coffee wars project

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Coffee Wars

Brand Equity: The Most Profitable Roast

Natalie Cullings & Gloria Castro

Professor John Fisher

MKT4515-02

13 March 2013



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Industry Overview

The coffee production industry is $27.8 billion U.S. industry characterized by the

production and processing of coffee beans into roasted, ground, or flavored coffee products, as

well as coffee concentrates, extracts, flavorings, and syrups (IBIS World). The industry has faced

increased demand and growth over the course of the last five years, especially due to the fast-

paced expansion of coffee shops. The key economic drivers of this industry include consumer

spending, the healthy eating index, the consumer sentiment index, and per capita coffee

consumption (IBIS World). The industry grew at an annual rate of 1.2% from years 2007 to

2012, but is projected to grow at an annual rate of 4.0% through the year 2017 (IBIS World).

Despite the surge within the coffee industry over the last decade, the market faced an

economic slump in 2009 which was coupled with changing consumer tastes. Major competitors

within the industry are adapting their future strategies to the evolving trends within the industry:

To combat slumping sales, major operators like Starbucks and Dunkin' Donuts areanticipated to expand their menus over the next five years and increase their

offerings of nontraditional, high-margin menu items like iced coffee drinks, breakfast items and healthy wraps. These additions are expected to aid thesecompanies in their turnaround. Many major chains are also investing ininternational growth as part of a long-term strategy. (IBIS World)

Passing on high input prices to consumers has enabled the coffee production industry's major

players to realize slightly higher profit, despite low consumer spending during the past five years

(IBIS World). The strong brand loyalty that the major players command has also contributed to

their high margins and revenue growth. The industry's ability to adapt to changes, like the rise of

ethical consumerism and the increased awareness of fair trade and organic coffee production

methods will largely influence future demand and consumption (IBIS World). Consumers have

grown increasingly health conscious over the past five years; IBIS World reports that “the

http://www.ibisworld.com/industry/default.aspx?indid=272&partnerid=prweb

http://www.ibisworld.com/industry/default.aspx?indid=272&partnerid=prweb



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general trend toward healthy eating has hurt the industry's unhealthier segments, such as donut

and ice cream shops.”

The coffee industry is a highly competitive, moderately concentrated market in a mature

life cycle stage; it has relatively low barriers to entry, but the major players within the industry—

Starbucks Corporation and Dunkin’ Brands, Inc.—hold high market share levels (IBIS World).

McDonalds has entered the coffee industry and gained market share through its sub-brand

McCafe. An integrated view of the coffee industry’s history, projected future, and current trends

proposes a huge question: which major player within the coffee industry will eventually win this

competitive “coffee war?”

Major Players

Dunkin Donuts

Dunkin' Donuts is the world's leading baked goods and coffee chain; it is a subsidiary of

Dunkin’ Brands (DunkinDonuts.com). It sells more than 1.5 billion cups of coffee per year

(DunkinDonuts.com). William Rosenberg founded the first Dunkin’ Donuts in Quincy,

Massachusetts in the year 1950; Dunkin' Donuts became famous for its many varieties of donuts

and wide range of bakery products including muffins, bagels and MUNCHKINS® donut hole

treats (DunkinDonuts.com). Dunkin' Donuts is also known for its coffee and specialty beverages

such as freshly brewed hot coffee (in up to nine flavors), espresso-based drinks, refreshing Iced

Coffee, and COOLATTA® beverages (DunkinDonuts.com). The company has approximately



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10,000 distribution points in 32 countries worldwide, roughly 7,000 of which are in North

America (DunkinDonuts.com). The rest are in key international markets including the Asian-

Pacific and Latin American markets (DunkinDonuts.com). As of December 2012, Dunkin’

Donuts enjoyed a 24.5% market share within the U.S. coffee production industry (IBIS World).

Starbucks Corporation

Starbucks is the premier roaster and retailer of specialty coffee in the world; there are

nearly 18,000 retail stores spread out among 60 countries internationally (Starbucks.com). The

first Starbucks store was open in the year 1971 in Seattle, Washington’s Pike Place Market;

however, it wasn’t until Howard Schultz, Starbucks’ current CEO, traveled to Italy in 1983 that

he sought to embody the Italy’s coffeehouse culture within the company (Starbucks.com).

