UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER’S THESIS COUNTRY-OF-ORIGIN EFFECT ON COFFEE PURCHASE BY ITALIAN CONSUMERS Ljubljana, March 2016 COK ALENKA AUTHORSHIP STATEMENT The undersigned Alenka COK, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), declare that I am the author of the master’s thesis entitled CONSUMER BEHAVIOUR IN THE ITALIAN COFFEE MARKET: COO EFFECT ON CONSUMER PURCHASE INTENTIONS, written under supervision of full professor Tanja Dmitrović, PhD. In accordance with the Copyright and Related Rights Act (Official Gazette of the Republic of Slovenia, Nr. 21/1995 with changes and amendments) I allow the text of my master’s thesis to be published on the FELU website. I further declare that: the text of my master’s thesis to be based on the results of my own research; the text of my master’s thesis to be language-edited and technically in adherence with the FELU’s Technical Guidelines for Written Works which means that I o cited and / or quoted works and opinions of other authors in my master’s thesis in accordance with the FELU’s Technical Guidelines for Written Works and o obtained (and referred to in my master’s thesis) all the necessary permits to use the works of other authors which are entirely (in written or graphical form) used in my text; to be aware of the fact that plagiarism (in written or graphical form) is a criminal offence and can be prosecuted in accordance with the Criminal Code (Official Gazette of the Republic of Slovenia, Nr. 55/2008 with changes and amendments); to be aware of the consequences a proven plagiarism charge based on the submitted bachelor thesis / master’s thesis / doctoral dissertation could have for my status at the FELU in accordance with the relevant FELU Rules on Master’s Thesis. Ljubljana, __________________ Author’s signature: ________________________ TABLE OF CONTENTS INTRODUCTION…………………………………………………………………………….1 1 COO IN THE CONSUMER BUYING DECISION PROCESS………………………....3 1.1 Consumer’s buying decision process………………………………………………3 1.2 COO in the evaluation process…………………………………………………….5 1.3 COO recognition…………………………………………………………………...9 1.3.1 COO cognitive perspective……………………………………………..11 1.3.2 COO affective perspective……………………………………………..11 1.3.3 COO normative perspective…………………………………………….12 1.4 Made in Italy……………………………………………..……………………... 13 2 THE COFFEE MARKET……………………………………………..………………….15 2.1 The global coffee market……………………………………………..…………...15 2.1.1 Coffee production and exports……………………………………….....17 2.1.2 Coffee imports and consumption…………………………………….....19 2.1.3 Coffee historical background and market regulations………………….22 2.1.4 The COO and the production process………………………………......24 2.1.4.1 Coffee supply………………………………………………….24 2.1.4.2 The coffee production process………………………………..25 2.1.4.3 Coffee distribution…………………………………………....26 2.1.5 Preparing the coffee drinks and coffee types…………………………...27 2.2 The Italian coffee market……………………….………………………….……..29 2.2.1 Espresso…………………………………..……………………………..31 2.2.2 Foreign companies in the Italian coffee market…………………..…….33 3 THE EMPIRICAL STUDY……………………………………………..………………...34 3.1 Qualitative research……………………………………………..………………...35 3.1.1 Focus group’s results…………………………………………………….35 3.1.2 Summary of focus group findings………………………………………41 3.2 Survey among coffee consumers…..…………………………………………………42 3.2.1 Research hypotheses and conceptual model……………………………42 3.2.2 Quantitative research methodology…………………………………….45 3.2.3 Questionnaire design and data collection………………………………47 3.2.4 Survey’s results…………………………………………………………48 3.2.4.1 Sample characteristics………………………………………...48 3.2.4.2 Reliability of measurement scales……………………………51 3.2.4.3 Hypotheses testing……………………………………………54 3.2.5 Summary of quantitative research findings…………………………….57 3.3 Managerial implication………………………………………………………………59 3.4 Limitations and suggestions for future research………………………………….60 CONCLUSION……………………………………………………………………………...60 REFERENCE LIST ……………………………………………………………………………...62 APPENDIXES i LIST OF FIGURES Figure 1. Buyer decision process…………………………………………………………………..3 Figure 2. Coffee production distribution, 2012/2013 and 2013/2014 comparison…………...16 Figure 3. Global production and global trade from 1990 to present (in million 60 kg bags)...17 Figure 4. Top 10 countries’ production and export quantities in 2013/2014 (in million 60 kg bags)………………………………………………………………………………..18 Figure 5. Major European Union’s importers in 2013/2014 (in million 60 kg bags)………...20 Figure 6. Percentage of world consumption from 1993 to 2013……………………………..21 Figure 7. Coffee consumption per capita in kg in 2013………………………………………22 Figure 8. Conceptual model of domestic purchase behaviour………………………………..43 Figure 9. Coffee’s COO recognition…………………………………………………………51 LIST OF TABLES Table 1. Top 10 coffee production countries in 2013/2014…………………………………..18 Table 2. COnsumption per country in 2013/2014 (in million 60 kg bags)…………………...21 Table 3. Italy’s import, consuption and re-export in 2013/2014……………………………..29 Table 4. Operationalization of studied constructs…………………………………………….46 Table 5. Demographic characteristics of respondents………………………………………..49 Table 6. Coffee drinking habits of respondents………………………………………………50 Table 7. Factor loadings and reliability for the constructs…..