My name is Rebecca Milloway, and I am a consultant to the coffeehouse company Starbucks. My goal is to provide the company’s board members with advice, based on data and statistics, that will provide them with tools to ensure the company’s future success. i will analyze the corporation and compare it to the global coffee market. I will identify the supply and demand conditions, price elasticity and how consumers respond to it, the costs of production, product availability, and trends in the market.
I will provide recommendations that reflect the facts and information that are found in order to maximize potential profit and revenue. The Starbucks Corporation is the largest coffeehouse company on the planet. It boasts more that 22,000 stores in 62 countries (https://www.starbucks.
com/about-us/company-information/starbucks-company-timeline, n.d.). As of 2012, Starbucks hit a revenue of over $13 billion and gave jobs to 149,000 people (https://successstory.
com/companies/starbucks-corporation-45, n.d.). The company’s mission is to “inspire and nurture the human spirit – one person, one cup, one neighborhood at a time” (https://www.starbucks.com/about-us/company-information/starbucks-company-profile, n.d.).
The coffeehouse giant started out as a small single location that was opened in 1970 in Seattle, Washington by three college buddies out of the University of San Francisco. Jerry Baldwin, Gordon Bowker, and Zev Siegl started their business endeavor as a whole coffee bean shop and kept it that way until 1976. After relocating to a bigger location, they began selling espresso coffees to customers. In 1987, the men sold the store to Howard Schultz, who took advantage of the opportunity to open other Starbucks stores outside of the city. By 1989, Schultz SHORT TITLE OF PAPER had expanded the company to 46 locations. Schultz continued to open more stores to meet the growing public demand, and by 1992 had 135 stores that brought in a yearly revenue of $72 million dollars.
Starbucks officially went international in 1996 when its first store outside of the U.S. was opened in Tokyo, Japan (https://www.starbucks.com/about-us/company-information/starbucks-company-timeline, n.d.
). Starbucks has expanded its outreach to customers by offering products other than coffee, such as pastries, teas, salads, soups and sandwiches. In this day and age, Starbucks is one of the largest and most successful companies in the coffeehouse industry. A company or firm’s supply and demand is considered to be one of the most crucial factors in a market economy.
The concept of supply refers to the selling firm and what price point they sell the product at. The concept of demand refers to the consumer and what price they are willing to pay for that product. When the supply of Starbucks’ product exceeds the demand for the product, the equilibrium price of the product will decrease and the demand will rise.
When the demand for coffee is greater than the supply, there will be an equilibrium price increase and the availability will decrease. This chart displays an example of Starbucks’ supply and demand shifts: (Image retrieved from: https://shuping94.wordpress.com/2013/10/24/microeconomic-individual-assigment-starbucks/) SHORT TITLE OF PAPER According to the graph, the equilibrium price is $2.50 and the equilibrium quantity is 1,000 cups of coffee. As the graph shows, if the prices decrease, the demand increases and the supply decreases.
When the demand is greater than the supply, there is a shortage of coffee. The main target market for Starbucks is both men and women ranging from ages 25 to 40. This group makes up almost half of the franchise’s business.
The second largest market would be a younger adult audience ranging from ages 18 to 24. (http://smallbusiness.chron.com/starbucks-target-audience-10553.html) Starbucks’ main target group are hip, modern, and probably mid- to high-income. Most of Starbucks’ customers are recent college grads or professionals.
In the past, Starbucks has raised its prices on several occasions. According to Bloomberg Businessweek, the company has raised its prices seven times since 1997, and it had very little to no effect on the demand. (http://www.businessweek.com/stories/2007-08-01/is-starbucks-pushing-prices-too-high-businessweek-business-news-stock-market-and-financial-advice) There is always the possibility that this could change due to the increase in competition.
The elasticity of Starbucks is considered elastic, because Starbucks’ product is more of a luxury than a necessity to consumers. The elasticity is determined by comparing the change in demand SHORT TITLE OF PAPER with the change in price. If Starbucks increased their prices, the demand will decrease, and their competitors will drop their prices to stay in competition with them. The changes in the demand curve will allow the price and quantities to shift. Therefore, the demand would be elastic.
The main reason behind the changes in prices is not necessarily the change in demand, but more the change of consumers and competition. When other competitors are marketing the same product at a lower price, or perhaps the same product with a new twist, consumers will go for the other option. However, the lack of shifts in demand for Starbucks could indicate a loyal and strong customer base. There are many factors that come into play when it comes to the shifts in consumer demand. Consumers’ income elasticity, the prices of goods, and quality of product are all popular reasons for it. The biggest influence on Starbucks’ performance as a company would be income levels. When there is an income increase in society, the demand will increase.
The same applies for lowered income levels. When it decreases, so does consumer demand due to the consumers’ need to spend less money. In the world of economics, the costs of production have to do with obtaining goods and services that produces revenue for a company. Starbucks’ main costs revolve around the price of coffee beans. They demand for coffee is high, so therefore Starbucks must import their coffee beans from several continents in order to meet those demands.
