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brand management assignment 1 for the case of second cup coffee Ivey Harvard research paper...

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10/10/2019

Second Cup: Going Back For A Second Cup - Ivey Business Review

Fall 2019 – Centennial – Marketing 717 (for student use only)

SECOND CUP: GOING BACK FOR A SECOND CUP Finding options for financially strapped Second Cup to re-establish its iconic brand identity Original: April, 2017 | Vishal Sharma and Raghav Srikanth Edited October, 2019 | Mark Deep

Not long ago, Second Cup Coffee Company (Second Cup) was considered the king of upscale coffee in Canada. The company has grown from its humble beginnings as a kiosk in 1975 to operating more than 300 Cafés across Canada at its peak. However, over the last 10 years, the premium coffee industry had undergone significant disruption from specialty Cafés and new international players, whose brands offered elite, specialized consumer experiences. This has gradually phased Second Cup out of the Canadian coffee market. This has significantly decreased the appeal of Second Cup’s premium coffee value proposition and has hindered their growth prospects. In fact, revenues have dropped 10 per cent over the last 10 years.

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Second Cup: Going Back For A Second Cup - Ivey Business Review

The introduction of CEO Alix Box in February 2014, a former Starbucks executive, also did little to spur growth of its retail coffee business. With competitors such as Tim Hortons, Starbucks, and McDonald’s all occupying unique niches within the Canadian market, the once up-scale Second Cup has seen its efforts to entice customers fall short, reflected by a stock price that has dropped 70 per cent since Box’s arrival. Limited Financial Capabilities On January 1, 2017, the company’s existing credit facility of $6-million matured and Second Cup was forced to generate funds from other sources to comply with the required bank covenants and debt obligations. Serruya Private Equity emerged as the only lender to offer Second Cup $8-million in cash to keep the business afloat at an alarmingly high interest rate of 10 per cent. Six million dollars of these funds were used to pay down the outstanding credit facility, with the remaining going towards general corporate purposes. Consequently, the company’s inability to generate sufficient cash flows from operations, due to declining foot traffic in stores, has put the business at risk of insolvency. Second Cup’s reliance on financial maneuvering to stay afloat shows that Second Cup’s ability to grow sustainably is limited. However, these financial problems are symptoms of a deeper issue, one wherein disincentivized customers have resulted in the closing of 20 stores over the past year. Ultimately, Second Cup’s lack of financial flexibility limits its ability to undergo a companywide rebranding effort. Franchising Difficulties Capitalizing on Second Cup’s Growth Potential Second Cup’s position is not all bad news for investors; in fact, it presents a fantastic opportunity for Second Cup to put up a ‘for sale’ sign on its front yard. To do this, Second Cup can leverage its primary asset: the prime locations of its under-utilized stores. These assets will present a unique value proposition to vendors who are seeking high foot traffic locations. Although Second Cup’s current financial constraints prevent them from properly capitalizing upon or further investing in these stores, a larger firm with greater financial resources will be able to take advantage of these currently under-utilized stores. In 2014, Second Cup initiated a store renovation project aimed at redeveloping its premium brand identity. During this time, the company made the decision to launch 14 Cafés that incorporated Second Cup’s new prototype redesign model, including a location in downtown 2/5

10/10/2019

Second Cup: Going Back For A Second Cup - Ivey Business Review

Toronto’s entertainment district. These redesigned stores, dubbed “Cafés of the future,” feature an on-tap dairy bar, murals by local artists, a central baking case, and a more dynamic seating arrangement; all in an effort to provide its consumers with an artisanal experience. The effects of this project have been overwhelmingly positive, with the downtown Toronto location turning cash flow positive. As well, same-store-sales increased by 48 per cent during the project’s first year and the location became profitable. Though this trial run demonstrates a clear opportunity for growth and brand equity development, Second Cup’s current financial struggles pose a hurdle. Given Second Cup’s lack of access to financing, rolling out the required capital investment of $500,000 capital investment for each location to even more stores would prove difficult. With a source of capital infusion, Second Cup would be able to pursue this strategy of redefining itself within the marketplace and reclaim its position as a company that provides an exceptional coffee experience.

