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ECONOMIC INFLUENCES ON STARBUCKS

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Figure 1 : Starbucks Logo Starbucks is a multinational company specialized in selling coffee and other soft drinks, and now diversifying to fast food business. Starbucks was founded in 1971 in Seattles Pike Place Market, since then Starbucks have grown bigger and bigger with more than 18,000 stores in 62 countries. The first Starbucks coffee shop opened in Malaysia was in Kuala Lampur on 17 December 1998. Since then Starbucks has grown into over 140 stores in Malaysia by 2012. As a very large multinational company, Starbucks main aim is to maintain their Corporate Social Responsibility. They raise funds for the poor people living in Malaysia, help their children to go to school. This is mainly done through local sourcing of banana and other types of fruits and vegetables. The main problem faced by Starbucks is competition, as we see there are a large number of coffee shops in each area with the intention to compete against Starbucks. The ability of another firm to influence the prices of the market through various factors is called competition (Stigler, 1972). In Malaysia the closest competitor is the local coffee shop called the Old Town White Coffee, who are specialized in selling white coffee. Demand is the amount of goods or service which is desired by the customer and he/she is ready to pay for it (Heakal, 2013). The demand for Starbucks coffee is elastic as it has many close substitutes like milk, other soft drinks like Coca Cola, and some energy Drinks like Redbull etc. So if Starbucks increased its prices the quantity sold will decrease more than the increase in price, as many customers will switch to other substitute products (refer to figure2).

Figure 2. Elasticity of demand Supply is the amount that the market firms can offer for sale (Heakal, 2013). In other words it is the amount that a firm is ready to supply at a given price over a given period of time. Firms will tend to supply more at higher prices than lower prices, as they would be always trying to get the maximum profit. High prices will increase the revenue earned than a lower price. The Supply of Starbucks coffee is likely to be price elastic as they can change the amount of quantity supplied very easily and they have a large number coffee stock available with them. As Starbuck is a very large multinational company, they will be enjoying economies of scale. Economies of scale refers to the reduction in cost due to trading in large quantities (The Economist, 2014). Starbuck will buy its raw materials from suppliers in large quantities which will entitle them to get huge trade discounts, hence this will decrease average cost of production. When cost of production is decreased they can enjoy higher profits as they will be selling at lower cost than other coffee shops. The prices set by Old Town White Coffee will greatly influence the demand of Starbucks coffee as they are very close substitutes. This effect is called the cross elasticity of demand, in which two products are compared against one products price (Riley, 2012). A substitute is a product or service which can be used instead of the other product. Due to competition prices of coffee drinks will tend to decrease as many suppliers selling similar coffee will be trying to get the maximum profit out of it. If the prices of old town white coffee goes up, we will see a rise in demand for the Starbucks coffee products. It is because of the substitution effect which occurs when the price of old town white coffee rises, more people will switch to Starbucks coffee (refer to figure 3).

Figure 3 Cross elasticity of demand Starbucks coffee is considered to be income elastic as it is a normal good. Income elasticity of demand is the responsiveness of a good or services demand to a change in the income of the customers (Moffatt, 2014). When the customers income increases, they will tend to buy more of

Starbucks coffee as it is considered to be a normal good. If they see a decrease in income of the customers Starbucks will see a fall in sales of coffee products. If government decides to control the coffee industry it will lead to a dead-weight loss. Dead-weight loss can be described as the welfare loss which is experienced by the customer of the supplier due to a government intervention for example, tax or subsidies, etc. (The Economic Times, 2014). This occurs when government tries to control a market, which result in losses to both the consumer and the producer. For example if the government imposes a maximum price for coffee products this will lower the prices of coffee products below market equilibrium. Equilibrium price is the price where the total market quantity demanded meets the total market quantity supplied (Riley, 2012). This will create a shortage because, as the law of demand states more will be demanded at lower prices than higher prices, this shortage cannot be fulfilled by Starbucks as they cannot produce large quantities at a lower price than the equilibrium since creating a dead-weight loss. (refer to figure 4)

Figure 4 Dead-weight loss Starbucks has been providing coffee for many years and it has slowly diversified into other types of foods and drinks. Diversification means investing in other or similar type of business activities in order to reduce the risk (Investopedia, 2013). Starbucks now sells different types of small snacks like sandwiches and cookies etc. This will help them to increase the customer base as they will come for not only coffee but to have a breakfast or eat a snack while enjoying their coffee. They have also diversified into other markets like selling branded coffee mugs and other equipment used to drink coffee or other drinks. This will attract more customers into the Starbucks shops. Starbucks can be considered to be operating in a market where monopolistic competition or oligopoly is being utilized. Monopolistic competition refers, when firms are producing similar products which are differentiated by brand name and packaging. In long run these firms will earn normal profits because there are no barriers to entry or exit the market. When Starbucks is making super normal profits, more firms will enter and compete against them until the super normal profit becomes a normal profit. And when they start making subnormal profits or in other words losses, the other firms will quit the business. This will lead to normal profits being achieved by Starbucks in the long run. In conclusion there are many economic factors affecting Starbucks, but Starbucks has been running smoothly for decades is because of its marketing and promotional strategies used. And it is very important how they adjust to changes in the market prices and other factors. REFERENCE

