Black Canyon Coffee

Black Canyon Coffee (BCC) is a Thai-based chain of coffee restaurants at the forefront of its domestic specialty coffee market. This case incorporates content which can be used to illustrate a broad range of strategic analysis, formulation, and implementation concepts. It is specifically about matching the company’s strategic choices with conditions in the environment. The case is set at a juncture in time (2002) when the young company needs to clearly define organizational goals that will guide BCC in an increasingly complex environment.

The case opens with background material on BCC and its founder. It establishes the market conditions, consumption patterns, and competitive atmosphere of the specialty coffee business in Thailand. Then Black Canyon Coffee’s strategy and operations are described. The case closes by presenting the product and geographic expansion options being considered by the company.

Given the dynamics and complexities of the worldwide coffee beverage market, BCC has many critical strategic decisions to make as it confronts increased competition in the home market and pursues growth beyond its national borders. This analysis will produce a full understanding of the company’s current situation, identify and isolate the factors that are relevant to the decision making process, and facilitate the development of clear cut objectives and decision criteria to aid Black Canyon Coffee in making those decisions.

Review the conditions in BCC’s external environment, and assess how they impact the company’s strategic choices. What does this assessment reveal about Black Canyon Coffee’s strategic needs? Review and summarize BCC’s organizational strengths and weaknesses. Assess the company’s ability to respond to conditions in the external environment. Based on a full understanding of the company’s current situation, how would you define BCC’s strategic priorities? Using the discoveries made during your analysis, how would you advise BCC’s leaders to design the company’s international
strategy?

ANALYSIS

Review the conditions in BCC’s external environment, and assess how they impact the company’s strategic choices. What does this assessment reveal about Black Canyon Coffee’s strategic needs?

In the Thai coffee market, the following conditions have an impact on the strategic decisions being made by the company.

The political stability and high literacy rate of the democratic Thai nation will be attractive to foreign investors looking to Asia for growth opportunities. Coffee demand, which tripled during the past 10 years, is expected to increase another 50% by 2010. Combined with the evolving sophistication of consumers and Thai coffee culture, this remains a promising growth market for both international and local chains. Black Canyon Coffee can expect increased competition for market share from rivals with substantial resources. 19.3% of the country’s population is located in urban centers, and half of that percentage is located in the city of Bangkok. The competitive threat posed by Starbucks (and other foreign chains which will follow the industry leader’s successful entry into a new market) is likely confined to these denser commercial markets.

The consumption of alternative beverages (juices, nectars, and bottled waters) is also increasing at a healthy rate of 30%. Competition from providers of these substitute products will negatively influence the profit potential of the coffee market in Thailand. However, this trend will harm its competitors more than it will harm BCC. Because of the full line of hot and cold beverages offered on Black Canyon Coffee’s menu, the company can easily offer these popular beverages for sale to customers. The expansion of local coffee chains is likely to emulate Baan Rai’s model of roadside or kiosk locations. The availability of full-size restaurant sites is limited, and this approach offers smaller companies the opportunity to tap into a growing market with lower investment costs. It is uncertain whether regional coffee chains will enter Thailand. Their decisions may hinge on whether BCC enters their home markets or behaves competitively in response to their expansion activities.

The Thai government is friendly to the interests of other Asian nationals, but protective of domestic coffee producers. These policies suggest that regional chains would be welcome in the Thai market, but that continued increases in imports of premium European coffees might be curbed. As independent coffee shop owners struggle to achieve profitability and seek an exit strategy, BCC should consider how an acquisition strategy could help the company achieve the objectives of its domestic business strategy. Predictions of industry consolidation imply that BCC cannot safely implement a tepid strategy. It will need to decide if and how to devise a comprehensive international strategy or to retrench into a domestic-dominated strategy with the intent to fortify the home market.

Overall, the world-wide market for coffee is enormous, and it continues to demonstrate an upward growth trend. This provides Black Canyon Coffee with opportunities to expand its business throughout the world. But other, larger coffee specialty companies will also be pursuing these opportunities. Also, rising coffee demand in Asia exceeds growth levels in Western nations – another reason that an increase in foreign interests is expected in the Thai market.