Moving Forward Second Cup’s struggle to win over customers in the Canadian retail coffee market has resulted in the closure of over 53 stores since Q3 2014 and ae! $25.7-million write down of Second Cup’s trademarks. The company has failed to keep up with the premium Café experience the Canadian market is currently demanding, and has faced financial difficulties. By evaluating its brand and position in the market, your recommendations can help make the path forward clear, so that Second Cup doesn’t have its last cup of coffee!

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Second Cup: Going Back For A Second Cup - Ivey Business Review

Other Information: May 2018: Some Canadian brands that saw their reputations decline severely in 2018. While still considered in the “strong” range in terms of their reputation, Tim Hortons (-5.7 points) was one of the fastest fallers in a large brand reputation survey, with the coffee giant going from 13th to 67th overall in this year’s rankings. “Authenticity really matters to Canadians, and we judge companies harshly when we don’t believe they live up to their stated values,” said Daniel Tisch, President and CEO of Argyle Public Relationships, a leading Canadian expert in reputation management. “The most reputable Canadian companies are almost nine points higher than their peers in perceptions of their corporate social responsibility – and it’s not surprising that they are widely perceived to be more genuine.” With a direct correlation between corporate reputation and business performance, companies have an opportunity – with the use of brand and reputation measurement tools – to understand the key opportunities and gaps, and have processes in place to manage reputation. Insights on Coffee Drinkers: https://www.macleans.ca/culture/coffee-taste-test-tim-hortons-vs-mcdonalds/ (watch the video) Coffee Loyalty Programs in Canada: https://www.macleans.ca/economy/business/whats-the-best-coffee-loyalty-card-in-canada/ Do your own research on the main coffee brands in Canada – Second Cup, Tim Horton’s, McDonalds and Starbucks are the ones we are focusing on in this assignment. 2017 Coffee & Tea Report – Market & Consumer Insights: From premium options to iced and craft brews, specialty beverages have become a key focus for operators looking to maintain an edge over the competition as customers continue to embrace options beyond traditional hot coffee and tea. “Regular coffee is by far the leading beverage when you look at the morning [daypart], but preference wanes through the day and that’s when you see other options — whether it be iced tea or cold coffee — become more important as you move beyond breakfast,” explains Charles Winship, senior Research analyst, Consumer Insights at Technomic. According to Technomic’s 2017 Canadian Bakery & Coffee Café Consumer Trend Report, this trend is driven largely by the ongoing generational shift and its continued disruption of the food-and-beverage industry. “Preferences tend to be different in that younger consumers look for things that are more unique — different from traditional options,” he says. “For beverages, that means things such as iced coffee in particular.” According to the report, younger consumers prefer frozen specialty coffee by a two-to-one margin over older consumers. According to Silver Chef – Canada’s State of the Coffee Industry 2017, trends in coffee change in response to changing consumer profiles. Cold-brew coffee is one of the most telling trends when it comes to current consumer preferences — displaying alternative brewing methods and a cold format, while offering a 4/5

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Second Cup: Going Back For A Second Cup - Ivey Business Review

