The Microeconomics of Starbucks Corporation

Introduction 

Purpose and How it Contributes to Conclusion 

The primary purpose of this paper is to provide recommendations on how Starbucks can be successful in its day to day operations and the future. Successful practices and processes are vital for the growth and expansion of any business in the modern age. As a business grows, it needs to make strategic changes following arising circumstances, try out new strategies, and adapt profitable and productive successful elements is vital to make a significant difference in business. Lemus, Feigenblatt, Orta, and Rivero (2015) argue that a ppropriate standards achieve best practices through benchmarking and putting in place strategic measures and managerial procedures. Some of the good practices include improving quality, increasing sales, developing new markets, using technology, responding to innovations, and harnessing skills of the company workforce. According to Qian and Xing (2016) w ith stiff competition evident among similar companies, a business needs to also set out the best managerial and management practices such as: leadership, a clear mission, vision communication, and careful strategic planning. The paper will analyze several microeconomic criteria concerning Starbucks and its operational market. It will offer details on how the company can be more successful in its day to day operations and the future. 

History of Starbucks 

Starbucks Corporation is an American coffeehouse and is the largest in the world. According to Geereddy (2013) t he coffee retail store was founded by three partners in Seattle in 1971. They were Jerry Baldwin, Gordin Bowker, and Zeev Siegel. Qian and Xing (2016) maintain that t he three founders were all students by then, and they all loved tea and coffee. They borrowed money and invested in opening their retail store and called it "Starbucks." Alfred Peet, a Dutch immigrant, played a critical role in inspiring the trio to venture into the coffee business ( Lemus et al., 2015) . Peet had started importing teas and coffee in early 1966. He had a small retail store in Berkeley, California. His success encouraged the founding members of Starbucks to open its retail store that sold high-quality coffee beans. They invested in a second-hand roaster and improved on Peets roasting skills. 

According to Lemus et al. (2015) by the year 1980, Starbucks expanded to four more stores in the streets of Pike Place Market. Siegel left in 1980 to get on with other activities leaving the two to pursue the future of Starbucks. The entry of Howard Schultz turned the fortunes of Starbucks as Schultz brought in new sales strategies and customer-friendly approaches to the company. His trip to Milan gave him an idea, but the two remaining Starbucks founders refused to buy. He departed from Starbucks and started his chain of II Giornale in 1985 ( Qian and Xing, 2016) . It was an instant success, and he started moving into large and major cities around the world. In 1987 Bowker and Baldwin sold Starbucks to Schultz. Schultz combined all the resources of his II Giornale under one brand, Starbucks, and concentrated in his café's ideology that focused on the sale of coffee beans and equipment ( Lemus et al., 2015) . Currently, the coffee house-chain is the largest globally operating over 30,000 stores. 

Supply and Demand Conditions of Starbucks 

Trends in Demand Over Time and Impact on The Industry and The Firm 

Coffee is an essential beverage drink for many in society. The high consumption levels of coffee are evident globally, as is evident in high exports and imports of coffee. The National Coffee Association approximates that over 78 percent of the US population drinks coffee. Increased demand for the product is common in the market with numerous tastes ( Geereddy, 2013) . Starbucks' chief goal is to make high-quality coffee with a dark roasted aroma ( Lemus et al., 2015) . Initially, Starbucks targeted well-educated clients, affluent customers, and white-collar employees. Over the years, the company has expanded to various segments, such as the less-educated, young, and low-income earners. 

According to Qian and Xing (2016) Starbucks' unique characteristics set it apart from other companies in the market. These include its coffee's shape, color, and features. The company has expanded and increased its profits by paying more considerable attention to coffee beans and quality, thus reducing its overall costing. Lemus et al. (2015) indicates it has also helped the company evade the volatility of its products. The strategy has earned the company high revenue in addition to growth prospects. Rhodes and Zhou (2019) argue that t he company is positioned in the market by offering a different and rich experience to its clients. The strategy has attracted a high number of customers in need of a meeting point to spend their time. 