Black Canyon Coffee’s Managing Director Pong has recently initiated BCC’s expansion into international territory. In addition, the company is still seeking ways to grow its domestic business; and Pong has given serious consideration to other market opportunities associated with (1) selling branded Black Canyon coffee beans in supermarkets and other retail outlets and (2) developing a new restaurant concept. Depending on the decisions BCC makes and the direction it takes, other opportunities also exist, such as developing Asian brewed teas or a specialty tea product line to substitute for pre-packaged and ice tea products which are growing in popularity.

Currently, Black Canyon Coffee’s stated vision is to “Be the best coffee house and international cuisine restaurant in Thailand.” While this broadly describes what the company aims to achieve, it provides no strategic direction for its international expansion efforts. In addition, the company’s existing objectives in support of its mission are vaguely defined. They provide no context for measurement in terms of volume, market share, or profitability. BCC needs both updated vision/mission statements as well as more precise business goals to steer the organization forward.

Given the environment described above, continued survival will depend upon the company’s ability to defend its home market against invading global branded competitors. And growing the business internationally will depend on a substantial global expansion strategy and on the ability to secure the resources to support such an initiative. Even though a regional strategy does not enable BCC to make a viable bid at a global leadership position in a future consolidated industry, it does strengthen the company’s ability to defend the home market with a larger regional posture. To choose amongst its strategic options, BCC needs to consider how it can create the greatest value with the firm’s available resources.

Review and summarize BCC’s organizational strengths and weaknesses. Assess the company’s ability to respond to conditions in the external environment.

Shifting focus to Black Canyon Coffee’s internal environment provides an understanding of the company’s capabilities to respond to the opportunities and threats in the external environment. Ultimately strategies should be selected which take advantage of BCC’s strengths. And weaknesses which can prevent the achievement of organizational goals require attention from the company’s management team. BCC’s strengths and weaknesses are summarized below.

Strengths

BCC owns the largest chain of coffee shops in Thailand. However, its core business is coffee and food. As the domestic market leader, the company earns 10% profit margins in what is considered to be a “low margin” market. The business is growing 15% to 20% per year without the use of debt or external financing. BCC has secured good locations throughout Thailand – primarily in commercial shopping centers and malls.

Black Canyon Coffee is perceived as a Western brand at a time when Western diets and drinks are gaining acceptance and global brands are penetrating the domestic marketplace. Compared to its competitors, BCC offers a quality menu at a reasonable price. Perhaps the greatest advantage to the company is its differentiation from competitor Starbucks in terms of store layout and menu. Because most competitors in the industry are also modeled after Starbucks, this differentiation is even more distinctive. The company’s unique blend of Asian-Thai-Western cuisine, quality service and products, and diverse beverage offering in a full restaurant setting distinguish BCC both domestically and in potential foreign settings. It positions the company in a way that is difficult for large global coffee companies to attack with their specific sets of capabilities.

The company enjoys a cost advantage and reliable supplies of high quality Thai-grown coffees. It has valuable experience with multiple outlet types as well as joint venture and cooperative franchise partnerships. Franchise owners have autonomy and knowledge of their local communities, which facilitates creativity, flexibility, and richer customer relationships. Black Canyon Coffee conceived and established the Thailand coffee house market which did not exist ten years ago. In its overseas locations, BCC’s niche is its Thai food offering (which is popular in Australia and the U.S.).

With these resources, Black Canyon Coffee clearly maintains the capabilities which will be needed to fortify and retain market share in the home market. They would also be sufficient to pursue a strategy aimed at regionally dominating the specialty coffee market.

Weaknesses

Black Canyon Coffee is quite small when compared to the industry giant, Starbucks. The company has no international exposure, and it has had to develop alternative outlets (mini-restaurants and kiosks) in Thailand due to constricted commercial development. Management resources for expansion are constrained, particularly when staff with language and other skills is required to open new international locations. While BCC’s supply chain is successful in Thailand, it has limitations when applied to the overseas model. And the company is severely lacking in capital required to fund major expansion initiatives.

