Starbucks

  Starbucks, is an American coffee company, a well-known franchise corporation by the society as it is a large biggest coffee firm in the entire. There are nearly 17,651 as of July1, 2012 stores across the global. (Starbucks 2012) It is in the restaurant industry which not only serve high quality coffee and delectable pastries but also serve coffeehouse experience. In 1971, the first Starbucks set up, at the time the firm was operating a single store which is located in Seattle’s Pike Place Market.

   Before talking about the demand of Starbucks coffee, let me briefly describe about what is demand. Based on the figure1, when the price rises from P2 to P1, the quantity demanded falls from Q2 to Q1, vice versa, there will be a movement along the curve. The relationship between price and quantity demanded is what we called as the law of demand as it is basically based on two reason. (Amosweb.com, 2013)

(figure 1)

  We will be looking at the income effect and substitution effect in this part.  As we know that, the price of Starbucks’s beverage isn’t cheap, there is a portion of consumer will only demand for it when there is a rise in their income and the price remain constant because their real income has risen, they will be able to consume more than previous. When facing a recession, consumers tend to saving more than spending will probably perceive it to be too pricey and cut their consumption on coffee, thus, leads to a fall in demand. Based on the figure 2, by drawing a demand-supply graph, consumer will definitely cut consumption when their income falls and the demand curve shifts leftward(D1-D2) while supply remains constant, new lower equilibrium price arises(P1-P2) and the equilibrium quantity decreases(Q1-Q2). There will be a surplus at the original price.

（figure 2)

Even though Starbucks stand a big part in the market but there are still various of coffee shop such as The Coffee Bean, when consumers income remain constant but the price rises, their real income had fallen and the power of purchasing will fall. So consumer will be very likely to switch to alternative or even low price coffee, therefore based on figure 3 when price rises from P1 to P2, quantity demanded will fall from Q2 to Q1 and this is the substitution effect.

(figure 3) 

  But it is not all just about the price, Starbucks beverage is highly demanded by the society nowadays even though it is quite pricey. Is all the consumers really addicted to coffee or are they actually that expert in coffee tasting? What made me say so? As it became to be a trend among the society, appealing to conspicuous consumption people will just blindly follow to consume Starbucks’s beverage not major focusing on its quality but by observing others consumers and this is probably the major determinants of its demand, thus, cause a rise in demand, based on the figure 4, demand curve shifts rightward (D1-D2), equilibrium quantity increases(Q1-Q2) and price is risen(P1-P2)

(figure 4)

  When we talk about the supply sides, it is the representation of the behaviour of sellers. Supply is all about the price and quantity supplied. The reason of decrease in supply is the weather condition, natural disease, etc. The coffee production will be disrupted due to the climate change such as excessive rain, will definitely affect the harvest, therefore,as shown in figure 5, cause a leftward shifting in the supply curve(S1-S2) and raises the equilibrium price(P1-P2) when demand remains constant. When there is less supply, demand remains constant, apparently will cause a shortage in the market. (Econmicro,2013)

(figure 5)

  Price elasticity of demand measures the responsiveness of a change in quantity demanded to a change in price. (Sloman, Wride and Garratt 2012, pg58) To determine the price elasticity of demand for Starbucks coffee, I will differentiate it into two parts. For those who perceive Starbucks as a necessity since there are a large group of loyal customers, price elasticity of demand is inelastic in this case. To reinforce these statement, here comes an example. For instance, if the price increases, will people still demand for it? If yes, then the demand for it is inelastic. But what if when a change in price cause a proportionate larger change in quantity? At this stage we will refer to elastic demand. When a consumer perceive a cup of Starbucks coffee as a luxury, he/she will definitely cut consumption when the price is increases. Consumer will probably switch to substitutes which is much cheaper than it. Since there are so many substitutes in the market, demand is relatively elastic. Whether the demand is elastic or not is based on how a consumer perceive it. In the other hand, income is also one of the determinant to determine the elasticity. When consumer income increase, quantity demanded will also be increased. When income increase, their power of purchasing increase too, therefore people will perceive some goods as an inferior good as they can afford to consume in a higher level. For example, for those who used to drink 3 in 1 coffee will turn to consume Starbucks coffee when their income increases.