………………………………..52 Table 8. Regression analysis results for purchasing behaviour of domestic coffee products...54 Table 9. Results of t-test for Hypothesis 5a and ANOVA for Hypotheses H5b, H5c, H5d and H5e…………………………………………………………………………………56 Table 10. Results of t-test for Hypothesis 6a and ANOVA for Hypotheses H6b, H6c, H6d and H6e…………………………………………………………………………………57 Table 11. Results of t-test for Hypothesis 7a and ANOVA for Hypotheses H7b, H7c, H7d and H7e…………………………………………………………………………………57 Table 12. Hypothesis testing results………………………………………………………….58 ii INTRODUCTION The amount of available goods in the market today is infinite. Within the same product category, consumers can choose from a broad range of alternatives in all types of shape, colors, price, quality and origin (Aziz, Bahadur, Sarwar, Farooq & Arshad, 2014). Among the many cues that differentiate one product from the other, the country of origin (COO) has a strong relevance in the moment of product evaluation (Ahmed et al., 2004; Chu, Chang, Chen, & Wang, 2010; Martìn & Cerviño, 2011). The country of origin refers to a territory, area or region that is intertwined with the creation, manufacturing, planning and the design of a product or service, and is sometimes equaled with the term “made in” (Nagashima, 1970). The term is broad and so is also the meaning that COO has for the consumers. In the first part of the thesis I will concentrate on the different theoretical concepts that are relevant to this study, explaining the evolution of the COO and the influence it has in the purchasing decisions. In literature there is distinction between the cognitive, affective and normative perspectives connected to the COO. For the cognitive perspective, previous experience with the country the product originates from or the knowledge and perceptions that consumers have of it are used to infer on an unknown product’s quality (Chu et al., 2010). Consumers are more likely to purchase products manufactured by countries having a good reputation for producing them and to not consider products manufactured by countries that doesn’t have it (Roth & Romeo, 1992). Therefore in the evaluation process, for each product there can either be a positive or negative COO effect. The COO effect will not depend just on the effective perceived quality image of the country, but also on consumers’ feelings connected to it. Consumers around the world grow up in different environments, with different cultures and external influences, that contributes to make them perceive COO differently. Scholars that took in consideration the so-called affective and normative perspective, list the level of consumer ethnocentrism (Aziz et al., 2014), socio-economic status, demographics (Samiee, Shimp, & Sharma, 2005) and patriotism (Vida & Reardon, 2008) as examples of elements that shape the consumer’s character and influence his decision. The difference in valuation is also pertinent to the product’s category as well as specific product level. A country could have a negative COO for a certain category or specific product and a positive COO for another. Transforming a negative COO in a positive one takes time and effort, but the result is a higher competitive advantage for companies. In the same way, a positive COO can be easily transformed in a negative one (Nagashima, 1970). My thesis proposes to examine whether the elements just described can have an influence on the buying decision of consumers in a specific market, Italy, when purchasing a specific product, coffee. In the second part of the thesis I will present the coffee industry in detail, focusing on the Italian coffe market, its coffee culture and consumers’ drinking habits. Italian consumers take pride in domestic manufactured products and are usually more inclined to buy domestic coffee. Italy is one of the countries where COO, operationalized with the Made in 1 Italy cue, has a big value for local firms. Although the Italian market is dominated extensively by small or medium sized enterprises (SMEs), these are based on long manufacturing traditions and crafting skills that were handed down from one generation to another (Grandinetti, 2011; Mattia, 2004). The Italian handmade production represents a competitive advantage for Italian