Based on these shortcomings, it is evident that Black Canyon Coffee does not internally possess the resources required for a full-throttled global expansion strategy. And predictions of global industry consolidation indicate that companies which do not contend for a leading industry position will eventually be eliminated by powerful competitors.

Based on a full understanding of the company’s current situation, how would you define BCC’s strategic priorities?

The figure below depicts the forces shaping competitive expectations in the Thai specialty coffee market.
Without question, Black Canyon Coffee’s first strategic priority is to protect its dominant position in the home market. Domestic coffee sales are still expanding; and foreign and local chains are going to challenge BCC for market share. Even though the company will need to defend the market with fewer resources than some of its competitors, its capabilities match the needs of the market. Knowledge of the home market, a national profile, price and location advantages, local institutional support, government cooperation, and access to local suppliers of quality coffees are all advantageous factors which contribute to building a strong defensive posture for the company. BCC can also use its market power outside of Bangkok and other major Thai cities to withstand attempts by foreign and regional interests to grow beyond these population centers.

Its largest competitive threat, Starbucks, has specific weaknesses that can be exploited by BCC to protect market share. The international coffee giant’s menu offering is limited to pre-packaged or baked food items along with coffee, tea, and bottled drinks. Its prices are high, and the quality of Starbucks coffee is inferior to locally grown product. Some of its Asian operations are not profitable, or in the case of Japan, yield very low margins. Starbucks’ knowledge of the local community is also limited; and despite its success, the corporation holds only 4% of the total worldwide coffee market. Consequently, Starbucks is vulnerable to a multitude of competitive forces in each nation that it operates and may be unable to respond to remote competitive conditions. Finally, Black Canyon Coffee’s differentiated approach enables the company to stand apart from the cookie-cutter Starbucks model. And it facilitates a variety of strategic options that allow BCC to avoid head-to-head combat against this powerful rival.

Because of the need to protect its status and performance in the home market, strategic initiatives which strengthen the brand (such as selling branded Black Canyon coffee beans in supermarkets and other retail outlets, diversifying the product line by offering specialty or brewed teas, etc.) should be pursued. In addition to reinforcing the company’s national dominance, such strategies will discourage other foreign coffee houses from entering the Thai market. BCC should also consider acquiring independent coffee shops which are actively exiting the market to eliminate domestic competitors and increase store profitability in markets that support fewer coffee shops, to gain access to limited commercial locations which currently constrains domestic growth, and to prevent other competitors from entering the market to fill a void.

The second major priority for BCC is to clearly define the scale of its international strategy, which markets the company plans to enter, and the entry mode which will best enable the organization to match its objectives with market conditions. A component of these decisions is to consider the implications of limiting expansion to only nearby Asian countries, either as an end-game strategy or as a stepping stone toward expanding globally.

Finally, it is essential for Black Canyon Coffee to obtain the amount of capital required to execute its expansion plans. Whether the company approaches venture capital firms, solicits lenders, or decides to sell stock to fund its strategy, it must understand the costs, risks, contractual requirements, degree of flexibility, loss of control, and stakeholder expectations associated with each option. The company should be aware that introducing capital stakeholders to access this critical resource increases BCC’s external commitments; and balancing the interests of multiple stakeholders who are impacted by the firm’s performance outcomes complicates strategic decision making.

STRATEGY

Using the discoveries made during your analysis, how would you advise BCC’s leaders to design the company’s international strategy?

Defining International Scale

Internationally, Black Canyon Coffee has only ventured beyond Thailand into a handful of Asian nations. This initial regional growth enables the company to take advantage of existing supply chain competencies and local supplies of fresh, high-quality coffee at a managerial pace that does not overtax corporate resources. In addition, cultural familiarity with neighboring countries facilitates easier international transactions. Despite the advantages of this approach, BCC should tread lightly in areas where regional competitors can be awakened by threats to their home markets. For instance, it is unclear why the company elected to open its first foreign coffee shop in the home market of regional competitor, Coffee Bean. This move is likely to produce a competitive response from the competitor and possibly attract the rival’s interest in the Thai market.

