Momentum Investing

11/28/2011

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        I. Introduction

Coffee has long been a part of our daily routine. Statistics say that over 71% of the UK population are coffee drinkers, consuming an average of 4 cups of coffee per day. It is estimated that each day 2.5 billion cups of coffee are consumed around the world. Although there are many kind of hot beverages around, coffee drinkers would say there is no true substitution to this product. With the increasing office hours as people spend more time for work, more coffee is needed for relaxation and concentration. Coffee comes with many different types, each of which has different quality. A few examples are ground coffee and instant (soluble) coffee.

This report attempts to describe general characteristics of the instant coffee market in the UK, the main forces driving the supply and demand for the product. It analyses the price trend of coffee in the past and explain the reasons for these trends. Then, the market is analysed further on competition and contestability. Finally, future prospects of the instant coffee industry are assessed at the end of the document.

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II. Market Structure

1) Type of good

Instant coffee is a differentiated product, meaning that these products are not identical but can be differentiated from one another. Unlike coffee beans, which is a commodity and is homogeneous, instant coffee is differentiated through heavy branding, and taste. Nescafé, the largest producer of instant coffee has many different types of product sold in the market nowadays: Nescafé Original, Nescafé Gold Blend and Nescafé Decaffeinated etc... ; All of which is differentiated mainly through taste. However, comparing one of those products to ones produced by other competitors, such as Nescafé Decaffeinated versus Via Decaffeinated (Starbucks) or Kenco Decaffeinated (Kenco), the differentiation is almost solely on branding. Large companies have invested a huge amount of money and time to develop strong brands and customer loyalty. For example, Nescafé announced a £17 million promotional investment in its instant range in 2007 and Starbucks launched their new product Via in 2008, which they took 20 years to develop. (The Times Online)