different flavour profile from traditional iced coffee. In fact, cold brew experienced such high popularity that respondents to Hunter Public Relations’ annual Food News Study dubbed 2016 “the year of cold-brew coffee.” Overall, consumer education levels and a desire for craft products are reshaping this segment. In its report, Silver Chef identified barista-made beverages, single-origin coffees (prepared as pour over), knowing the story behind the coffee, alternative milk options and sustainable and environmental efforts as key elements of the successful modern café. DAILY CUPPA Along with the shift away from regular hot coffee is an increased interest in non-coffee beverages. Leading the pack in this category is tea — specifically iced and specialty teas. In this category, too, younger consumers are the driving force. In fact, Technomic findings suggest 39 per cent of younger consumers would like more cafés to offer specialty tea drinks (compared to 19 per cent of older consumers). Canada’s multiculturalism is also credited with bolstering the popularity of tea. “Canadians really love their black teas because of our British [roots], but as the population is diversifying, we are also diversifying in our taste,” says Louise Roberge, president, Tea and Herbal Association of Canada (THAC), adding generational shifts are also part of this diversification. “Millennials are the ones that are embracing a lot of beverages and they’re embracing tea…but don’t count the boomers out,” she urges. Though, as Roberge notes, most people prepare and consume their tea at home; for out-ofhome occasions “people drink tea at coffee and doughnut shops, specialty coffee/tea places (such as Starbucks), Asian restaurants and in the office.” Starbucks continues to capitalize on tea’s growing market share. Iced-tea beverages, in particular, have been a focus of the company’s Canadian product launches. During summer 2017, Starbucks introduced its line-up of Teavana Shaken Iced Tea Infusions, which contain tea, fruit and botanical blends and are free of artificial flavours and sweeteners. The addition also allows customers to customize any iced-tea beverage with the flavours of pineapple, peach citrus or strawberry. “We realized we could appeal to our tea customers looking for ways to customize their tea just as coffee drinkers do with their espresso beverages,” explains Melynda Cheng, product developer at Starbucks. The company also incorporated its Teavana teas into its Cups-of-Kindness collection (released in June), which featured Matcha Lemonade and the Ombre Pink Drink made with Cool Lime Starbucks Refreshers, coconut milk and Teavana Shaken Iced Passion Tango Tea. TOP DOGS Still the largest player in the Canadian coffee segment, Tim Hortons has made visible strides this year towards upping its coffee game. In April, the chain launched a latte made with freshbrewed espresso and steamed milk. Despite its branding, the “perfectly uncomplicated latte” marked a shift from the brand’s prior powder-based espresso and required a significant equipment investment ($12,000/espresso machine). As part of the latte’s marketing campaign, Tim Hortons opened a pop-up shop in Toronto under the name Perfectly Uncomplicated Lattes, offering only its new latte, which is available only in one size. The brand later revealed it was behind the shop, just ahead of the drink’s national launch. Tims also recently reimagined its dark roast, launching a “darker, richer Dark Roast coffee” in March.

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Second Cup: Going Back For A Second Cup - Ivey Business Review

McDonald’s Canada is also making strides to improve the quality of its coffee offerings. Last fall, the chain released a new espresso blend for its McCafé specialty beverages. The brand and its franchisees are also investing in state-of-the-art Swiss equipment that will bring European-inspired espresso beverages to approximately 1,200 restaurants nationwide by the end of this year. “We take immense pride in the reputation we’ve established for McCafé as a leading coffee brand in Canada,” says Michele Boudria, McCafé officer, McDonald’s Canada. “As we continue evolving the brand and build on the success of our McCafé brewed-coffee business, our new espresso blend demonstrates our continued commitment to delivering the best coffee experience in the country.” McCafé has also taken its coffee to new heights — literally — through a partnership with WestJet, which serves approximately 30,000 cups of McCafé Premium Roast coffee to WestJet customers, daily. Starbucks has made the ongoing premiumization of its brand and offerings a core focus of its growth strategy — a move that strives to better align the brand with the tastes and desires of younger consumers. In line with this initiative, the company has opened two Starbucks Reserve coffee bars in Canada within the past year. The first Canadian location of the concept opened in Ottawa’s ByWard Market last November, while the second opened in Vancouver in May. “Designed to integrate the educational aspects of the Seattle Roastery, this store includes an immersive coffee bar where our rare small-lot Reserve coffee comes to life by being handcrafted using state-of-the-art brewing techniques, including siphon, ceramic pour over, black eagle and Clover,” explains Mary Saunoris, associate Communications manager, Public Affairs, Starbucks Coffee Canada. “We know our customers are passionate about coffee and the new experiential Starbucks Reserve coffee bar provides an opportunity for them to discover a wide range of brewing techniques.” Tapping into consumers’ desire for variety and choice, Starbucks launched its Starbucks Blonde Espresso in Canada in February — marking the first-ever addition to the company’s core espresso offerings. The chain’s recent launches have also included several beverages created using non-dairy milk alternatives, such as coconut milk and almond milk (introduced in January). THE DIGITAL DOOR As Technomic’s Winship points out, convenience is paramount in this competitive segment. This includes loyalty programs, as well as “Digital ordering channels and digital payment — anything to make the ordering process more convenient and seamless,” he explains. “Consumers tend to be more loyal to cafés in general — due to coffee preferences — but, because younger consumers want something new, they are less likely than older consumers to stick to specific brands when they get their coffee. But, they are more likely to say that loyalty programs will influence them to be loyal.” Starbucks has put significant focus on the development of its mobile app and loyalty program in recent years, through the launch of Mobile Order & Pay in 2015 and updates to its My Starbucks Rewards, which took place in spring 2016, and saw the program switch from a transaction-based system to a spend-based system in Canada and the U.S. “Since the initial launch, we have seen strong demand for Mobile Order & Pay from Canadian customers,” says Saunoris. “We were the first national retailer to offer our own mobile-