Information and Data Related to The Demand and Supply 

Figure 1 

Fig.1. Starbucks revenue by segment. Adapted from Monex. (2019, February 6). Insights. Retrieved October 18, 2019, from https://www.monexsecurities.com.au/insights/news/starbucks-earnings-analysis-our-projections-and-insights-on-a-new-chinese-competitor-looking-to-take-over. 

Revenue by Prediction 

Figure 2 

Fig.2. Starbucks revenue prediction and progress. Adapted from Monex. (2019, February 6). Insights. Retrieved October 18, 2019, from https://www.monexsecurities.com.au/insights/news/starbucks-earnings-analysis-our-projections-and-insights-on-a-new-chinese-competitor-looking-to-take-over. 

Figure 2 above shows Starbucks' overall earnings in the first quarter of 2019. The coffee shop reported a total of $6,633 million in operating revenue and income of $1,016 million in the first quarter of 2019. In the same first quarter, it also opened 163 new stores. 

Figure 3 

From the figure 3 above, the equilibrium pricing at P1 is $2.5, and the quantity is Q1 of one thousand cups of coffee. At P2, the demand quantity will go up to Q2 at 1800 cups, while the supply quantity decreases at Q3 by 600 cups. From the graph, the demand quantity is higher than that of supply ( Rhodes and Zhou, 2019) . There, a deficiency of approximately 1200 cups is experienced. Elasticity of the company is comparatively elastic since its coffee and other products tend to be luxurious. 

Figure 4 

From figure 4 above, the change in quantity is greater than the difference in percentage prices. Similarly, the income is same as the change in prices (rate). Thus, the elasticity of demand is more than one. The initial pricing is P1 as it goes down to P2, the company's demand will be more than the previous quantity of Q2 and Q1. The elasticity is mostly impacted by brand loyalty, since the consumer is loyal to the company, and in this case, the elasticity will be small. 

Price of Related Goods 

Starbucks menu prices are as follows: 

Ahmad (2015) states that white chocolate Mocha sized Grande costs $4.45, freshly brewed coffee-sized high, costs $1.85, newly brewed coffee-sized Grande costs $2.10. Other coffee cups Skinny vanilla latte, high price $3.45, and Cinnamon Dolcelatte, Grande costs $4.45 ( Sakal, 2018) . The company's primary competitor is Luckin Coffee, which has over 2000 stores, which is more than half of Starbuck's stores in China ( Lemus et al., 2015) . In terms of pricing, Luckin has a relatively high-priced coffee as compared to China. Starbuck's coffee in China costs about 20 RMB. Luckin costs about 30 RMB. Luckin reduced its cup of coffee to 21 RMB and 26 RMB meaning that it is losing about 10 cups of coffee due to its free coffee they give away to customers. 

In terms of cost structure, the company has spent about 70 percent of its revenue to care for its operations. For example, in China, the Starbucks sales cost ration went up by about 27 percent in the first quarter from 18 percent ( Sakal, 2018). 

Population and Demographics 

Starbucks' primary target market comprises women and men of 25 to 45 years of age. The age bracket accounts for approximately 50 percent of the chain’s consumers. The age bracket includes the working class, unemployed, wealthy, and needy clients ( Geereddy, 2013) . Those in the age bracket of 18 to 24 comprise about 40 percent of the company's revenue ( Lemus et la., 2015) . Each year, adults grow by 4.6 percent. The majority of the customers are free thinkers, live in their apartments. Many are single and prefer TV and movies or online streaming. They are active LinkedIn, Twitter, and Facebook users ( Ahmad, 2015) . They work in creative employments and earn at least $125, includes: painters, graphic designers, and writers, among others. 

Tastes 

Sakal (2018) states that Starbucks is tailoring its coffee tastes to suit its varied market demand. For example, in Europe, the company is focusing on offering espresso, blonde espresso roast, and original coffee beans. The coffees are full of flavors and come black or no sugar. 

Future Prices 

According to Ahmad (2015) the world's most caffeinated are set to increase by over 25 percent by the end of 2019. These include its main core input, coffee beans. The primary reason for the increase is due to a surge in coffee supply from Brazil. 

Supply 

The underlying secret to Starbucks' success lies in its supply chain. The giant coffee maker uses a similar supply chain as its main competitor. However, it is applying a different standard that is vertically integrated, from its stores (coffee bean) direct to the consumers ( Sakal, 2018). It thus works directly with its coffee growers to maintain its flavor standards and high quality. 

