Economics of Starbucks CONTENTS A. Introduction B. Analysis economics of Starbucks 1. Nature of product/service 2. Market trends 3. Production/supply process and costs 4. Structure of the industry/market 5. Government role 6. Business environment 7. Firm/Industry Location 8. Business and pricing strategies 9. Entrepreneurial ability of managers C. Conclusion D. References Introduction Starbucks, what started in Seattle in 1971s by three friends: erry Baldwin, Zev Siegl, and Gordon Bowker. They opened a small shop and began selling fresh and cold coffee.
Starbucks has always been a place where you can find world’s best coffee. In 1970s, Starbucks open its first coffee restaurant and its name comes from a classical American novel (Starbucks, 2013). Through 1980s, Howard Schultz came into Starbucks, after a business trip to Italy and impressed by coffee culture, his perception is that how to make it come true in U. S, he experimented from Seattle. In 1990s, Starbucks has expanded their production line beyond Seattle. Stepping cross the rest sates of U. S as well as international market.
At the same time, Starbucks released its special option that offer stock option to employees, which made Starbucks become a public traded company. From 2000s, Starbucks continued its awesome phenomenon, its operation widespread over 15,000 locations over 40 countries. Classical Starbuck’s coffee beverage has been well recognized by lots of customers. Nowadays, Starbucks is not merely a successful coffee retailer; it is a coffee culture and place that people enjoy their lifetime. The nine main areas will give out an explanation how Starbucks looks like.
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Key word: Nature of product; Market Trends; Production/Supply Process & Cost; Structure of the Industry; Government Role; Business Environment; Firm/Industry Location; Business & Pricing Strategies and Entrepreneurial Ability of Manager. Analysis of the Economics of Starbucks Nature of Product Existing products: obviously, as a coffee related retailer, Starbucks mainly focus on coffee diversify selling. The main kinds of Starbucks coffee are latte, espresso, frappuccino as well as some sweet bakery, ice cream and so on.
By the way, according to the idea of Starbucks itself, what they likely do that create a friendly drinks atmosphere rather than only sell a cup of coffee. Actually, customers really enjoyed their coffee time in Starbucks store thanks to cultural environment. What is more, Starbucks also provide coffee beans, coffee pot and coffee cup and other products. In the Chinese market localization of product design, and some tea kind, drink even has a particular season sales of Starbucks moon cakes, etc.
Role of technology: Starbucks always try their best to improve well-roasted coffee beans, ground to perfection and then brewed to personal taste. The CEO released a statement that the company spends 20 years perfecting a top top-secret technology that ultimately results in a cup of coffee made with via, that is indistinguishable from Starbuck's typical brewed coffee (CNN money, 2009). In 2008, Starbucks purchased new coffee equipment that is called “clover”. The Clover uses precise technology and a calculated algorithm to brew coffee within one degree Fahrenheit of its ideal temperature and produce the ideal flavor (Chron, 2013).
It also gives a control to interaction between water and grounds. What is more advancement, it could connect by Starbucks network in order to more effect management each unit. Product life cycle: generally, product life cycle is divided into four parts, introduce, growth, mature and decline. Every production has to walk through these four parts. According to Starbucks, with different coffee launched based on seasons, it is still located into growth period but close to mature step.
Starbucks play its role in coffee industry similar like what monopolist do, its production occupied almost whole market share that should directed to mature stage, but new production occasional launched hold Starbucks to increase its sales volume. Price elasticity: The price elasticity of Starbucks is not very high. On one hand, coffee is necessary in daily life. On the other hand, Starbucks’ goodwill has been recognized among coffee fans, it is not matters of price. Substitutes and complementary products: coffee’s substitutes will be water, tea, mike or other fruit juice.
When you step into Starbucks store, customer service is unchanged if you pick up juices even a bottle of water. Market Trends Consumer behavior: Starbucks hold approximately 33 percentage of market share in U. S. however, half of this huge number accounted by guys who aged at 25- 40(Chorn, 2013). Obviously, primary target audience of Starbucks is this grouped people. The characteristic of them is relatively high income, professional careers and a focus on social welfare. Motivation of consuming of these guys to Starbucks certainly for entertainment, enjoy life and pursuit of fashion and communication.
The sub target customers is young adults who aged at 18-24, Starbucks position itself as a place college student can hang out, studying, writing paper and meeting. The rest customers of Starbucks are kids and teens who get there by their parents. Indifference curves: Indifference curve means products, which have different combine differently to satisfy customers. A simple indifference curve is shown in figure 1 For the coffee, at the same time, environment and music can satisfy customers. Coffee can satisfy customers’ taste sense, while environment can satisfy customers’ spirits.