Today, Starbucks offers more than 30 blends and single-origin premium coffees along with

handcrafted beverages including hot and iced espresso drinks, Frappucino® coffee and non-

coffee blended beverages, smoothies, and Tazo® teas (Starbucks.com). Starbucks also offers a

wide variety of merchandise and fresh food which includes baked pastries, sandwiches, salads,

oatmeal, yogurt parfaits, and fruit cups (Starbucks.com). Starbucks’ mission is “to inspire and

nurture the human spirit—one person, one cup and one neighborhood at a time”

(Starbucks.com). Lastly, As of December 2012, Starbucks commanded a market share of 36.6%

within the U.S. coffee production industry (IBIS World).



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McDonald’s/McCafé

McDonald's is the leading global foodservice retailer with more than 34,000 local

restaurants serving nearly 69 million people in 119 countries each day (AboutMcDonalds.com).

Ray Kroc opened the first McDonald’s in Des Plaines, Illinois in the year1955

(AboutMcDonalds.com). McDonald’s is famous for its fast-food offerings including burgers and

sandwiches, chicken and fish, breakfast selections, salads, snacks and sides, beverages, and

desserts and shakes. McCafé is a sub-brand of McDonald’s that competes within the coffee

industry. The first McCafé was launched in Australia in 1993 and debuted with the U.S. in Oak

Brook, Illinois in 2001 (Entrepreneur). McCafé offers a variety of products including hot and

iced coffee, real fruit smoothies, shakes, Frappés, and espresso-based beverages. McDonald's

brand mission is to be our customers' favorite place and way to eat (AboutMcDonalds.com).

Industry reports on the coffee industry do not yield specific market share information regarding

McCafé; a possible reason for this lack of specific data may be that McCafé is a sub-brand and

represents a segment of the larger foodservice industry that McDonald’s competes within.

Who Will Win the “Coffee War?”

Dunkin’ Donuts, Starbucks, and McDonald’s are the leading competitors that are battling

one another to win the great “coffee war” within the coffee industry. Who will win? More

importantly, how will the victor be evaluated? The competitors will be compared through 2

different models of brand equity frame work: the David Aaker Model and the Robert Kopp



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Model. Ultimately, a brand equity model assesses the current strengths and weaknesses of a

brand and may act as a predictive tool for the future potential of the brand—harnessing and

fulfilling that future potential is the key to winning the “coffee war!” The Aaker Brand Equity

Model is represented by a wheel made up of 5 key criteria: awareness, association, quality,

loyalty, and other assets. The Kopp Equity Model is represented by a pyramid of criteria that a

brand must progressively build to ultimately achieve brand equity at its third-tier peak. Value

proposition and value delivery, comprised from the 4 P’s—product, place, price, and promotion,

makes up the foundation criteria of the pyramid. The second tier criteria are the brand’s

personality, authenticity, and assets. These five criteria work together to drive important business

strengths and outcomes such as brand loyalty, top-of-mind awareness, brand valuation,

profitability, and leveragability. The competitor who achieves the highest brand equity, as

indicated by its combined performance on both brand equity models, will win the “coffee war.”

Each brand’s performance will be based upon industry/market research information and the

consumer perceptions collected from 15, in-depth surveys that were conducted over Babson

College Campus, Wellesley Square, and the Natick Collection; the pool of respondents varied in

both age and gender. Brand equity models are research driven and consumer centric; the victor

of the “coffee war” understands and acts upon its consumers’ perceptions (and preferences).

The Aaker Brand Equity Model

Awareness

Awareness is a function of recognition and recall that generates a strategic understanding

of a brand (as opposed to a general awareness). As leading global brands, Dunkin’ Donuts,

Starbucks, and McDonald’s all have an extremely high level of recognition, although McCafé’s

recognition is lower as a sub-brand with a shorter brand history. However, whereas Dunkin’



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Donuts and Starbucks also excel in regards to recall, McDonald’s suffers; when the coffee

market is cued, Starbucks and Dunkin’ Donuts come to mind, but McDonald’s does not. This is

due to the fact that the McDonald’s brand is primarily associated with the foodservice industry.