Figure 5 

Figure 5 above illustrates the supply and demand of the company. The original pricing is set at P1 and quantity at Q1. At the intersect of the supply-demand and curve stands out as the original balancing point at that point, the price is similar, consumers' income increases, and demand increases ( Ahmad, 2015) . The demand curve changes towards the right. Thus, new rate is, therefore, P2, and further demand is Q2. The newly created point is the section of the supply curve and demand curve. The overall revenue impact points to an alteration in market equilibrium. 

Main Competitors 

The corporation’s main competitors are Costa Coffee, Café Coffee Day, Dunkin Donuts, and McDonald. Other indirect competitors include Kentucky Fried Chicken and independent Fast food chains and Bakery ( Nekrassovski, “n.d”) . With the rising number of fast-food chain stores offering coffee, Starbucks is thus faced with both direct and indirect competitors. 

Technological Improvement 

The company has implemented a reinforcement learning technology, a learning machine that helps in decision making, especially in an unpredictable environment ( Geereddy, 2013) . The primary purpose of the technology is to personalize customer's experience, especially those using the company's mobile app ( Sakal, 2018) . Customers can order drinks at their precise location at any time of the day. The digital platform also enables customers to receive instant messaging on their preferred coffee preferences. Another important technology is the IoT. The technology allows for the company's operations to run all through without a hitch ( Rhodes and Zhou, 2019) . Azure Sphere is used by the company to deliver its devices across its retail stores all over the world. 

Prices of Substitutes 

Key competitors such as McCafe's offer coffee at a slightly low rate as compared to Starbucks. For example, a cup of coffee at Starbucks costs $4, while in McCafe's the price is as low as $2 or $1. McDonald lowered its coffee cups price to survive in the market dominated by Starbuck ( Ahmad, 2015) . The scenario has pushed Starbucks to lower its coffee prices or close some of its stores. By the end of 2008, Starbucks had closed over 900 retail stores due to price wars. 

Price Elasticity of Demand for The Products 

It is the ration of supply or demand of a commodity concerning changes in the price. It thus measures the portion of an equivalent change in the amount demanded to the equal change in pricing. When Starbucks lowered its price, the move did not have an impact on the overall demand. The effect will be lower than 1. Any significant small change may thus lead to a direct shift in demanded quantity. If Starbucks lowers its coffee price, the volume of demanded decreases. 

Figure 6 

Fig. 6. price elasticity of demand. Adapted from Rhodes, A., & Zhou, J. (2019). Consumer Search and Retail Market Structure.  Management Science ,  65 (6), 2607-2623. https://mpra.ub.uni-muenchen.de/69484/1/MPRA_paper_69484.pdf 

Concerning other company’s any decrease in other company’s coffee is bound to have an impact on the demand for Starbucks products ( Nekrassovski, “n.d”) . Thus, with time, if other players in the industry, especially crucial competitors such as Dustin Donuts, are bound to have a significant impact on the company’s overall demand. 

Factors that Affect the elasticity of demand 

A change in pricing may not affect the demand for a product. According to Geereddy (2013) a small change in the price of a laptop may not affect its demand. Several factors can affect the elasticity of demand for a given product ( Rhodes and Zhou, 2019) . These include the nature of the commodity, the income level of the consumers, availability of substitutes, and the level of pricing. Other factors include: several users, postponement of consumption, and the total share expenditure. 

Passage of Time: Consumer’s demands change with time, depending on various factors. At the same time, the entry of new players may affect consumption levels and the need for a given commodity ( Rhodes and Zhou, 2019) . Thus, Starbucks' performance is dependent on various factors with time. 

Luxury or necessity: The need for luxury products and services may have an impact on consumers' demand for some products such as coffee. 

