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Advertising Management – Cafe de Columbia Case Assignment

1) Describe the key issues facing the FNC.

The key issues facing the FNC are:

* Decline in coffee consumption: Per capita coffee consumption (cups per person per day) in the U.S. has declined by about 30% during the period 1950-2000. The decline has been particularly severe among females (37% versus 24% for males) and in the 20-29 year & 30-39 year age groups (68% & 65% respectively). Most of the decline can be attributable to the rising popularity of various types of soft drinks, bottled water, juices and ‘new age’ drinks that have been particularly targeted at the younger generation. In addition, increasing health awareness (in particular, the risks of high caffeine consumption) has also contributed to the decline in the coffee consumption.

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* Unfavorable industry structure: While there are more than 400 roasters in North America, four of them – Kraft Foods, Procter & Gamble, Sara Lee and Nestle (or the ‘Big Four’) account for about 75% of the retail market share. Hence, these companies enjoy significant bargaining power with respect to the coffee growers. Private labels are however emerging as significant players in the retail market and, by virtue of their lower overhead costs, are exerting a downward influence on pricing.

* Increasing price sensitivity / lower quality differentiation in the minds of consumers: Given the decline in overall market, the Big Four & the private labels have resorted to greater use of the relatively cheaper robusta beans in their coffee products in order to reduce their cost of production and maintain aggressive pricing. As a result, the differentiation between the various varieties of coffee (for example arabica versus robusta-based coffees, 100% Cafe de Columbia versus other Columbian coffees and miscellaneous mild products) and different brands at the retail level has declined. Moreover, the frequent use of price promotions by the major roasters has further increased the price-sensitivity and reduced the quality-consciousness of consumers. These developments have been particularly detrimental to FNC since it markets the 100% Cafe de Columbia as a high quality product and expects to charge a higher price for it (since the cost of production of the Columbian coffee is higher than that of other countries).

* Changing dynamics of world coffee production: International prices of coffee have declined significantly in recent years due to stagnant consumption and rising production, especially from newly-emerging coffee producers like Vietnam and Indonesia. The share of robusta beans in total coffee beans production has increased from about 25.4% in 1980-81 to 33.4% in 2000-01. In addition, the overall quality of robusta beans has also improved. These factors, in combination with the recent decline in the quality of arabica beans from Columbia (due to harmful weather conditions and a plague that affected the coffee beans crop) have further eroded the image of premium quality arabica coffee beans.

* Emergence of specialty coffee stores & the gourmet coffee sector: In contrast to the overall decline in per capita coffee consumption, the consumption of gourmet coffee products (such as espresso, iced tea and blended coffee products) has been rising gradually. However, gourmet coffee drinkers drink coffee less frequently; in addition, many of these products (e.g. frapuccino) use a relatively small proportion of coffee. The popularity of gourmet products has risen further with the proliferation of espresso bars and coffee stores (e.g. Starbucks). The latter are however generally averse to ingredient branding (e.g. ‘100% Cafe de Columbia) and only mention the country of origin for the coffee beans.

What are the political and economic issues that they must be aware of, and how should their marketing strategy factor in those considerations?

Macro-economic and political issues: Although coffee’s share of total Columbian exports has declined sharply in recent years (from 82% in 1955 to 9% in 2000, mainly at the expense of oil products), coffee remains an important part of the Columbian economy. Because of the labor-intensive production process, the coffee industry serves as one of the main sources of income for about 4 million people, accounting for about one-third of rural employment.

With the decline in economic activity in the country (due to the 1998 recession) and increasing levels of violence in the countryside, the rural-to-urban migration in Columbia has increased significantly in recent years. Many local coffee growers are getting discouraged at their inability to make a decent living and resorting to plantation of different crops or even joining rebel forces or paramilitary groups. Hence, these factors could have an adverse impact on the level and quality of coffee production in the country.

Given the above, it is clear FNC’s attempts to enhance revenues from coffee production (through higher usage as well as better prices) could go a long way in improving the living conditions in the rural areas, encouraging productive activities (rather than participation in violence) and having a favorable impact on the country’s economy.

Micro-economic issues:

FNC’s activities are financed through the ‘Coffee Contributions’ made by its members (coffee producers) into the National Coffee Fund (NCF). However, due to the decline in coffee prices, FNC’s cash flows have eroded and it has been forced to cut the level of advertising in recent years in order to have sufficient resources for other needs (for e.g. R&D and the purchase of entire crop at a certain minimum sustenance price level). This situation has put FNC in a quandary since without the necessary investments in advertising and other promotional activities, it will not be able to enhance revenues from coffee production.

2) Outline what you believe the FNC’s program objectives should be for 2003-04.

The main objectives of FNC for 2003-04 should be as follows:

* Enhance the value of the ‘100% Cafe de Colombia’ brand: This would be a critical component of the overall objective of increasing revenues from coffee production. Enhancing the brand value is critical since coffee is essentially a commodity product. FNC represents only a portion of Columbian coffee growers & the remaining growers produce coffee of a similar variety & quality as FNC does. In addition, countries other than Columbia also produce the ‘Colombian Milds’ variety (that FNC marketed) as well as other similar mild varieties of coffee. Furthermore, the cost of production of Columbian growers is higher than that of the growers in other countries. FNC’s objectives extend far beyond merely providing a common platform for small coffee growers – it is also responsible for promoting education & healthcare in the local communities, and monitoring R&D, shipping, logistics and quality control. All of the aforementioned reasons make it imperative that FNC expend resources to differentiate its product from others and charge a premium price.

* Expand customer base: As mentioned previously, coffee consumption has suffered a particularly sharp decline among people between the ages of 20-40 years. And although statistics for the teenage population are not available, it is well known that drinks other than coffee (such as soft drinks, juices and water) are also far more popular among this segment of the population than coffee is. Since long-term consumption habits (including for coffee) are formed in young adult life, it is critical for FNC to target these segments of the population in order to expand its existing customer base and lay the groundwork for lifelong consumption.

* Expand product usage: Research has shown that coffee is increasingly seen as a breakfast-time drink. The proportion of coffee consumed at breakfast has increased from 43% in 1950 to 61% in 2000. In contrast, the coffee consumption during other meals of the day has declined by about 84% during the same period, while that at other occasions (e.g. eating places) has fallen by around 23%. Clearly, an increase in the number of ‘product usage occasions’ will have a major impact on overall coffee consumption.

* Retain existing customers: Notwithstanding the above, it is also critical for FNC to retain its existing consumers, most of whom are over the age of 40. Hence, while developing its marketing communications program, FNC should ensure that the existing customer base is not alienated while a new one is being targeted.

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