivalry is based on an organization’s ability to develop, produce, brand and sell on a timely basis, new features and services that meet existing and anticipated demands. In this dynamic, fragmented market many rivals are working toward product innovation and geographical expansion because the payoff to be in many markets is so high. The payoff comes in the form of being a strong industry follower. Although entry barriers in regional markets are low, because of the moderately large investments that companies make to get started on a global scale, there is a high cost to exit. KGT is among the smallest among its rivals in terms of funding and employees, and this adds to the pressure, because it is vulnerable and prospective customers are less likely to purchase from them. But demand for its product is growing rapidly, which reduces the pressure. Adding the fact that the cost of switching is low for coffee and tea beverage consumers, results in moderately high pressure from rivals. KGT’s task is to create a branded product concept and maintain a competitive edge over its rivals. Protecting its innovations through the use of either patents or trade secrecy, and successfully being the first to market with the next generation green tea product could, at best temporarily, create the needed edge and a stronger position with buyers.

The threat of potential new entrants is moderate to high.

Specialized technological knowledge, resource requirements, and economies of scale are moderate industry factors. Branding and access to prime locations with high disposable income and adequate foot traffic can effectively bar entry.

The threat of substitutes is moderately high.

Coffee and tea beverages are in close competition with many well-established ready-to-drink items. The low cost of switching will initially be in KGT’s favor, but once the concept is proven, will induce copycat competitors as well as price competition from established firms like Starbucks and Caribou Coffee that already offer some version of the green tea drinks.

Supplier power is moderate.

Green tea suppliers, except perhaps for exporters to the U.S. market, have relatively little power, and this can be a key area for KGT to gain a competitive edge given its ownership by Ito En, the largest green tea manufacturer in Japan. The raw materials could, most likely, also be purchased from several different vendors, which will allow for cost competition and possible efficiency. However, pressure comes from scarce and much-needed store talent. KGT must determine how to attract and keep highly skilled staff that can add value to their product concept and create a rewarding in-store experience for customers. While it fosters a culture of trust and harmony, KGT also needs to review training and compensation and promotion practices in order to make it harder for competitors to recruit and utilize this very important resource.