Case Study

Juan ValdezRebeca Dallal

About Juan Valdez1

“Creating value for Colombian coffee growers”

– Procafecol

History

Juan Valdez was established by the National Federation of Coffee Growers of Colombia as a strategy to promote Colombian coffee trade in order to provide value and better conditions for coffee producers in the country.

Vision: To be the worldwide preferred Premium Coffee because its quality and generation of wellbeing in its environment.

Objectives:

1.Position Juan Valdez as the premium Colombian coffee in its current and potential markets.

2.Strengthen the business models generating sustained value for the shareholders.

3.Build and consolidate a service and innovation oriented organizational culture.

4.Generate customer satisfaction through differentiated products, environment and service.

5.Guarantee the fulfillment of the Juan Valdez promise of value in international markets.

In Colombia the coffee industry employs over a million people and

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Industry: Coffee

Goal: Be the

worldwide preffer

coffee

Product: Coffee

represents 8%of the GDP.In 1927 the National Federation of Coffee Growers of Colombia was created by half a million Colombian coffee growers, the great majority small farms, to promote their interests and aid them in research among other things to improve producers’ quality of life and increase sales and profit. In 1959 they faced a crisis in the coffee trading price and the FNC managed to increase coffee’s price, even to a bit higher than in other countries.

It was during this crisis that, a value added strategy for promoting Colombian coffee was developed, and as part of this strategy, the FNC decided to build a strong, highly identifiable symbol that would allow them to promote the specialties of the Colombian coffee to increase sales. This was the image of Juan Valdez, a symbol of a Colombian coffee grower. Six months after the launch of the campaign, 87% of American people associated Juan Valdez with Colombian coffee. In 1961 Juan Valdez was launched to the European market with

the same success. They had been able to differentiate a commodity, create new markets and increase the demand by the use of a strong global brand image n HBS).

Up to the year 2000 more than $750 million dollars were destined to promote Juan Valdez’s image and Colombian coffee.

The strategy to promote coffee as a product worked and accomplished the goal to improve prices and conditions for coffee growers. The next decades brought dramatic changes in consumption patterns as a result of new preparation techniques and the creation of new channels of commercialization. The

Colombian coffee industry model needed to be restructured. This new paradigm was not just about selling high quality product; it leveraged the ability to provide new services along with the value of its intangible assets as it allows coffee growers to benefit from the highest segments of the value chain between the farm and final consumer.

The new strategy was put into operation in 2002 when the fist Juan Valdez coffee shop was inaugurated with a very positive national, and then international public response. (n amazon) The venture into diverse business lines has allowed Colombian coffee producers a direct participation in

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Colombian Coffee Culture

Movie 1.1 Juan Valdez Coffee

dynamic, high value market segments.

One of the most important success factors is the support of Colombian coffee producers, represented by the Colombian Coffee Growers Federation. It certainly took a great effort to persuade half a million independent coffee growers to develop high quality products and to comply with on-time delivery, but the promise of higher living standards for the producers and their families was a great incentive.

During the first decade of the twenty first century Colombian coffee growers would have to renew its differentiation strategy in order to maintain the privileged position in the world market that they had been able to accomplish.

In September 2007 the European Union granted the National Federation of Coffee Growers of

Colombia the protected destination of origin on intellectual property of the Juan Valdez slogan.

The Colombia Coffee Federation represents coffee producers in Colombia to defend their interests, ensure their wellbeing and protect them against market instability.

Juan Valdez recently opened its first store in Kuwait. Expansion of a multi-Latin company in this globalized world is no way far from common, and this is the first effort from the Procafecol* (Promotora de Café Colombia S.A.) to conquer markets in the Middle East and North Africa (MENA) as part of a plan launched in 2013. The plans are to open a second store in Dubai, followed by Brunei, South Korea and Singapore in 2014. The plan is to open 60 new stores in the Middle East during the next five years.

*Procafecol S.A.-created in November 2002 by FNC as a part of its strategy of added value. The objective was to create a company that would operate the Juan Valdez Café stores and that would be in charge of the

marketing of the Colombian Premium Coffee products under the brand Juan Valdez. It is a private company out of which more than 20.000 Colombian coffee growers are shareholders in a direct way as well as the FNC and the IFC. operates 3 channels: Stores, Supermarkets and institutional.

Procafecol is licensee of the brand, and as such, it is committed with ITS development in different times of consumption to be able to get to the premium coffee consumer in markets around the world. The company also pays royalties to the National Coffee Fund for the use of the brand. These royalties benefit the Colombian coffee growers.

The Colombia Coffee Federation represents coffee producers in Colombia to defend their interests, ensure their wellbeing and protect them against market instability.