Dunkin’ Donuts and Starbucks hold higher overall awareness levels than McDonald’s within the

coffee industry.

Associations

Brand associations are driven by brand identity and reflect what the brand means through

the lens of consumer perception. Associations are also key drivers of brand personality and help

to differentiate a brand, and a reason to buy it, over its competitors. Although a brand can be

associated with nearly any aspect of a consumer’s perception, associations can be groups into

key categories: visual imagery/metaphors, country of origin, organizational attributes, local vs.

global, brand/customer, brand heritage, product class/scope, use/application, quality/value,

lifestyle/personality, customer relationships, and product attributes. Survey Respondents were

asked to come up with words that came to mind when each brand was cued in general and when

certain aspects about the brands were cued such as its personality, relationship with customers,

etc. A summary of the associations that the respondents described Starbucks, Dunkin’ Donuts,

and McDonald’s with can be found in Exhibits 1, 2, and 3 respectively. Together these

associations help to craft each brand’s identity on four levels: product, person, organization, and

symbol.

Quality

Quality, whether actual or perceived, wins in the marketplace. Quality helps to

differentiate a brand, contributes significantly to its customer value proposition (CVP), and may



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help to position a brand’s products. As a primary driver for consumer perceptions, the claim of

quality must be genuine. The perceptual research technique of a perceptual map will be used to

evaluate each competitor’s perceived quality in the “coffee war.” A perceptual map measures

consumers’ ratings on a brand’s certain attributes—in this case based on similarities of the

attributes—through a pictorial representation. The perceptual map constructed for the “coffee

war” is based on relative judgments regarding the soft attributes of the brand as an experience vs.

a product (x-axis) and as low quality vs. high-quality (y-axis). Data has been collected and

compiled from the conducted surveys in order to create an attribute-similarity-based perceptual

map which compares brands through a multi-brand basis (Exhibit 4). Starbucks is the only

competitor who was ranked in the quadrant marked by both high quality and experience; overall,

Starbucks was perceived to have the highest level of quality (Exhibit 4).

Loyalty

Loyalty to a brand is a function of the brand’s awareness, associations, and quality; the

sum of these criteria is proportional to consumers’ loyalty to a brand. Scott Talgo once said, “A

brand that captures your mind gains behavior. A brand that captures your heart gains

commitment.” This is the nature of loyalty. High levels of loyalty lower a brand’s marketing

costs, create powerful trade leverage, establish barriers to competition, and provide more time to

respond to competitive threats. Essentially, it takes less resources and money to retain a customer

through loyalty than to obtain a new one.

Survey respondents revealed their loyalty, or lack thereof, to Starbucks, Dunkin’ Donuts,

or McDonald’s through qualitative explanations (Exhibit 5). Dunkin’ Donuts achieved loyalty

through its New England regional heritage, convenience, and cheaper prices (Exhibit 5).

Customers preferred Starbucks for its specialty drinks, overall experience, high-quality, and



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coffee-related knowledge (Exhibit 5). One respondent preferred McDonald’s on road trips, but

otherwise no loyalties were communicated towards McCafé or coffee related products (Exhibit

5). Dunkin’ Donuts and Starbucks displayed relatively equal weights in consumer loyalty within

the coffee industry, however, since loyalty is an overall function of awareness, associations, and

quality, Starbucks commands a stronger combination of these factors.

Other Assets:

Other assets include logo, slogan, colors, symbols, metaphors, jingle, packaging,

advertisements, etc. which trigger both recall and recognition of a brand and contribute to its

overall equity.

Starbucks’ other assets include its green logo of a twin-tailed siren from Greek

mythology, the symbol of Seattle’s Pike Place Market, the Starbucks name originating from the

first mate in Herman Melville’s Moby Dick , and the company’s reference to its employees or

baristas as partners along with many more assets (Starbucks.com).

McDonald’s other assets include the Golden Arches, the symbol of Ronald McDonald, its

slogan “i’m lovin’ it,” its famous “Mc” prefixes, and the Big Mac among a plentitude of other

assets (McDonalds.com).