To keep up their reputation for serving the best quality, they make use of Arabica and Robusta blends to help maintain the integrity and trustworthiness with their always-growing customer base. Each cup of coffee from Starbucks costs, on average, $0.02 to $0.07 to make (Kikorian, 2014). Over the years, the costs of making coffee has increased and will continue to do so as the SHORT TITLE OF PAPER consumer demand for coffee steadily increases. Brazil produces the majority of Arabica coffee beans (around 40%). Central and South America produces the Robusta bean.
There are times during production that the supply is shorter than the demand, and costs of production and prices may affect the ability to harvest beans and meet the demands, so therefore the prices would rise. Starbucks will continue to keep up their growing profits while accounting for production and operating costs. Below are charts that represent the cost of goods and operating expenses of Starbucks over time: SHORT TITLE OF PAPER Since Starbucks does not franchise, this means that Starbucks is responsible for all of the operating expenses and costs of goods. Fixed costs, also known as overhead costs, are expenses that do not change based on the production.
Fixed cost for Starbucks would include taxes and advertising, which would stay relatively consistent and would not be affected by the production of coffee beans. Variable costs, or directs costs, are the costs that depend on production. Variable costs for Starbucks would be expenses such as raw materials, labor wages, shipping, and fuel. Costs of goods sold (COGS) would also fall under this category, and the prices of the products revolve very heavily around it. The company must adjust their pricing in such a way that they can find a price point that would keep their customer base strong while also keeping a healthy profit margin.
Overall, Starbucks maintains a good understanding of the market. “Starbucks has been providing great achievements, like: a stock price growth of 948 percent; a market cap expansion from $5 billion to $57 billion; a more than ten-fold increase in total shareholder return; and serving more than 70 million customers per week in more than 20,000 stores in 64 countries” SHORT TITLE OF PAPER (https://www.linkedin.com, n.d.). Market share refers to the percentage of the company’s sales that is earned over time. Market share is determined by dividing the sales of the company by the sales of the entire coffee industry, all within a certain period of time.
Below is a graph that represents Starbucks’ market share during the year 2005: The barriers to entry into the coffee industry are considered to be low for Starbucks. The low entry into the market will cause profit margins to decrease in the long run. Because the costs over time do not decrease, the startup costs are not constraining. However, there are factors that should be considered when entering the coffee business. When entering as an entrepreneur or small business owner, there is always a chance of failure due to bigger competitors. In order to stand out from other competitors, the new company must establish a loyal customer base and gain their trust with a good quality product. Initial costs should be spent on advertising in an attempt to leave a footprint on the industry’s market share.
Big competitors, such as Starbucks and Dunkin’ Donuts, may be intimidating to small businesses. On the other hand, small businesses have the ability to persuade consumers with lower prices and unique products that aren’t your “run-of-the-mill” coffee products. SHORT TITLE OF PAPER Starbucks operates under a monopolistic market structure, and this allows them to keep control of their own prices.
In this type of competition, companies are allowed to produce the same goods as other companies, but each is permitted to make their own production decisions to allow their products to stand out from the competition and create their own prices. Simce the majority of Starbucks’ competitors focus mostly on coffees and pastries, Starbucks has generated a new stream of revenue over the past few years by expanding its menu to offer daytime casual foods, such as soups, salads, and sandwiches. As far as the coffee industry goes, many factors can influence supply and demand. I believe that Starbucks will continue to stay on top of the competition. My recommendation is that Starbucks should monitor the price elasticity of demand whenever they introduce new products to its consumers. Consumers will be influenced by lower prices of its competitors. I also recommend that the company markets its product well so that they may maintain their success. There will be marginal costs involved with the launch of a new product, but if it is marketed well, the revenue it brings will be even greater.
Starbucks should continue to understand and evaluate sales and demand trends over time. If they can continue to do so, the firm will continue to be the greatest coffee company in the world. SHORT TITLE OF PAPER References:Starbucks Corporation SuccessStory. (n.d.). Retrieved November 11, 2017, from https://successstory.com/companies/starbucks-corporation-45Starbucks Company Timeline.
Retrieved December 17, 2017, from https://www.starbucks.com/about-us/company-information/starbucks-company-timelineIs Starbucks Pushing Prices Too High? (2007, August 01). Retrieved December 03, 2017, from https://www.
bloomberg.com/news/articles/2007-08-01/is-starbucks-pushing-prices-too-high-businessweek-business-news-stock-market-and-financial-adviceWho Is Starbucks’ Target Audience? (n.d.). Retrieved December 03, 2017, from http://smallbusiness.
chron.com/starbucks-target-audience-10553.htmlGogeek Seguir. (n.d.). Dunkin’ Donuts. Retrieved December 11, 2017, from https://pt.
slideshare.net/gogeek/dunkin-donuts-1940212/10Krikorian, Matthew (Jan. 2014). Why Starbucks Deserves Your Attention. Retrieved December 11, 2017, from https://beta.
marketrealist.com/2014/01/understanding-starbucks-cost-structure-operating-expenses?utm_source=redirect5&utm_medium=autoSHORT TITLE OF PAPER Krikorian, Matthew Understanding Starbucks Cost Structure (n.d.
). Retrieved December 11, 2017, from https://beta.marketrealist.com/2014/01/understanding-starbucks-cost-structure-operating-expenses?utm_source=redirect5&utm_medium=auto