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Procafecol S.A. is a private company out of which more than 20.000 Colombian coffee growers are shareholders in a direct way as well as the FNC and the IFC.

Within its marketing strategy, Procafecol operates 3 channels: Stores, Supermarkets and institutional. These channels allow us to get to our customers in different consumption occasions with a proposal of relevant and unique proposal.

Colombia produces mostly Arabica, preferred over other varieties by gourmet drinkers and baristas because of its intense flavor but smooth taste. It is also naturally less caffeinated –about 1.1 percent compared to the stronger Robusta at 2.2 percent. The variety has been called the “Adam and Eve” of coffee, originated in Ethiopia about the year1000 B.C. but now, Coffee Arabica is scarcely found in its native region due to changes in variety and crops.

Competitors

StarbucksFounded in 1971

Present in 62 countries wit 20,861 stores.Simple and modern interiorsPositions itself as a place college students can hangout, study and meet people30% of customers have more than $100k annual incomeIt is associated with status, it is visited by celebrities and highly powerful playersCaribouFounded in 1992The second largest operator of non-franchised coffee chains in USAInteriors reflect the atmosphere of a mountain lodgeHigh coffee quality33% of customers have $60-$100k annual income

Café OmaFounded in 1970.200 Stores in Central America.Exports coffee to America, Europe and Russia.Acquired by MesoFoods in 2012.Interiors reflect modern coffee shop.

Customers middle working-class.Cielito Querido CaféStores only in Mexico City Acquired by ADO Group, intention to franchise in other countries.Interiors and recipes aiming to resemble small, traditional Mexican diners.Customers middle and high class.

Café Punta del Cielo170 stores in Mexico, USA, Hong Kong, Spain and France.Sale of Mexican gourmet coffee and heavy duty coffee machines.Modern interiors.Exports to more than ten countries.Customers higher class.

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Reasons to drink coffee

Worldwide Coffee Consumption

Study Work Airplane Restaurant Club Home Store JV Coffee

Energy

Wake-up

Freshening

Enjoy

Relax

Nutrition

Social Image

As food

To Socialize

Warm-up

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Coffee Value Chain 1. Cost of production – it costs money to fertilize, prune, and generally take care of coffee trees, let alone the costs of harvesting the coffee and processing it until it’s stable enough to send to market. These costs alone are about US$1/lb,2. Cost of transportation – not as much as it used to be, but it’s tricky getting coffee from the mountainside where it grows over bad/nonexistent roads to a major port.

3. Cost of roasting – green coffee does not make a very tasty beverage; they need to be roasted first to turn it into the coffee we drink, which of course needs fuel. There is also weight loss in roasting process.4. Cost of distribution – the now-fragile roasted coffee needs to be distributed to thousands of retail stores, and coffee shops each of which needs to mark up the coffee to keep the store in business.The processing and handling of green, or raw coffee adds 50% to its price,

according to estimates by the Fairtrade Foundation, which works for a better deal for coffee producers. Much of this goes towards paying for transport, storage and handling costs. Then, as part of the exporting process, freight and insurance will add about 10% before an importer takes over.AlliancesHotels: Hotel JW Marriott, Hotel Marriott, Hotel Sheraton, Hotel Sonesta, GHL Hotel Capital.Businesses:LAN Airlines, Samsung, Procter & Gamble, Alpina, Carvajal, World Bank, IFC, France Embassy.Restaurants:McDonald’s, Popsy, Archies

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Financial Status

Based on the financial analysis, Juan Valdez has shown a steady growth in sales since the creation of Procafecol and the strategies they have implemented. There had been losses up to 2012, and in the past two years there has been a small profit. It is recommended that they now start working on ways to reduce operating costs to decrease the money they spend in operations and increase the profit. This is critical to achieve sustained profit and make sure they will be strong enough to face contingencies, such as the 35% fall in coffee prices during 2013.

Juan Valdez has been aggressive in expanding its market and opening new stores with a considerable growth. The plans for the next five years are very ambitious in extending the market reach

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0

24000

48000

72000

96000

120000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Sales

Sales Million Pesos $MM

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD-300

-225

-150

-75

0

75

Net Results ($MM million pesos)

* YTD Sept 2013

5%11%

74%

10%

International StoresStores in ColombiaLarge SurfacesInstitutional

250 Stores and Restaurants in 2013:

Stores and Restaurants in five years:

10

0

40

80

120

160

200

Colombia Ecuador Chile Peru Mexico USA Panama Spain Kuwait El Salvador MENA* KuwaitNumber of Stores

0

37.5

75

112.5

150

S.Korea MENA MX Florida Peru Bolivia Salvador Panama C Rica Singapore Malaysia Brunei Guatemala Aruba

Number of Stores (5 years)

Strategic Analysis2

“We generate moments of indulgence that transport the consumer to special places in Colombia”

– Juan Valdez

Strategy Models

Generic Strategy ModelNarrow

• Only for people who walk into their stores.