George J. Stigler (1972) Economic competition and political competition. Available from: http://link.springer.com/article/10.1007%2FBF01718854?LI=true#page-1 [Accessed 30 December 2013]. Heakal, R. (2013) Economics Basics: Demand and Supply. Available from: http://www.investopedia.com/university/economics/economics3.asp [Accessed 30 December 2013]. Investopedia. (2013) Diversification. Available from: http://www.investopedia.com/terms/d/diversification.asp [Accessed 30 December 2013]. Moffatt, M. (2014) Income Elasticity of Demand. Available from: http://economics.about.com/cs/micfrohelp/a/income_elast.htm [Accessed 30 December 2013]. Riley, G. (2012) Cross-price Elasticity of Demand. Available from: http://tutor2u.net/economics/revision-notes/as-markets-crossprice-elasticity-of-demand.html [Accessed 30 December 2013]. The Economic Times. (2014) Definition of Deadweight Loss. Available from: http://economictimes.indiatimes.com/definition/deadweight-loss [Accessed 30 December 2013]. The Economist. (2014) Economies of scale and scope. Available from: http://www.economist.com/node/12446567 [Accessed 30 December 2013].

Microeconomic Individual AssigmentStarbucks


Posted on October 24, 2013 by shuping94

Starbucks Corporation was established in 1971, it is a largest coffee house company in the world and global coffee chain in America. It has 20,891 stores in 62 countries including Japan, Canada, United Kingdom and the others. The first Starbucks opened by three partners Jerry Baldwin an English teacher of University of San Francisco, Zev Siegl a history teacher and a writer Gordon Bowker on 30 March 1971 in Seattle. These three partners are interest in roasted coffee bean and equipment. Starbucks just sold the roasted whole beans coffee during this time. In 1986, Starbucks led by Jerry Baldwin expand to 6 stores in Seattle they just begun to sell espresso coffee. Nowadays, Starbucks also sell hot and cold beverages, pastries, hot and cold sandwiches and the others not just only coffee. The complimentary product in Starbucks is their coffee drinks, the account are 75 percent of Starbucks sales. They also provided some facilities to their customer for example free Wi-Fi zone.

According above graph, there is a demand and supply curve of Starbucks. The equilibrium price is P1 (2.50 dollars) and equilibrium quantity is Q1 (1000 cups) of coffee. If the prices decrease to P2 (1.50 dollars), the quantity of demand will increase to Q2 (1800 cups) of coffee and the quantity of supply will decrease Q3 (600 cups) of coffee. The quantity of demand greater than quantity of supply there is shortage of 1200 cups of coffee. This is the price effect the supply and demand point to move.

The graph show that the demand and supply of Starbucks. The original price is P1, the original quantity is Q1. The intersect point of supply curve and demand (before) curve is the original equilibrium point. When the price of coffee is remaining as same, the income of

consumer increase, the demand of coffee will increase. So, the demand curve will move shift along to right. The new price of coffee is P2, and the new quantity of demand is Q2. The new equilibrium point is the intersect point of supply curve and demand curve (after). This is the income effect lead the market equilibrium change.

The elasticity of Starbucks are relatively elastic, because of its products are more towards to luxurious goods. According to above graph, the percentage change in quantity demanded greater than percentage change in prices. Total revenue received by firms from the sales of product will be same as the total consumer expenditure. The elasticity demand of Starbucks is greater than 1. The original price coffee of Starbucks is P1, when it decreases to P2, the demand of coffee will greater than the original quantity Q1 to Q2. The brand of loyalty is one of the reasons to affect the elasticity of demand. It means the consumer is more preference or loyalty in Starbucks coffee, the elasticity demand of Starbuck is small. Starbucks is a franchise under monopolistic competition. Starbucks primary target market is men and women aged 25 to 40. They account almost half for 49percent its total business. The secondary target market is young adults age in 18 to 24, total 40 percent of Starbucks sales. The age group customers of Starbucks are more hip, contemporary design and the prices of product sale in Starbucks tend to relative high income person and professional careers. (Chron (2013) Small Business Available from: http://smallbusiness.chron.com/starbucks-target-audience-10553.html [Accessed 4 October 2013]) The Starbucks coffee is more towards in luxurious goods in Malaysia. According to Bloomberg BusinessWeek 2007, they have write about the prices product of Starbucks is pushing too high, Starbucks has raised the prices of coffee seven times since 1997, there has been little effect on demand, and they expect the July 31 price increase to be same. The near future could be change because increase competition and new growth coming from less-affluent customers. (BloombergBusinessweek (2013) Available from: http://www.businessweek.com/stories/2007-08-01/is-starbucks-pushing-prices-too-highbusinessweek-business-news-stock-market-and-financial-advice [ Accessed 11 October 2013]) They also write about the Starbucks two competitors. One of the closest competitors of Starbucks is McDonalds. McDonalds boomer trend in1960, the primary audience are the children, teenagers and the young urban family. In 1970s and 1980s, they rode the globalization trend by transferring the American Way of Life to many countries around the world. They supply a fast and inexpensive menu. In 1990s and early 2000s, McDonald transforms the images by launching Fast and Convenient campaign to adjustment the company product portfolio to emerging food industry trend, refurbishment their restaurant to achieve more natural dining environment. Nowadays, they

