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Case study: Monopolistic Competition
Aussies flock to local baristas as big coffee-chains struggle to grind out market share
19 September 2014, Smart Company
It seems it is not just Melburnians who love their coffee. Australia wide, the $4.3 billion-dollar coffee industry is expected to grow by an annualised 3.2% over the next five years.
But the coffee industry is one where the big end of town is failing to keep up with the small guy, as consumers continue to choose independent cafes and coffee shops over chain stores, according to research from IBISWorld.
The research comes months after it was revealed US coffee giant Starbucks is struggling amidst Australian coffee snobbery, consequently being sold off to the Rich-Lister Withers family.
The report found the quality of the coffee is crucial to customer choice in Australia, with coffee brand, texture, temperature, milk and even the level of crema in an espresso becoming increasingly important to customers.
A growing number of small speciality cafes and coffee shops have resulted in a high level of competition in the industry, which is characterised by low barriers to entry and low industry concentration.
There are around 6700 coffee businesses operating in Australia, with no major player holding more than 5% of the market.
The Coffee Club chain has the largest market share, but that is only an estimated 4%, followed closely by Gloria Jeans (3%) and Michel’s Patisserie (3%).
IBISWorld senior industry analyst Ryan Lin told SmartCompany the high profile sale of Starbucks earlier in the year was testament to the fact externally operated coffee chains aren’t performing well in the Australian coffee climate.
“The Australian coffee culture is very unique,” says Lin.
“It has been ever since early European settlement.”
Lin says that the burgeoning independent coffee shop scene is largely concentrated to Melbourne and Sydney because of this higher demographic of European background.
He says the low barriers of entry make it easy for independent coffee shops to start up and close easily, with new operators minimising establishment costs by leasing premises, equipment, furniture and fittings.
Lin says local operators are able to compete with the prices of big chains because of this and through value-added offerings such as customer loyalty cards or coffee and meal specials.
It is not all bad news for the coffee chains. Internationally known chains are performing well in high tourism locations, such as airports and Sydney Harbour, by appealing to international visitors without the same link to coffee heritage.
But while the big coffee chains look for tourists coming in, smaller coffee shops have their eyes on international shores.
The reports shows a number of Australian cafe owners have taken their concepts overseas, with both New York and London “increasingly awash with Australian cafes, with Australian-born and trained baristas seeking to introduce fine coffee to markets traditionally perceived as serving lower quality coffee”.
“The Australian coffee scene is now internationally recognised as among the world’s best,” says IBISWorld.
Source: http://www.smartcompany.com.au/growth/43846-aussies-flock-to-local- baristas-as-big-coffee-chains-struggle-to-grind-out-market-share/
1. The coffee industry is a typical example of monopolistic competition. We know this because the article states there:
a. Is a high level of competition in the industry, with low barriers to entry and with each coffee business selling the same type of coffee
b. Is a low level of competition in the industry, with medium barriers to entry and with each coffee business selling coffee that differs in quality
c. Is a low level of competition in the industry, with high barriers to entry and with each coffee business selling coffee that differs in quality
d. Is a high level of competition in the industry, with low barriers to entry and with each coffee business selling coffee that differs in quality
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