Starbucks can develop their own cup, coffee beans to improve efficiency. Shifts in demand and supply curves: With six factors influence demand curve: consumers' income, taste and preferences, consumer expectations, related product price, the government behavior and regulations and the number of consumers. Again, six factors influence supply, number of suppliers, prices of resources, technology, supply expected, price of all products and government actions. Particularly, Starbucks hold 33 percentage of U. S coffee market share, demand of Starbucks will increased, so demand will shift toward right side.
Also, thousands of hundreds location established would satisfy these demand, supply curve move right side. Production/supply Process& cost Input: what Starbucks need do if it needs transforms quality coffee is inputting coffee bean, water, some capital investment as well as labor. Production function & Cost function: production function relates to the maximum quantity of output that can be produced from given amounts of input. A graph showed below about Starbucks production function. Figure 2: Retrieved from: http://faculty. washington. edu/ezivot/econ301/labor_demand. tm Apparently, as more and more labors putted into operating room, sales of Starbucks coffee increased. However, when increasing labor beyond quantity maximum, there is no increase on quantity. Marginal analysis: marginal analysis is one of the most important managerial tools. It states that optimal managerial decision involve comparing the marginal benefits of a decision with the marginal cost. Variable costs will not affect the output of the change in Starbucks. Coffee industry did not have a fixed mode. Coffee is the taste of the food service industry depends on customer. Structure of the Industry/Market
Nature of industry: Starbucks as global famous coffee retailer had build one of world’s most powerful and recognizable brands of high-quality coffee and the unique "Starbucks Experience. " It first revolutionized coffee making industry by creating “third place” between workplace and home that is a clean, friendly environment where customers would escape chaos from daily life (Wikinvest, 2013). So, whole coffee industry has been winded by Starbucks style that creating relax and comfortable place for staying by quality coffee servicing. The rest of other competitors is trying advance environment as well.
Industry concentration: it also another important part affect marginal decision. As we mentioned above, almost one third coffee production consumed by customers derived from Starbucks, coffee industry mostly distributed by this large company, certainly, other small company or local coffee store also account for whole coffee industry. Competition: obviously, Starbucks hold a dominate position in coffee industry and has no clearly rivalry in this section. The National Coffee Association estimates that the US coffee market will reach $29 billion in 2011(Wikinest, 2013).
However, the three monsters in coffee industry target their different market. Starbucks try their best to hold on unbelievable market share with some change of price strategy. Whereas, even McDonald's larger retail footprint may overlap more with Starbucks' core markets, but their stark differences as stores are reflective of the general differences between their core customers. The Dunkin donuts ranked in the third, its customers experience is more similar to “coffee-to-go” rather than place to enjoy lifetime. Consequently, market of coffee to go will be a fierce competition.
Oligopoly Models: an oligopoly is a market that dominated by few competitors, Starbucks controlled not less than 30% coffee market share and made a important role entire market. Whereas, McDonald’s, Dunkin Donuts, and Caribou Coffee affect coffee industry could not be ignored. Government Role Government role should be considered inseparable component as running business wherever domestic or global. What is good news for successful applying government role that it signed a contract with a province in China based on Chinese government role.
That is positive on input procurement of Starbucks in Chinese market. There is a signed deal that Starbucks cooperate with province of Yunnan to set up its first-ever coffee-bean farm in the world to cater to a rapidly growing population of coffee drinkers in China amid a global battle for quality coffee beans (The wall Street Journal, 2010). In contrast, the illegal operation in U. K will produce a punishment for itself. In 2011, the company paid exactly zero in corporate tax rate even 398 million in sales (Forbes, 2012).
The British government has already taken a action and adjust some law restriction specially. Business Environment Business environment consisted by two components, general environment and industry environment. Through a deep analysis could help the company compete well in the market and make more profit from that. The general environmental analysis in which a firm exists in following five parts, economic, political, socio-cultural, technological and demographic (Brain Mass, 2013). The recent global economic recession affect business with both rising operation cost and lower profit margin.
Almost every industry even companies have been involved into this horrible crisis. The consumer of the products are facing increase price of commodities. It made people’s life difficult and hard to pay too much on their daily food and drinks. During the economic crisis in 2008, coffee customers were still had 3. 3 cups per day on average and they may choose the lower cost coffee. The political and legal pressure is also filled with the coffee industry. Coffee companies buy coffee beans from different countries under their own regulations and customs.
