The coffee industry continues to grow worldwide. From agriculture (growing of beans) to the production process to retailing to consuming, participants in the coffee industry seem to be increasing across the value chain. A key decision by participants in the industry is in which parts of the industry value-chain (supply-chain) is it best operate? Moreover, do we have the core competencies to do so?

At the consumption end, the Australian coffee market contains two broad channels: retail (in-home consumption) and food service (out-of-home consumption). In Australia over the past 30 years, per capita coffee consumption has doubled from 1.2 kilograms to 2.4 kilograms a year. The love for coffee sustained industry demand following the global economic downturn and has fuelled revenue growth over the past five years. In Australia, coffee industry revenue was forecast to grow by an annualised 3.2 per cent over the five years to 2014-15. This includes an expected increase of 2.4 per cent in 2014-15 to $4.3 billion. However, competitive pressures have pushed profitability down slightly over the past five years.

Australia has three major coffee growing regions: Far North Queensland, Central and South-East Queensland, and Northern New South Wales. While Australia has not traditionally been a major participant in the coffee growing segment of the value chain, this did not stop Andrew Ford starting Mountain Top Coffee in Northern New South Wales in 1997. Mountain Top Coffee grows premium green coffee beans, predominantly for the export market. According to Ian MacLaughlin, the owner of Skybury Coffee (one of Mountain Top Coffee's competitors), the need to develop export markets for Australian coffee beans is partly driven by the relatively high fixed and labour costs in Australia. When starting a coffee growing business from scratch, as Andrew Ford did, an understanding of the likely costs, as well as the behaviour of those costs over time and under different conditions, is required. Identifying those costs that remain the same (fixed costs) and those that vary according to some key measure (variable costs) is necessary to understand the fundamentals of the business. For example, when starting a coffee growing business, common fixed costs might include land lease costs, interest on financing costs, and equipment (such as a harvester) and associated costs (leasing or depreciation). Variable costs might include spraying, fertilising and harvesting costs. It is important to understand what drives these costs; for example, the volume of coffee beans produced may drive some variable costs.

In the production of roasted coffee beans segment of the market is DiBella Coffee, which was launched in 2002 by founder Philip DiBella. DiBella Coffee provides a variety of its coffee blends to more than 600 outlets in Australia. More recently, DiBella has expanded internationally to China and set up retail operations in India. The retail segment of the value chain in Australia is made up of a mixture of specialty coffee chains and independent coffee shops. The coffee chains include Gloria Jean's, McDonald's McCafs and Hudsons. Growth in this segment of the market still seems possible, with most chains planning more outlet growth. In this coffee shop segment of the market, costs would be well identified in the coffee chains and franchise segment, but independent operators would need to identify their costs and plan carefully.

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(Eldenburg 30-31)Eldenburg, Brooks, Oliver, Vesty, Dormer, Murthy.Management Accounting, 3rd Edition. John Wiley & Sons Australia, 08/2016. VitalBook file.

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Required:

How does an understanding of value-chain analysis

a. Help companies decide where to participate in the coffee industry?

b. Help companies in the coffee industry better manage their internal costs?