Eco_365_Week3

Starbucks Coffee Market Conditions Competitive Analysis ECO/365 Starbucks Coffee Market Conditions Competitive Analysis History of The Organization Starbucks Coffee, based in Seattle, Washington, is a coffeehouse chain that demonstrates how effective marketing can be in the development and promotion of new products. Starbucks is one of the most innovative companies in the world, ranked 24 out of 50 by Fast Company (Gertner, 2012). From a simple coffee roaster and grinder in 1971, by the 1990s Starbucks had grown its product and brand into a worldwide coffeehouse chain that dominates the industry to this day (Starbucks, 2012). As many businesses strive to do, the challenge for this new upstart company was to identify a market need or niche and develop a product or service that fills that need. In this effort, Starbucks succeeded fully with a business model that seemed as desirable as it was unique. Of course there had been coffee for hundreds of years and coffeehouses or cafes for many decades in Europe and the U.S., but rarely had the products of coffee and the coffeehouse environment been marketed in the way Starbucks does. Product Description Starbucks product line has grown to include more than freshly brewed coffee. When a customer walks into a Starbucks location they will receive a full experience outside of the norm of a small coffee shop. Starbucks product line include coffee, iced espresso's , Tazo tea, and other beverages. However Starbucks did not stop at becoming the world name for coffee that went further and began to offer their loyal customers sandwiches, salads, and baked pastries. While waiting on the perfect beverage a customer can browse and buy Starbucks products. These products include coffee grinders, espresso machines, coffee brewers, whole bean coffee, tea, premium ice cream, coffee liqueurs, bottled Frappuccino as well as a variety of books, music CD's and Starbucks gift cards. Factors Affecting Supply, Demand, and Equilibrium Supply and Demand is affected by the market around the area of each store and how the company markets the product. How the economy and the population embraces each item that is brought onto the marketing scene can be looked at in several different ways. In the fall any item that has the flavor of a pumpkin pie or the pumpkin spices. Competing in the open market can be brutal and open your product up to criticism that can tell if you product will make the cut or not. New customers are always something that a growing company needs to be open to, because without growth the company will fail. Within Starbucks we always look at different ways to bring the newest products and ideas to the open market by watching the demand of our customers and how the competitors markets are opening to the markets around the world and how we can take the market by storm and bring these individuals back to our stores. Marketing to new markets like bringing our products into the malls or even into military bases or veteran facilities we can open doors that might not have been an ideal market in the past. Military soldiers have always been strong coffee drinkers, but have soon looked at coffee as a growing trend in a market that was at one time would have not been something that looked achievable. Competitors are on around every corner from our stores and even in the military bases, Competitors are even in the countries that we are attempting to help. Starbucks has an abundant of competitors that are beginning to dip into the world of the specialty coffee beverage industry. These main competitors are specialty coffee shops and quick-service restaurants. Quick-service restaurants have began to offer products in the same category as Starbucks, there are many competitors running against Starbucks the main players are Dunkin Donuts, Panera Bread and McDonalds. these companies have a greater operating system, therefore offering bigger marketing resources that Starbucks is unable to afford. Due to these changes Starbucks has been faced with many competitors who are continuing to work to build the brand of ready-to-drink coffee market. Rivalry increases as businesses began to improve their position in the industry, in order for these competitors to gain new customers the competitors will be willing to reduce prices, increase marketing efforts and will introduce new products. Starbucks customer's choose to continue to use Starbucks and not their competitors is built around the product placement Starbucks has achieved. Product service, convenience and price all play a role in way Starbucks is able to compete with old and new competitors. Elasticity Demand Price elasticity measures the extent to which the quantity of good changes when the price of good changes. When determining the price of demand in elasticity one must compare the change in demand with price change. Suppose Starbucks raised the price of a espresso from $5 dollars to $7 dollars per cup the quantity of demand of an espresso would decrease. If the company were to increase its price of a espresso the competitors (McDonalds, Krispy Kreme, etc.) would decrease their prices in order to compete with Starbucks. When these prices began to rise a quantity of demand will began to decrease along with the curve of demand. This process allows the quantity and price to always change in the opposite directions. Starbucks has an elastic demand and although some may simply be addicted to coffee what is offered at Starbucks is a luxury and not seen as a necessity. Starbucks coffee