Dunkin’ Donuts other assets include its pink and orange color combination, its “DD”

logo, its “coffee cup” picture logo, and its slogan “America Runs on Dunkin’” to name a few.



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The Kopp Brand Equity Model

Customer Value Proposition

The customer value proposition (CVP) addresses the product and price elements within

the marketing mix; the overall value proposition is based upon the performance and features a

product delivers at a certain price level. The value a brand delivers, coupled with the relationship

with its customers, drives the ultimate purchase decision and provides the brand with a

meaningful competitive advantage.

The perceptual research technique of a value map will be used to evaluate each

competitor’s perceived value delivery in the “coffee war.” A value map plots the benefits

received from a brand (quality) on the x-axis against the price paid for those benefits on the y-

axis. Data has been collected and compiled from the conducted surveys in order to create a value

map that compares brands through a multi-brand basis on the value provided by each for its price

(Exhibit 6). Of the three competitors, Starbucks offers the most benefits, but also at a near-

proportionally high price (Exhibit 6). Dunkin’ Donuts offers a relatively mid-range of benefits,

while maintaining a lower price point than Starbucks (Exhibit 6). McDonald’s falls on a dually

low point for both price and benefits offered (Exhibit 6). Overall, Starbucks is able to position

itself with a strong CVP within a premium market of goods—a category that yields higher

margins—while Dunkin’ donuts positions itself with a strong CVP within a value market—a

category that yields lower margins (Mark and Vishwanath). McDonald’s fails in its attempt to

position itself with a strong CVP within a value market and teeters towards the lower end of its

low-margin category (Mark and Vishwanath).



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Value Delivery

A brand’s value delivery is made up of the promotion and place elements of the

marketing mix. Place elaborates on distribution channels and geographic reach of the brand.

McDonald’s, Starbucks, and Dunkin’ Donuts all maintain a global presence, yet McDonald’s has

the largest in scope while Dunkin’ Donuts has the smallest. In addition to in-store service,

Starbucks and Dunkin’ Donuts both sell coffee through retail, but McDonald’s only sells its

coffee in-store.

Promotion involves traditional marketing activities such as advertising and PR and helps

to drive consumer learning about the brand while engaging consumers. Analysis through James

Shroer’s ad-spending equation allows a thorough comparison of the effectiveness of each brand’s

promotional spending. Shroer’s equation states that share of voice (ad spend) = share of market

(market share). Starbucks spent a total of $111,826,687 million on advertising in 2011 primarily

through the magazines ($37 M), U.S. internet ($17 M), and national newspapers ($ 15 M)

channels (Redbooks). As of December 2012, Starbucks had a 36.6% market share of the coffee

industry within America (IBIS World). Dunkin’ Brands, Inc. spent a total of $128,328,361

million on advertising in 2011 primarily through the spot TV ($49 M), cable TV ($22 M), and

Network TV ($19 M) channels (Redbooks). As of December 2012, Dunkin’ Brands, Inc. had a

24.5% market share of the coffee industry within America (IBIS World). McDonald’s spent a

total of $996,726,940 million on advertising in 2011 primarily through the network TV

($321,971 M), spot TV ($164,716 M), and Cable TV ($143,047 M) channels (Redbooks). IBIS

World did not name McDonald’s or McCafé as a major player within the coffee industry in

America, nor did it provide any market share information regarding either brand. Overall,

Starbucks holds the highest share of the coffee market despite the fact that it is the competitor



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with the lowest voice; Starbucks’ is the most effective brand in terms of its promotional spending

and value delivery.

Brand Personality

According to Kopp, “Often personality is the only thing between your brand and the

competition.” Brand personality is a Gestalt concept meaning that it is a holistic view of both the

“thinking,” or functional, and “feeling,” or emotional, modes of thoughts; both modes must be

consistent and mutually supportive of one another to craft a strong personality. The survey

respondents described each brand’s personality with both “feeling” and “thinking” perceptions.