• Offers exclusive Colombian coffee blends packages.

•Low Cost

• Products at better prices than competition

• Offers a good experience to customers

• Controls the whole value chain

Five Forces Threat of New Entry:

• Barriers to entry not so high although there are countries where strong competitors are established.

• Strong competitors have very good brand recognition.

• Specialist knowledge is a good asset, high quality producers

• Although composed by micro-producers to large producers, they achieve economies of scale

• They have great cost advantages because the company is run by the National Federation of Coffee Producers (representing over 500,000 coffee growers), they all work together to achieve top quality at best cost.

• There has been technological development, but it is not exclusive to any brand

• The coffee industry poses low barriers to entrySupplier Power:

• Juan Valdez has a great advantage regarding the number of suppliers; the brand represents over half a million Colombian coffee producers, who are exclusive suppliers.

• Suppliers have a high bargaining power because one of the main differentiators is coffee quality, the best farms in other countries who supply other brand are usually able to choose who they sell to.

• Uniqueness of service

• There are strong, international brands that offer caffeinated drinks, but they do not pose a high

threat of substitution because their quality is much lower.

Threat of substitution:

• The coffee bean Arabica is also produced in other countries, but quality is uneven among farms due to processes, weather and transport conditions, there is a limited number of substitutes.

• The cost of change is low, there are other producers and technology is not exclusive or expensive. This allows other brands to offer products similar in price and quality, and in some cases at more convenient locations.

• Substantial product and service differentiation.

• Competitive Rivalry:

• There is fast industry growth rate.

• There is a large diversity of coffee brands that also offer superior quality and specialty products and this creates considerable rivalry.

• Other brands also offer their products in supermarkets, grocery chains, restaurant and airlines.

• Switching costs

• Customer loyalty

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Lower Cost Differentiation

Broad Range

of Buyers

Narrow Buyer Segment

or Niche

• Exit barriers are lowBuyer Power:

• There is a large number of customers.

• Buyers require special customization; sizes must be set to satisfy customers’ needs and likes.

• The main difference between competitors is that Juan Valdez has a destination of origin and exclusive suppliers. They also have better control of coffee beans price

• Buyers must be convinced of the product quality to pay the set price.

• Cost of changing is low, there usually are other coffee shops available in the vicinity.

• There are diverse distribution channels

SWOTStrengths

• Global coffee brand with fine products and reputations

• Premium quality products

• Great customer service

• Strong ethic values and mission statement

• Offer relevant and unique experience to customers

Weaknesses

• Strong competitors (Starbucks, Cielito Querido Café, Punta del Cielo)

• Over-reliance on a few markets

• Depending on foreign exchange rates

• Dependant on main competitive advantage, coffee retail

Opportunities

• Opportunity to expand global operations of high quality reputation

• A growing market with huge potential

• New services and products can be retailed in cafes and stores

• Environmentally aware producers

• Co-branding with other manufacturers or companies

• Franchising has good potentialThreats

• Import barriers in other countries

• Apparition of new trends of drinks and beverages

• Strong brands

• Exposed to the rise in the price of coffee beans and dairy products

• Weather conditions

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Key Success Factors

StrategyThe main goal of the Juan Valdez strategy is to get to the premium coffee consumer in markets all around the world, extending market reach as well as per capita consumption. All this is done to improve life quality for the Colombian coffee growers and their families.As mentioned before, Procafecol uses three channels to distribute Juan Valdez coffee: stores, supermarkets and institutional. Since prices do not leave a lot of margin to compete, the key factors for success are to differentiate and innovate. The company already has a very successful brand image (Juan Valdez with the donkey), has been granted a certificate of destination of origin, produce high quality coffee and has a great customer satisfaction policy (92% customer service satisfaction grade).Juan Valdez must reduce operation costs because up to 2011 they have not been able to have profit due to high operations costs. In order for a company to survive, it must have sustained profit, and Juan Valdez has operated with loss for many years now. It is critical to have a plan in which business strategies include the use of technology to achieve effective and efficient operations.Key success factors must successfully harness the company’s resources, skills, capabilities and other associated attributes to accomplish its goals andgain competitive advantage in the marketplace.