Impact of price elasticity of demand on pricing decisions 

Elastic products are subtle to any slight increase in pricing. However, inelastic products are not very sensitive ( Nekrassovski, “n.d”) . In case the price of a commodity is reduced, the quantity demanded by consumers cannot have an impact on price decrease, thus decreased revenue. Similarly, in case the pricing of inelastic products is reduced, the earned income will not bring forth any significant change in the number of goods required ( Ahmad, 2015) . Price elasticity provides for a flexible way of forming pricing tactics. At the same time, companies dealing in inelastic products can handover the manufacturing cost to consumers without seriously affecting demand for the same products. 

Cost of Production 

Market Share 

According to Ahmad (2015) the cost of goods is the difference between the start and end inventories for touchable products that result from expenses reflecting sales and production costs. For the year ending of June, Starbuck's cost of goods sold was $2.809B ( Rhodes and Zhou, 2019) . The value was an increase of year over year. For the 12 months that ended 30 June 2019, the cost of goods was at $10.78B. In other years, 2017 and 2016, the company registered a significant increase in the price of goods sold ( Ahmad, 2015) . The figure 7 below shows the pictorial representation of the value of products sold through the years 2006 to the beginning of 2018. 

Figure 7 

Fig. 7. Pictorial representation of the value of products sold through the years 2006. Adapted from Macrotrends. (2019). Starbucks Cost of Goods Sold 2006-2019: SBUX. Retrieved October 18, 2019, from https://www.macrotrends.net/stocks/charts/SBUX/starbucks/cost-goods-sold . 

With the increasing price of coffee from Brazil, Costs of goods sold (COGS) will continue increasing, and Starbucks will be forced to adjust its coffee bean price to respond to the market demands. 

Figure 8 

Fig. 8. Growth trends. Adapted from Macrotrends. (2019). Starbucks Cost of Goods Sold 2006-2019: SBUX. Retrieved October 18, 2019, from https://www.macrotrends.net/stocks/charts/SBUX/starbucks/cost-goods-sold . 

Operating Expenses from 2006 to 2019 

Starbucks' operating expenses have been on the increase since 2006. The Figure 8 above shows the increasing trend from 2006 to 2019. In the first quarter of 2019, the company made profitable returns in the US and China cafés ( Rhodes and Zhou, 2019) . The market value rose by 41 percent, with a market value of 110.2 billion. Its net income for the period grew to $1.38 billion from $852.6 million per share ( Nekrassovski, “n.d”) . Both the US stores and China stores are bound to experience more customer visits as the company strives to drive more customers to its retail stores. In the first quarter, the company added approximately 400,000 new customers totaling 17.2 million customers. The companies varied costs and fixed costs help it determine its overall financial performance in the market. With a manageable fixed price, the company can change its variable value and achieve a significant profit. 

Overall Market and Competition 

Starbucks is more than coffee. It is an experience. The coffee market is allocated to various segments; Out of Home and Ground coffee verses soluble, coffee is taken, In-Home verses Out of home ( Geereddy, 2013) . Instant coffee caters majorly for local tastes, for instance, Nestle, with over 35 percent of households taking coffee ( Nekrassovski, “n.d”) . Other types of coffee compete with other domestic brands such as the “Kopi-O” or “White Coffee.” Home consumption is estimated at approximately 3.2 billion, with Starbucks having a market share of 4 percent. In the food sector, specialty coffee is estimated at $5 billion, and Starbucks has a market share of about 5 percent ( Sakal, 2018) . The main menu offered by Starbucks comprises: Frappuccino’s, coffee alternatives, cold beverages, espresso favorite, and traditions. Starbucks holds it that “Partner satisfaction leads to customer satisfaction.” All over their stores, Starbucks employees are referred to as “partners.” 

Figure 9 

Fig. 9. Overall market. Adapted Rhodes, A., & Zhou, J. (2019). Consumer Search and Retail Market Structure.  Management Science ,  65 (6), 2607-2623. https://mpra.ub.uni-muenchen.de/69484/1/MPRA_paper_69484.pdf 

Figure 9 above shows Starbuck's competitive edge over other vital competitors that include Dunkin' and McDonald. According to Sakal (2018) its innovative and customer experience maintains Starbucks' competitive advantage. The company has concentrated on consumer preference and community investment, among other strategies. 