On the emotional side, Starbucks was considered a “friendly, personable, and made sure

everyone was having a good time.” Functionally, Starbucks was described as “reliable, high-

quality, upscale, and as providing a customer experience.” The Gestalt view suggests that

Starbucks is a fun and personable brand that delivers a true customer experience built around

high-quality products. Emotionally, McDonald’s was perceived as “distant, road trip, and

irritating” while “convenient, reliable, and unhealthy” characterized them in a functional sense.

The Gestalt view of McDonald’s suggests that it’s a convenient, widely-available brand that

serves relatively unhealthy food without an emotional connection. Respondents felt that Dunkin’

Donuts was a “common, neighborly, young” brand, but logically thought the company was

“efficient, reliable, and convenient.” A Gestalt view would argue that Dunkin’ Donuts is a

reliable neighbor that can always be counted on to provide good quality variety at a good value.

The Gestalt view reflects each brand’s positioning from a consumer perception stand-point.

Personality can be measured through three different frameworks: cultural relevance and

image, image and celebrity, and the “emotional ladder.” In this emotional ladder, a brand



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personality strives to communicate values to consumers—this is the highest rung in the ladder.

The lowest rung of brand personality provides features to the customer while the middle rung

provides benefits. Data collected from the surveys reveals that Starbucks is the only brand that

respondents perceived to communicate values to consumers; Starbucks appears to have the

strongest personality of the three competitors (Exhibit 7).

Authenticity

The authenticity of a brand involves its reputation, longevity and history, integrity, and

nostalgia; authenticity is built through rankings, consumer feedback, market share/sales, market

penetration, and consumer emotion. While Starbucks, Dunkin’ Donuts, and McDonald’s all hold

high market shares, McDonald’s does not hold a measurably high market share within the coffee

industry and therefore lacks authenticity in the market; Starbucks holds the most authenticity in

this regard. Consumer emotion was previously discussed in the brand personality section. All

three brands have distinct histories and have been in business for several decades. Starbucks

holds a strong reputation as a responsible company that gives back to local communities and the

environment, ethically sources its coffee, and fairly supports the coffee farmers it partners with

(Starbucks.com). McDonalds is known for its long-standing and respectable charity work

through the Ronald McDonald House (McDonalds.com). The Dunkin’ Donuts & Baskin-

Robbins Community Foundation has donated more than $2 million to organizations including

Feeding America, American Red Cross, and children’s hospitals (DunkinDonuts.com). Each

competitor is authentic in its own sense, yet consumer emotions (perceptions on the brand

personality and CVP) have, and will continue to, affect each brand’s authenticity in years to

come.

http://feedingamerica.org/

http://www.redcross.org/

http://www.redcross.org/

http://feedingamerica.org/



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Brand Assets

The brand assets component of Kopp’s brand equity model is nearly identical to the

“other assets” criteria in Aaker’s brand equity model; analysis of the three brands’ assets will not

be repeated to avoid redundancy.

The Victor

Market research and consumer perception surveys provided two strong, balanced sources

of information which allowed for a thorough comparison of the three competitors’ overall brand

equity. One brand outperformed the others in both models; Starbucks is the victor of the “coffee

war.” Starbucks has a strong personality, positive associations, high brand awareness, premium

quality in a premium category, high customer loyalty, brand assets with high recognition, strong

CVP and value delivery, authenticity, and a leading market share. Its brand equity evaluation

serves as a prediction for a strong future to come. However, Dunkin’ Donuts is a strong

competitor and McDonald’s has a lot of equity building to do before it can become a leading

force within the coffee industry. Starbucks understands, and effectively acts upon, its customers’

perceptions and values; the victor understands that true value extends far beyond its coffee.

“I pledge my honor that I have neither received nor provided any unauthorized assistance during

the completion of this work.”

Natalie Cullings & Gloria Castro



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Exhibits

Exhibit 1 Starbucks Corporation Associations

Exhibit 2 Dunkin’ Donuts Associations



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Exhibit 3 McDonald’s Associations

Exhibit 4 Perceptual Map



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Exhibit 5 Excerpts from Survey about Brand Loyalty

Exhibit 6 Value Map



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Exhibit 7 Kopp’s Emotional Ladder

Exhibit 8 Brand Identity: Core and Extended (Based On Survey Perception Data)

coffee wars project

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