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Second Cup: Going Back For A Second Cup - Ivey Business Review

payment technology combined with a deep loyalty program and we’ve seen a tremendous response from our customers welcoming these innovations.” In December, Tim Hortons began testing mobile order-and-pay in 25 locations in Ontario. This service was originally scheduled to launch March 30, however, according to the Globe and Mail, tensions between Tim Hortons franchisees and the chain’s parent company, Restaurant Brands International (RBI), delayed the release of this app, which was ultimately released in late July as an update through its new Tim Hortons app. Standing in stark contrast to its competitors, McDonald’s Canada’s coffee loyalty program remains distinctly low-tech. The chain’s free-coffee cards allow customers to redeem one free medium hot drink for every seven stickers (found attached to McCafé cups) collected. The brand has given no indication of plans to update its program in Canada. That said, in light of McDonald’s recently launched partnership with UberEats, customers in Montreal, Ottawa, Toronto, the Greater Toronto Area and Edmonton can now get their favourite McCafé beverages delivered. It’s possible that this move could give McDonald’s a leg up on its café competition. As Winship points out, “industry wide, there has been a lot of push towards delivery,” though this hasn’t been reflected in coffee-focused establishments to the same degree. THE CONSCIOUS CAFÉ The “activistic” nature of Millennials and Centennials has led to further changes to the coffee and tea segment. These groups identify best with brands that reflect their own values, spurring cafes to show off their socially and ethically conscious side. According to the 2017 Canadian Bakery & Coffee Café Consumer Trend Report, 23 per cent of consumers stated they would be more likely to visit cafés that offer fair-trade coffee; 16 per cent said the same for organically grown coffee. “Both of those skew to younger consumers,” notes Winship. By far, the most significant influencing factor was sustainability, with 63 per cent of consumers expressing a preference for sustainable items — a trend echoed throughout the foodservice industry. In response to these demands, McCafé has launched McCafé Premium Roast Keurig compostable pods in Canada, which are certified by the New York-based Biodegradable Products Institute and made out of plant-based materials, coffee-bean skin and other compostable materials. The brand’s specialty coffees are also made with 100-per-cent Rainforest Alliance Certified espresso beans. Coffee purveyors and café operations of all sizes have made visible commitments to social responsibility. Companies such as Starbucks and Nespresso have also placed sustainability and social responsibility at the core of their business plans through comprehensive 2020 goals and initiatives. Many smaller and younger coffee and café brands in Canada have made these values central to their branding efforts. For example, Smile Tiger Coffee Roasters in Kitchener, Ont. creates and serves Direct Trade, transparently sourced coffees made in small batches and has done so since its launch in 2016.

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Second Cup: Going Back For A Second Cup - Ivey Business Review

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