GoalIncrease Market reach at a global scale.Key Success Factor:Carefully choose the countries or markets in which Juan Valdez will either begin or increase market presence by doing research regarding each market consumption habits, competition, economic situation, entrance costs and barriers, and the necessary investment.Juan Valdez has left out opening stores in Europe in its plans, which calls my attention because it has most countries with the highest coffee consumption worldwide (map in Chapter 1, Section 1). It might be interesting to do comprehensive research to decide if it should be included in the expansion strategy.

GoalIncrease per capita coffee consumption.Key Success Factor:It is critical to understand the culture in each country Juan Valdez has presence. There are several specific reasons why people drink coffee (as stated in Chapter 1, Section 1) and they must be taken into consideration for marketing and advertising campaigns, as well as when defining strategies.

Goal

Promote a sustainable coffee sector in Colombia

GoalEstablish activities to create value that exceeds the cost of providing products, thus generating a greater profit margin.Key Success Factor:

GoalReplace existing technology. to improve integration, increase speed during peak transaction hours and improve information accuracy. Current software is based on customized solutions that inhibit global integration

GoalImprove customer experience at restaurants and stores through the use of mobile technology.

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Technolgy Solutions3

“We are a company with a great vision and development, committed with Colombia and its future.” -

– Juan Valdez

Solutions

Based upon the strategic models presented in this paper and where the company is now, I recommend xxxx technology solutions.:Reduce operation costsTechnological Integration among stores, supermarkets and institutions, as well as among different countries.Because the operations of Juan Valdez are carried out across several countries and in stores and restaurants, as well as the intent to integrating eCommerce, it is extremely important to have connected systems and allow data exchange data in the most effective and efficient way. A team should be formed to carry out this project to create integration among the selected software, in this case I recommend Microsoft Dynamics AX, Junctions Solutions along with a consumer site (web and mobile) with systems for shipping, labeling, store inventory and point-of-sale.This software has prebuilt integration to streamline implementation in order to replace customizations and are more manageable and dependable.It is critical to have efficient processes such as packaging, scheduling, shipping, inventory, order taking and resource tracking and management as a part of a holistic and connected transaction framework. Technology should also be able to integrate multi-channel retailers, various distribution centers and manage them both as a whole and uniquely.Inventory and transaction reporting should also be updated in real time.Any additional software or tools should appear unified in a user friendly and multi-lingual environment to encompass all of Juan Valdez’s necessary transactions and operations.Juan Valdez recently replaced their POS terminals with an NCR solution to enhance customer service and experiences chain-wide. This is part of creating a standard platform and improved service and security, as well as the capacity to integrate with the afore mentioned technology.

The technology solution should be the only source to hold and store all of the business data and to emit whatever reports and measurement the business model demands, as well as key performance indicators in order to allow planning and purchasing processes.The technology solution should support and ensure quality standards and allow space for growth and expansion. It should provide accurate and timely information to aid to asses and manage the performance of all processes involved, and help management in decision making to align activities and processes with company goals.Bridge the gap between in-store and mobile experience.According to current tendencies to a quick growing mobile adoption in most countries in the world, it is a good move to innovate in the mobile space and capitalize in the fast growing mobile market. Juan Valdez must launch a mobile site with user localization to allow users to access real-time menu, prices, near store/restaurant locations, on-line shopping. Both the web and mobile site should allow users to sign-in (social sign-in is recommended, safety measures provided) along with a personal profile with shopping history, reminders and special offers, and which allows eCommerce and mobile payment in the countries where this is possible.The goals are to capitalize on the mobile market, improve user experience on mobile and in-store experience and better understand the mobile impact on physical locations.This should be approached developing an app using breakthrough technology and measure for constant optimization and mobile conversions.It is important to integrate Social Commerce, in which users combine the shopping experience with technology to share with friends in a digital environment. By doing this more than one objective is accomplished: branding, engagement, product exposure, customer loyalty and allows for close and precise measurement.

Technological innovation to differentiate and enhance customer experience.Use geolocation and an application that offers shopping rewards program that uses a points loyalty system through smartphones. This solution does not require customers to have the app open, but it alerts them when they arrive at a store or restaurant and immediately starts interacting. When customers scan products or codes, participate in certain dynamics designed according to marketing strategies or when they buy products, they will obtain value by getting points in the reward program. The points offer discounts and special promotions to customers in future in store or e-commerce purchases. By incorporating the newest tools customers have access to the latest trends and will look forward to such an experience. Going to coffee shops, specially trendy ones like Starbucks or Juan Valdez, is fashionable and provides status, by incorporating this new technology there is value added to the experience and people will seek it just to be a part of it.

