The Broadway CafÐ"©- Porter's Analysis

1. The Broadway CafÐ"© History

The cafÐ"©, I inherited from my grandfather is located Downtown Raleigh, NC on the Fayetteville Street. The cafÐ"© offers many different kinds of specialized coffees, teas, a full service bakery, and homemade sandwiches, soups, and salads. My grandfather first opened the Broadway Cafe in 1952 and it has been a local hotspot for many years. Unfortunately the business has been declining for the last five years and inevitably is going to hit the wall soon if some staple measurements using business techniques and technology aren’t taken.

It is also worth noting that Fayetteville Street, where the cafÐ"© is located, is now undergoing magnificent cityscape projects valued over $2 billion dollars, which will bring more crowds to downtown. So every attempt to recover the business to yield success will have a high payback.

2. Porter’s Five Forces Analysis

Rivalry: High

The first force Michel Porter describes is the current Rivalry among existing companies.

The coffee shop business is mainly framed in 2 mainstreams. First group is the major players like Starbucks, Seattle's Best Coffee, Dietrich, Brewsters, New World, Gloria Gears, which can be denoted as Specialty Brands. Second group contains One-Store coffee shops like The Broadway CafÐ"©. These are generally local, small businesses.

The coffee shop industry possesses a very high intensified competition on all players: both Specialty Brand and One-Store Coffee Shops. The main reasons that contribute to the high competition are

• The number of shops is huge (hoovers.com)

• Competitors are selling same or similar products, including specialty coffees as well as high quality foods.

• The fixed cost portion constitutes a high portion of the cost structure. Companies should sell more products to cover these costs, which increases competition.

Threat of Potential Entrants: High

Porter’s next force is the threat of Potential Entrants. The threat of entrants for Specialty Brands is not that high as for One-Store Coffee Shops. The Specialty Brands like Starbucks determine the industry guidelines. They are innovating and showing strong product differentiation. That differentiation is like a barrier for new entrants in this segment. The new entrants should compete with these respected brands. On the other hand, this is not the case for one-store coffee shops; the same threat is very high for these shops with the following reasons:

• The entry investment is not high.

• There are not any legal barriers.

• National food servers like McDonalds started to create strong coffee menus and becomes the strongest competitor (msn.com).

• The industry is growing i.e. from 2002 to December 2004, the market it estimated to grow 14%. (hoovers.com). There are many investors who find that industry very attractive.

Bargaining Power of Buyers: High

The Broadway CafÐ"© customers are her buyers. They have a High buyer power for the following reasons:

• The product - coffee is basically same from all companies. It can be found at every corner.

• Customers will face no switching costs in switching from The Broadway Cafe, to, for example, next coffee shop 200 yards away. This is a threat to The Broadway CafÐ"©.

• Customers have the ability to brew their own coffee at home.

Even though the buyers do not buy on price alone, they are price sensitive to some extent.

Bargaining Power of Suppliers: High (for premium coffee)

Coffee is the world’s second largest traded commodity (Reality Based Trading Company). South and Central America produce the majority of coffee traded in the world. But still, it is hard to find the quality coffee beans while there are many quality coffee shops in the market.

• An over-crowded market gives the coffee suppliers bargaining power

• The supply of coffee is affected by weather conditions, and the health of coffee trees.

• The price of the coffee bean could rise in the future due to lower supply, and heightened demand.

• The industry buying guidelines introduced by Starbucks brings a definition for Premium coffee and all good players follow that.

• The Broadway Cafe will play in the ivy league of coffee buying only premium coffee. This will decrease our buying bargaining power but quality will pay off.

Note: The coffee is a commoditized product. Ordinary type of coffee is easy to buy and for that ordinary coffee segment Power of Suppliers may be low. But for premium coffee, which we intend to use at The Broadway Cafe, the supply is scarce and the Power of Suppliers is High.

Threat of Substitute Products: High

There is a large threat of substitute products in a food and drink industry.

• Tea (there is a tea house 4 blocks away)

• Mocha / Frappuccino

• Juices

• Sodas

• Beer (Even Starbuck plans to add beer to its product spectrum)

• Home Brewed Coffee

3. Porter’s Three Generic Strategies

Porter describes the 3 strategies to compete as follows:

• Cost Leadership

• Differentiation

• Market Segmentation (focus)

Combining multiple strategies is successful