  However, to probe the elasticity, the length of time period plays an important role as consumers take time to respond to change in price. The demand for goods is likely to be inelastic in the short run, this is because consumers usually take time to react to the change in price and alter their purchasing habits. The quantity demanded will only fall slightly in the beginning. However, as time goes by, when the price increases, consumers may have sufficient time to alter their consumption, since there are so many substitutes in the market, the demand of goods may be more elastic in the long run, quantity demanded may substantially fall.

Starbucks is in the monopolistic competition market structure. Roughly talk about it, in monopolistic competition, there will be many firms in the market competing, all firms are allow to enter the market  or leave the market if there is a loss, decision making is consider independence as it will not have much effect to the competitors. Market power is owned by the firm in some degree, the product which is produced in monopolistic competition is similar but they are not perfectly substitutes. However, monopolistic competition is a productively inefficient market due to the market control and the downward slopping demand curve.( Amosweb.com, 2013) The theory of profit maximizing is where marginal revenue equal to marginal cost, however since monopolistic competition have the degree of control in charging prices, the price charged by the firm will be greater than marginal cost. In a monopolistic competition market, Starbucks remains successful as the firm’s strategy is to more focus on differentiate themselves from many specialty coffee shop which gradually springing up nowadays by their quality, logo and trademark. Since there are so many firms who producing similar product in the market, Starbucks is stable enough to stand a big position as they own their loyalty customers who have the belief that it is one and only coffee shop which can give them the superb quality that couldn’t be found in any other coffee shop.

  In the long run, Starbucks experiences economies of scale. The so-called economies of scale refer when increasing the scale of production leads to a lower cost per unit of output. (Sloman, Wride and Garratt 2012, pg144) As Starbucks is getting more and more branches over the world, it would be able to purchase certain inputs in bulk such as syrups, dairy goods, etc in a cheaper price, thus, cause the cost of production to be declined.

As the main objective for a firm to operate is to maximizing profit, Starbucks uses price strategy to profit maximization. (Dawson,2013) Profit maximization is a process of determine the price and output level by the firm that produce the most profit. When there is a small price increase, it might be a tremendous impact on their margins as their customers aren’t that sensitive into price changes. There are three choice can be choose between the size, such as tall, grande and venti. Starbucks takes advantage when raising the price for tall size as people who find it will be worth to upgrade to grande, and thus making more profit.

  In conclusion, even though Starbucks is in a monopolistic competition which means that it act independently, but as more and more firms are entering this industry, there are a few strategy that can be implemented by Starbucks. Starbucks can continue using it privilege card, reward program or build Starbucks drive-through in order to keep customer loyalty and to attract new comer. Starbucks should also consider to reduce cost as to promote growth and profit, thus minimize their cost of production, increases their profit. However, since more consumers is getting conscious about the price and start to realize that they could have alternatives to switch, it is necessary to reinvent themselves so that they can react to the alternatives.

Reference list

Amosweb.com (2013) Monopolistic Competition, Efficiency. Available from: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic+competition,+efficiency [Accessed 18 October 2012].

Amosweb.com (2013) Law Of Demand. Available from: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=law+of+demand [Accessed 17 October 2013].

Dawson, T. (2013) How Starbucks Uses Pricing Strategy for Profit Maximization. Available from: http://blog.priceintelligently.com/blog/bid/184451/How-Starbucks-Uses-Pricing-Strategy-for-Profit-Maximization [Accessed 20 October 2012].

Starbucks (2012) Starbucks Company Profile. Available from: http://www.starbucks.com.sg/Starbucks-Company-Profile.pdf [Accessed 18 October 2012].

Sloman, J., Wride, A. and Garratt, D. (2012) Economics. 8th ed. Italy: Pearson Education.

Yoo, H.E. (2013) Starbucks Drinkers Won’t Get Break as Colombia Supply Drops. Available from: http://econmicro.wordpress.com/2012/10/26/starbucks-drinkers-wont-get-break-as-colombia-supply-drops-2/ [Accessed 15 October 2013].