demand will decrease if the prices grow due to the huge market of competitors Starbucks has that offers the same goods and services as Starbucks, and offer these prices at a cheaper price. A great example of this would be Dunkin' Donuts is offering coffee at a three dollar lower price than Starbucks offers. With the US dollar gradually falling, consumer income begins to gradually diminish causing a demand of normal goods to decrease, this will cause a shift in the curve of demand. Starbucks is measured on luxurious goods and services on both the high prices and quality. In this time consumers with lower income are needing what is necessary and not focused on the luxury items they once loved. This brings Starbucks coffee to being elastic when the luxury has more elastic demands and is responsive to price change. Long-term Profitability There are many issues and opportunities regarding the Starbucks brand and its products. Not least of which is the fact that Starbucks coffee is considered to be a high-end treat for many of its patrons. This can also be said for the nicer, and costlier, Starbucks store environment that helps to create the overall Starbucks experience. Together, these factors that make Starbucks special also makes the product more vulnerable to recession and customer income. In other words, Starbuck coffee has a very elastic demand as there are many lower cost alternative that the customer can turn to. Under more favorable economic circumstances however, Starbucks coffee prices are less elastic than many products. Customers willing to pay a premium price for a quality treat and pleasurable environment, often do not shy away from a modest price increase. This allows Starbucks to price the product as needed. Factors variable cost Having an eye for technological innovation is always a priority is staying ahead. Though automation of fabrication of their coffee products within stores reduce labor costs, having coffee made by a trained barista is a vital part of the Starbucks experience this may not good option. Controlling other fixed and variable costs are also key. Programs designed to make improvements in supply, distribution, and other aspects of the business operation would be productive ways to reduce overall costs. Many factors affect the variable costs and in particular, the coffee beans. From issues or global warming to political strife can disrupt coffee production around the world. Starbuck is particularly sensitive to these factors that can drastically affect the cost of coffee. Establishing a diverse and flexible supply change is essential to combat these affects on supply so that a stable price for the end product can be achieved. Other than coffee prices and supply, some additional variable costs for the company are such items as paper cups, straws, napkins, sweetener, milk, and cream. Technological improvements in many of the paper and plastic products used are assumed to be forthcoming and will play a major role in the company’s future. Factors affected fixed cost Because Starbucks in primarily located in the United States and other mature markets, where a condition or diminishing marginal productivity is dominant, adding more stores in these regions is not likely to produce addition sales or profits. Emerging markets in Asia however, are another matter. By establishing an increasing number of stores in these new markets will require a rapping up coffee production and all other complimentary products as the demand curve is shifted outward. Fixed costs in these new markets are expected to be lower, rather than higher. This is expected to reduce the amount of investment capital needed for the same amount of growth. However, additional costs may be incurred to overcome the issues or operating overseas, such as communication and training costs, acquiring and retaining skilled labor, and local or regional permitting and licensing fees, some of which are knowable ahead of time. Recommendations for Maximizing Profits Starbucks has been known as the luxury of gourmet coffee in the industry of coffee and have gave their customers the feel of an upscale coffee shop all while in a very approachable neighborhood feel. In order for a new customer to join in this new gourmet coffee bandwagon they will have to be willing to pay the price for the premium coffee and in this economy most consumers are unable to pay those prices. Consumers do not want to spend their limited income on gourmet coffee when they are able to find it in cheaper locations, as in McDonalds or Panera Bread. Starbucks has been forced to compete with their competitors to drive down prices in order to compete in this industry. This proves that coffee price is elastic and if priced at a higher amount the demand for the good will decrease. Conclusion In order for Starbucks to continue to compete with their competitors they will need to realize to lower prices in this economy. Another factors for Starbucks has been the development of consumers going an alternative route and purchasing Starbucks coffee beans and making their own luxury coffee outside of Starbucks. In order for Starbucks to remain a major player in the coffee shop market they will need to address these issues. References Colander, D. C. (2010). Economics (8th ed.). New York, NY: McGraw-Hill Companies, Inc. Gertner, J. (2012). Fast Company. Retrieved from http://www.fastcompany.com/most-innovative-companies/2012/starbucks  Starbucks. (2012). Our Heritage. Retrieved from http://www.starbucks.com/about-us/our-heritage