still maintain the fast and convenient concepts and supplemented the healthy, more natural by adding the salads and fruits to the menu and promote the happy meal for the kids. (Forbes (2013) Available from: http://www.forbes.com/sites/panosmourdoukoutas/2013/04/25/starbucks-and-mcdonaldswinning-strategy [Accessed 18 October 2013] )They provide the high quality coffee and health drinks. Although McDonalds also more towards to luxurious good, comparison the price coffee of McDonald and Starbucks, the price coffee of McDonald is cheaper than Starbucks. Another one competitor of Starbucks is Dunkin Donuts. They also set the target audience as rich women and professionals. The main products of Dunkins Donut sales are doughnut and coffee. The comparison of prices between Starbucks and Dunkins Donut especially the coffee price, Starbucks coffee price still higher than Dunkins Donut. They use their high quality customer service and menu diversity in their food and beverage. They add the ice cream in their menu because they have paired with Baskin Robin. ( International Business Times (2013) Available from: http://www.ibtimes.com/dunkin-donuts-vs-starbucksstarbucks-leads-scorecard-819741 [Accessed 20 October 2013])They combine coffee, doughnut and ice cream to improve their menu become well and to provide the customer more of choices.

These are the product pumpkin spice latte of three competitors sell. The first one is Dunkin Donut, second one is McDonald and third one is Starbucks. The colour of three lattes is difference, Dunkin Donuts latte is dark brown colour but the Starbucks and McDonalds are violently orange. Besides, the Starbucks add whipped cream and cinnamon on the top of coffee make a big difference with two others. The flavour of Starbucks latte is not too sweet and not too bitter and smoothly whipped cream. The latte of McDonald can perceive the smell of pumpkin inside. The latte of Dunkin Donuts the flavour is bitterness. (HuffPost Taste (2012) Available from: http://www.huffingtonpost.com/2013/09/26/pumpkin-spicelatte_n_3997918.html [Accessed 22 October 2013]).This is comparison differentia between each brand of product in monopolistic competition. They all have their own brand loyalty and customer preference.

In long-run the Starbucks have normal profit, because in the monopolistic competition the entry of market is unrestricted. So, if they have supernormal profit, long run will attract more of new firm. When new firms entry to the market, they will partition the original firms share of market. So, the profit of firms will reduce to normal profit. The cost of ingredients also affects the total revenue in their business. The coffee of them sell less than the coffee their customer consume, they will lose the revenue to cover their ingredient cost. The labour cost also is a burden to Starbucks for example the general wages or health care cost increase. Another one is some of the conservatism customer do not like their creative product coffee. They prefer the taste of most original coffee comparison to contemporary the creative of coffee. There are a few problems the Starbucks may face in the future. The cost of ingredients also affects their price of coffee because the ingredient like Arabic coffee bean is one of the expensive ingredients. If the price of Starbucks coffee continue to increase, the revenue of them will decrease because of the economy problem affected the income of customer. Due to the customer in Starbucks is the brand loyalty because they prefer the coffee of Starbucks more than the others. The coffee is the main power of Starbucks, but the menu unchanged still a problem because of they cannot attracted the new customer to consume their product. In conclusion, the Starbucks main products many types of coffee will attract the customer but the prices of coffee is very expensive comparison to the other caf or coffee house in Malaysia. Most of the people from normal income will choose the other cafe because of the price is expensive they cannot afford. The price of coffee and limited income makes them to choose the closest of substitute caf to consume. So, they will affect the supply and demand of Starbucks due to the income effect and substitute effect. Reference List BloombergBusinessweek (2013) Available from: http://www.businessweek.com/stories/2007-08-01/is-starbucks-pushing-prices-too-highbusinessweek-business-news-stock-market-and-financial-advice [ Accessed 11 October 2013] Chron (2013) Small Business Available from: http://smallbusiness.chron.com/starbuckstarget-audience-10553.html [Accessed 4 October 2013]