CostsJuan Valdez has invested large amounts of money in the past decades and it has paid off well. It is not easy to put together small local coffee growers and build a company with global presence and such a strong brand with excellent reputation.The past two years were the first to show profit, this is expected not only to remain this way but to show a sustainable increase in the profit margin.In order to implement the mentioned solutions, it is necessary to define a budget for technology implementation. The proposed solutions require an initial $45 million US dlls for software implementation and hardware acquisition.An additional $8.5 million US dlls will be needed for personnel training and $11.3 million US dlls for implementation and integration.

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The implementation of the mobile solution along with eCommerce and the geolocalization application, which should take place as soon as possible, and can take place at the same time as CRM and EPR implementation (it takes place in different platforms and does not clash), will need a development and implementation budget of $4.8 million US dlls, plus $1.2 million for the first year of operation in terms of updating and maintenance.The implementation and integration of new technology will require a considerable investment, but in order to generate a valuable business with an innovative customer oriented service and value added for shareholders and customers, it is not only justified, but it will provide measurable results in the very short term in a clear and noticeable market penetration and per capita consumption, as well as positioning the company as highly innovative and leading in technology.

Juan Valdez “Origins”As a tribute to coffee’s region and growers in Colombia Juan Valdez opened its first “Origins” store last december.Its objective is to strengthen its brand and internationalization and only offers coffee from differentiated origins.Visitors will use its senses to make a voyage through the different cup profiles of the different origins of Colombian coffee, including Calds, huila, Antioquia, Cauaca and Santander.Visitors will also be able to buy the numbered and limited edition of micro-batches of coffee, a new production trend of special coffees.

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Shopkick+iBeacon detects when shoppers are in or near stores and offers rewards targeted to them.

Movie 3.1 Enhanced shopping experience

Recommendation

The marketplace is changing and changing fast. markets are faced with constant challenges and face constant challenges in the economic and environment arenas. Competition is fierce and the globalized world is more and more connected, causing that something that happens in one corner of the world to affect us all.In order to, not only make Juan Valdez ready for the present conditions and for the future, but to position it in a leading role in the international coffee industry, the CEO must seriously review the business model and consider integrating technology as an inseparable business strategy to strengthen the current models so the company can achieve sustainable business value for shareholders, many of them the coffee growersAccording to business goals, Juan Valdez wants to strengthen its current markets and position itself in potential ones. In order to do this the company must take steps to be more efficient and effective all along its value chain and including its external suppliers as well as all personnel and staff.The company wants to strengthen its business models generating sustainable business value for shareholders, so it must create value in all processes making sure the whole framework provides the proper conditions to operate with the highest quality standards and making sure this is periodically measured to make the necessary adjustments.

Customer satisfaction is a key goal in any company that offers a product or service.A part of the aims in the suggested technology solutions is to increase customer satisfaction through the use of digital tools to make customer’s experience a better one, both online and offline. A company that innovates and improves the products and services it offers can be sure it will differentiate from its competition.Juan Valdez wants to build and consolidate an innovative and service oriented organizational culture. Since the company already has premium quality products and has full control over this, the fastest and best way to accomplish a service oriented organizational culture is with the implementation of Information Technologies. This is specially important for a company that has presence in a dozen countries worldwide and has further expansion plans. IT allows for real time, fluid and accurate information regardless of geographic location or different time zones and including all stakeholders, from producers and suppliers to the final customer.Juan Valdez has and will continue to face difficult market conditions, fall in international coffee prices, crop losses due to fungus or meteorological conditions, variations in exchange rates and other conditions that will affect market conditions and can hinder its performance and results. To be able to face difficulties and survive with the least losses possible, the company must raise its performance and compete with superior capabilities to have as

much advantage as it can. Great care must be taken to reduce operation costs and have them running smoothly to achieve sustained growth and profit to turn Juan Valdez in a global solid company.One of the most important actions the company must take is implementing strategies that measure financial processes (cost control, profitability and market share to show, in a clear and unmistakeable way, current operations provide or fail to provide. Doing this is a strong strategic advantage because it allows the company to identify un-efficient and un-effective processes or activities which need to be adjusted, changed or eliminated.There always is a switching cost, but when carefully planned, the return of investment should be clear and make it profitable.Juan Valdez must stand out by offering uniqueness with cost well below premium. Since the company has operations in several regions and countries around the world, it is important to do cultural research, to understand customers’s profile and keep this in mind to customize and tropicalize certain marketing strategies or store locations as well as relevant service processes when applicable.Procafecol has accomplished a lot in ten years:“The coffee and the stores became the showcase of the best Colombian coffee, being the reflex of a responsible, honest authentic, committed and proud of representing to the thousands of Colombian coffee growers brand.”...may it remain that way!

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