Alignment with the company’s domestic capabilities should enable Black Canyon Coffee to compete effectively and gain market share in the Asian region. However, the foundation for success in international markets diminishes as geographic diversity increases. The further from Thailand that BCC decides to operate, the greater the need to build new supply chain and logistical systems, to find local partners who understand the new markets and can adapt the company’s strategy to local conditions, and to secure substantial sources of capital to fund expansion. Combining the liabilities of foreignness with the limitations of managerial and staff resources, Black Canyon Coffee is not yet prepared for broad international expansion that would make it a contender for a global leadership position when the industry consolidates.

Before the company can successfully enter remote geographic markets, BCC needs to understand and acquire the skills and resources necessary to meet its goals. Given the company’s resource constraints, immediate entry into regions such as North America or the Middle East can be achieved only through strategic alliances or licensing agreements with partners that have sufficient knowledge and resources to contribute to the venture. Without a cooperative strategy, full and rapid international expansion is unlikely. And again, substantial sources of capital would need to be secured to pursue this strategy.

The argument for entering high volume markets is the potential for product acceptance and revenues based on high levels of demand. However, if these markets are heavily penetrated or not growing rapidly, entry will be more challenging. (For instance, Europe and Scandinavia are experiencing falling consumption rates.) In these markets, competitors should be expected to take defensive measures against new foreign coffee shops, prime locations are likely to be taken, and entry into mature markets is generally more risky.

In moderate consumption markets, conditions vary. Entry into America requires new logistical and operational systems. However, existing coffee suppliers from South America could feed operations in this part of the world. There appears to be an opening in the market due to consumers switching from standard coffee products to upscale specialty drinks. 62% of the U.S. population is now classified as occasional drinkers of specialty coffees. With its differentiated brand, high quality product offering, and Thai food niche (recall that Thai food is popular among Americans), BCC might present a more enjoyable eating/coffee drinking experience that could successfully compete against American coffee giants.

Some of the U.S. market may not relate to Starbucks (which is perceived as overpriced), but might relate to the Black Canyon Coffee brand. Additionally, professional market research is recommended to determine how American markets would respond to BCC’s Wild West theme, which suggests rebellion and ruggedness. Also, trial operations in a country such as Australia (geographically closer to Thailand) would be a good opportunity to learn about operating in a more Western nation. Due to the political uncertainty in the Middle East, proceeding with plans to open coffee shops in these nations should be pursued with great caution.

In low consumption markets, demand can only grow. With the company’s experience at creating a new market where formerly there were few coffee drinkers, it is actually a good fit to enter nations where people drink less than 2 kilos per year. With the exception of Mexico and the Middle Eastern countries, this is primarily an Asian segment. In addition to the benefits described above, expansion into these markets is particularly appealing because they are unlikely to attract foreign chains; and early entry may remain unchallenged long enough to establish a strong foothold.

Because the strongest international companies are likely to survive industry consolidation, at a minimum BCC should establish a plan for growth beyond Asia – even if acting on the plan is delayed until the resources and appropriate entry strategy are in place.

Selecting Entry Mode

Black Canyon Coffee entered Singapore with a small equity stake in a joint venture. This strategy enables the company to expand with a partner to share costs, resources, and risks in a new market. A strategic alliance with local interests enables the firm to gain knowledge of legal, social, and cultural norms so that it may more quickly become competitive. The downside to such a strategy is that BCC has to share decision making and returns on the venture.

For the purposes of growing its international business profile, acquisitions can be used to enter markets very quickly, but the costs are high and integration with domestic divisions can be complicated. Alternatively, licensing arrangements have low costs and risks, but at the expense of less control and lower returns. Considering BCC’s options, continuing with cross-border strategic alliances is the mode of entry best suited to the situation at hand. The fact that firms competing internationally tend to outperform domestic-only competitors suggests the importance of learning how to geographically diversify. Compared with mergers and acquisitions, cross-border alliances seem to be a better way to learn this process during the early stages of international expansion. And joint ventures are perhaps the most effective way to gain access to compete in uncertain environments and to transfer tacit knowledge for the purpose of cultivating the core competencies required for success.