Barriers to Entry 

According to Nekrassovski (“n.d”) Starbucks has a low barrier to entry. In almost every street with a Starbuck store, there are numerous other coffee shops. Every block has a conspicuous coffee shop ever since Starbuck entered the market. However, Starbucks has the edge over the coffee shops due to its strong market presence, strategic marketing plans, and high-quality coffee. However, this does not mean that entry to the market is challenging. 

Market Structure 

Starbuck operates in a monopolistic market structure. Market structure is the attributes of a market that a business operates ( Sakal, 2018) . The monopolistic structure is whereby various firms selling has differentiated commodities and few barriers to entry. Starbuck has been in a position to hold onto its structure even at the time it is making losses. The market structure offers its consumers some of the best benefits as compared to other coffees. 

Recommendation 

Starbucks' future is focused on a fast-growing market, relevant innovation, and human connection. As it strategizes on its next course of market interaction, the company will try to bring together its various stores to 90 million consumers weekly. The company also is, on course, to improve its customer experience through the use of its digital apps. Other focus includes coffee and tea innovation, menu development, concerted expansion into China, and hiring commitments. On hiring commitments, the company is aiming to absorb over 70,000 new employees as it strives to open more new stores. It will specifically target military spouses, veterans, and youths. In 2018, Starbucks surpassed its target of hiring 10,000 military spouses and veterans. 

In line with its key competitors, the company should first change the face of its customer service by using the recruits. The new employees should be trained on new customer service strategies in addition to new coffee-making techniques. These should be applied in newly opened locations to give the customers unique experience and satisfaction. 

Starbucks should maintain its core product differentiation, which has been its core marketing and operation strategy. The strategy should be enhanced by improving its well-and inviting stores with excellent atmosphere and adequately trained personnel. At the same time, it should also improve on its "Starbucks Card Strategy" by the use the referral system. It should also harness further on new advertising strategies, targeting new customers and free coffee samples. On marketing, the company should focus more on "consistent change management" to increase its global appeal and success. 

References 

Ahmad, A. (2015). Executive Stock Option Contract Increases Firm Value and Performance: A Case Study on Starbucks Company.  Global Journal of Management And Business Research . https://journalofbusiness.org/index.php/GJMBR/article/download/1768/1670 

Geereddy, N. (2013). Strategic analysis of Starbucks corporation.  Harward [Електронний ресурс].–Режим доступу: http://scholar. harvard. edu/files/nithingeereddy/files/starbucks_ case_analysis. pdf . 

Lemus, E., von Feigenblatt, O. F., Orta, M., & Rivero, O. (2015). Starbucks Corporation: Leading Innovation in the 21st Century.  Journal of Alternative Perspectives in the Social Sciences ,  7 (1), 23-38. http://www.academia.edu/download/39107534/Starbucks_Corporation_Leading_Innovation_in_the_21st_century.pdf 

Macrotrends. (2019). Starbucks Cost of Goods Sold 2006-2019: SBUX. Retrieved October 18, 2019, from https://www.macrotrends.net/stocks/charts/SBUX/starbucks/cost-goods-sold. 

Monex. (2019, February 6). Insights. Retrieved October 18, 2019, from https://www.monexsecurities.com.au/insights/news/starbucks-earnings-analysis-our-projections-and-insights-on-a-new-chinese-competitor-looking-to-take-over . 

Nekrassovski, O. Starbucks Coffee Company: A Strategic Analysis. https://www.researchgate.net/profile/Oleg_Nekrassovski/publication/309351808_Starbucks_Coffee_Company_A_Strategic_Analysis/links/580a706408aecba934f9660e.pdf 

Qian, Y. A. N. G., & Xing, T. U. (2016). Starbucks VS Chinese Tea—Starbucks Brand Management Strategy Analysis in China.  International Business and Management ,  12 (1), 29-32. 

Rhodes, A., & Zhou, J. (2019). Consumer Search and Retail Market Structure.  Management Science ,  65 (6), 2607-2623. https://mpra.ub.uni-muenchen.de/69484/1/MPRA_paper_69484.pdf 

Sakal, D. V. (2018). COMPANY ANALYSIS OF STARBUCKS CORPORATION.New York, NY: http://finance.hr/wp-content/uploads/2018/11/Starbucks-Company-Analysis.pdf