The company has to know the professional knowledge about how to import coffee beans from other country and follow the change of political policy. At the same time, firms must prepare well of necessary forms and permits to do coffee business. It includes business entity applications, tax forms, contracts and store leases and so on. The company also need abide by the laws and regulations issued by the local and federal governments, such as food handling regulation and labor laws. The social-culture segment based on the reflection of consumers and how the company response to it.
As growing number of health-conscious customers, the company should keep up with the changing situation and meet demand of new market needs. Although companies like Starbucks initially resisted using anything other than whole-milk in coffee beverage preparation. Under the pressure, the product producer need come up with new products with both nutritious and tasty to satisfy the customer’s needs. Nowadays, the technological is getting more important to help extend business almost in any industries. It is also a major factor in the coffee industry.
The technology is related to the product innovation, services and the consumer’s interaction. According to Starbucks, as a world’s famous coffee producer, no matter the operation or customer service, what only you could see is technological equipment. The article in “AdAge” on February 2010, Starbucks was able to use social media to its commercial or customers’ feedback. Technological software is being launched in 2011 that is App Starbucks. It is could help customers make purchase, track reward numbers and check balance by mobile with internet.
It is convenient for both cashers in front desk and customers who need a cup of Starbucks. Digital network is also an advantage positioned by Starbucks; Starbucks could service as a moving office even a meeting place thanks to ultimate Wi-Fi connection in its store. For brewing, Starbucks still equipped by advanced coffee brew machines. Such as clover, it precise control time, temperature, material volume in order to qualified coffee (Chorn, 2013). As environment deteriorated day by day, environmental conscious and protection is being paid more attention.
It is committed to a role of environmental leadership in all facets business (Starbucks Coffee Company, 2013). Starbucks is considering replacing plastic package by some special biodegradable material; what is more, Starbucks try it best to do recycling even if some location is hard to come true that. According to industry environment, coffee service has evolved into very specialized profession, the coffee retailer do not believe themselves as merely coffee seller any more. With a profusion of advanced delivery system and a wide variety of products, they willing to create an awesome culture those customers have even experienced.
Truthfully, there is no direct offense to Starbucks by other coffee firms; however, more recently an intense competition between those major coffee brands, there will be more pressure on Starbucks. For instance, McDonald's has 14,000 stores in the U. S. and caters to a wider demographic than Starbucks; it also enjoys increased traffic from its variety of well-established breakfast options. McDonald's coffee sales increased 15% in 2006 (Hub Pages, 2012). From the side of customers, customers are powerful force in coffee industry. The largest segment of revenue is coming from individual buyers.
They can influence the price, quantity and quality of the product. That is to say the rate of profit of a coffee company directly affected by customers. Starbucks’s most supplements come from its loyal customers, Starbucks brand has been deep widespread among crowded. But as no apparent lower unemployment rate exists and lots of people fired from their work position, they have to tight daily expenditure even if they are crazy about Starbucks. The price strategy should be mentioned by Starbucks under tough market environment. Replan a flexible and reasonable selling price based on customer behaviors.
Firm/Industry Location Starbucks is the largest coffeehouse company in the world, with 20,366 stores in 61 countries, including 13,123 in the United States, 1,299 in Canada, 977 in Japan, 793 in the United Kingdom, 732 in China, 473 in South Korea, 363 in Mexico, 282 in Taiwan, 204 in the Philippines, 164 in Thailand and 3 in India (Wikipedia, 2013). Starbucks’ located combined by daily and evening locations. Almost every location builds at corner of traffic lots. Besides, some of Starbucks located in college campus, because college students are its target market either.
Taking a conclusion, Starbucks’ location always depend on how service customers efficiently in order to profits getting back. Business and Pricing Strategies Starbucks planned its pricing strategies divided to two columns. One is that it headed downwards most popular production such as, brewed coffee and lattes coffee. It is also redesigned its menu to feature out low priced brewed coffee or lattes. Another one is increasing the prices of its higher-end more complex drinks including Frappuccinos and caramel macchiatos, of which there is less competition from rivals.
In some cases, prices are rising by 30 cents (Pricing for profit, 2009). As a result, some speculate that Starbucks is trying to make the most profit from its devoted customers who are hooked on its products. Different price strategy on different marketing production is in order to make good profits. Entrepreneurial Ability of Managers Entrepreneurial Ability of Managers it is an important function of management which helps to maximize efficiency and to achieve organizational goals. The mark of an effective leader is his ability to foresee the business trends and stay ahead of his rivals. Howard Schultz who is the owner of Starbucks.
In a sense, Howard Schultz did what similar to Steve Jobs and other innovators have done, creating something that we really did not know we needed until we had it. He spends lots of his time in working place and focuses more on company innovation and effective management. Recently, Starbucks launched its new production that is named Verismo (Business Insider, 2013). Schultz stated that its plan is to use Verismo to be a global leader. As well-know, Starbucks cover more employees’ benefit than other coffee related company. No matter part-time workforce or full-time there, Starbucks provide unbelievable benefit that you never seen.
That is exactly what Schultz’s belief that employee satisfaction lead to customers’ satisfaction. What is more, Starbucks encourage employee to participate to social activities, it is good way of brand reorganization. An efficient management will release a help to sales increase and profits maximizing. Starbucks always realign its top management based on specific situation. Unlike other company grouping their firm entirely wherever domestic market or international market, Starbucks divided their responsibilities for its business into three global regions, Asia, America and rest of world’s place.
Every region has its own executive, which take a hold of the entire region. Which is possible of this change would help maximize its opportunities in growing market like China, Brazil and India. Conclusion Starbucks is the leader of the coffee industry devote to produces high quality and premium roasted coffee to market in many areas of the world. The success is hard to ignore the contribution from Howard Schultz. With his entrepreneurial ability and effective management, Starbucks is keeping moving forward to grow up and face changing situation and variety of problems caused by both internal and external impact.
The management structure of Starbucks became a benchmark in coffee industry which many industry players are willing to emulate and study. Starbucks is powered by their continual bringing new innovative product, build good relationship with customers, ability to expand globally and right decision of select locations. Coffee and tea are popularly in all over the world and attract large number of population. Coffee industry is sensitive that can provide attractive revenues to the company. However, the company only could be success and get huge profit under the competition if the efficient and effective strategies are being taken.
The key successful factors of coffee industry demand is utilize technology to enhance customer experience, innovate products, select appropriate location and prepare well to conquer competitors. References Business Insider. (2013, Jan 26). Starbucks Seems Almost Giddy about Its Verismo Machines. Retrieved from http://www. businessinsider. com/starbucks-verismo-2013-1 BrainMass. (2012). General Environment of Business. Retrieved from http://brainmass. com/business/business-analysis/191029 Chorn. (2012). Who Is Starbucks' Target Audience? Retrieved from http://smallbusiness. hron. com/starbucks-target-audience-10553. html Chron. (2012). Starbucks ; Its Use of Technology. Retrieved from http://smallbusiness. chron. com/starbucks-its-use-technology-28272. html CNNMoney. (2009, Oct 2). Starbucks' new high-tech coffee. Retrieved from http://tech. fortune. cnn. com/2009/10/02/starbucks-new-high-tech-coffee/ Forbes. (2012, Dec 19). Self-Righteous Starbucks Forced To Chug a Venti of Greedy Government. Retrieved from http://www. forbes. com/sites/kylesmith/2012/12/19/self-rigtheous-starbucks-forced-to-chug-a-venti-of-greedy-government/ HubPages. 2012). Specialty coffee industry analysis. Retrieved from http://meangreen. hubpages. com/hub/Specialty-coffee-industry-analysis Pricing for profit. (2009, Aug 26). Starbucks’ New Pricing Strategy: The Beginning of the End? Retrieved from http://www. pricingforprofit. com/pricing-strategy-blog/starbucks-new-pricing-strategy-beginning. htm Starbucks Coffee Company. (2013). Our Environmental Mission Statement. Retrieved from http://gr. starbucks. com/en-US/_Social+Responsibility/_Social+Responsibilities/Environment+Mission+Statement. htm Starbucks. 2013). A Brief History of Starbucks. Retrieved from http://philippines. starbucks. com/en-US/_About+Starbucks/History+of+Starbucks. htm The Wall Street Journal. (2010, Nov 15). Starbucks to Open China Coffee Farm, Securing Global Supply. Retrieved from http://online. wsj. com/article/SB10001424052748704462704575609733431622088. html Wikinvest. (2012). Starbucks Corporation. Retrieved from http://www. wikinvest. com/stock/Starbucks_(SBUX) Wikipedia. (2013). Starbucks. Retrieved from http://meangreen. hubpages. com/hub/Specialty-coffee-industry-analysis
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