Abstract
Starbucks is the largest coffee-selling company in the United States. Its brand has grown alongside the economic growth of the company. The particular brand’s strength places the company at the top of the industry. The purpose of this paper is to analyze the economic characteristics of the company. After analyzing the demand and supply, the elasticity of coffee, and Starbucks’ market structure, it is economically stable. The demand and supply of the company are interdependent, and the price elasticity of the demand is elastic. Therefore, the oligopolistic company is at its level among various coffee companies.
Introduction
Starbucks is a multinational coffee-selling company serving exceptionally delicious coffee. Starbucks coffee is recognized in the United States as one of the best coffee in the country. Indeed, the company is said to have created a coffee-drinking culture in America. High demand for various types of coffee makes the company sell more, thus making more revenue. The demand and supply, the elasticity of the company’s coffee, and the structure of the market illustrate the economic status of Starbucks. The coffee is sold at relatively high prices, yet the firm sells at least 4 billion cups every year (Pandey et al., 2021). As of 2020, Starbucks reported a revenue of $19.16 billion (Pandey et al., 2021). Thus, the economic characteristics of Starbucks coffee indicate the stability of the company.
Demand and Supply
The demand for coffee is influenced by many factors that affect the price equilibrium. Some of these factors include taste and preferences, population, prices of substitutes, income level, taxes, and consumers’ expectations (“Elasticity,” 2016). However, when the supply influences the demand, it increases when the supply decreases. When one or many of the considered factors change, the level of demand changes; in other words, unless all the factors considered remain constant, the level of demand will change with any change within. The law of demand states that when the prices are high, the demanded quantity is low (Alicke et al., 2017). The supply law provides that when the prices are high, the suppliers will supply more products.
The supply of coffee beans significantly influences the demand for Starbucks coffee. When the prices of coffee go high, the suppliers offer more coffee materials to the company. The suppliers are motivated by the product prices with which the company purchases its raw materials (“Elasticity,” 2016). When the prices go down, the suppliers are less motivated to supply more materials, so they supply less.
On the one hand, demand is influenced by many factors other than the quantity supplied. On the other hand, supply is highly affected by one major factor, the weather on the farm (Alicke et al., 2017). Coffee production involves relying on the weather, which is very unpredictable. Starbucks’ leading coffee bean suppliers are based in South America. Unfortunately, there is a lot of unpredictability in the temperature in the region.
Starbucks’ coffee supply beans depend on how favorable the weather has been in the producing regions. Coffee beans are often destroyed by lousy weather, especially when they are not yet harvested. Bad weather can be caused by either heavy rains or low levels of rainfall. During heavy rains, the coffee beans develop mold, excessive fermentation, and diseases, thus increasing the beans’ defects during harvest (Pandey et al., 2021). During low rains, the size of the coffee beans grows smaller, thus dropping its quality and quantity. During this bad weather, the farmers may not sell enough to the suppliers. Henceforth, with reduced supply, the level of demand for coffee in Starbucks increases.
Demand is affected by various factors that are determined by the economy. The prices of substitute coffee in the US, like Costa Coffee, may affect the demand for Starbucks’ coffee. When Costa Coffee offers lower prices for the same type of coffee, customers will likely go for the cheap coffee. Income and taxes are other significant factors influencing the demand for Starbucks coffee (“Elasticity,” 2016). When the income decreases or is highly taxed, the customers may reduce their spending on coffee. The taste and preferences of US customers could not change from the delicious Starbucks coffee; thus, the factor is less likely to affect demand (Alicke et al., 2017). Other factors that might not significantly affect Starbucks coffee demand are consumers’ expectations and their population.
The Elasticity of Starbucks Coffee
A product is considered elastic if its quantity in demand changes with a change in prices. Conversely, if the demand changes barely change the prices, then the product is said to be inelastic (“Elasticity,” 2016). In Starbucks, the coffee is elastic, meaning that the change in demand drastically affects prices. The elasticity of coffee demand in the company is not experienced in all types of coffee.
However, so long as the demand is influenced by factors affecting demand, it deems the demand elastic. Latte coffee is one product with substitution; hence more likely to have an elastic demand. For example, various types of latte coffee in Starbucks are sold between 2 and 5 dollars. Costa Coffee latte prices range between 2 and 4 dollars (Pandey et al., 2021). Most types of lattes are sold at standard prices between the two companies. Therefore, if Starbucks increases the costs of lattes, the customers will buy from Costa Coffee.
The price elasticity of demand is determined by the quantity needed over the prices. Elasticity is the responsiveness of one item concerning changes in another economic variable (“Elasticity,” 2016). In this case, the elasticity of demand is determined by a change in the quantity and prices of a product. Therefore, to assess the elasticity of responsiveness of Starbucks coffee’s responsiveness to the costs, there is a need to consider its price elasticity. The magnitude of price elasticity of demand is measured by the quantity demanded by customers when they experience price changes. The more price-elastic the demand is, the more the customers react to prices. Henceforth, the more the customers will adjust their spending behaviors.
In Starbucks, the price elasticity of demand is usually not extreme. It means changes in demand may alter the prices of the coffee, but the customers change their spending behavior slightly. According to Schwartz (2018), Starbucks often raises coffee prices and gets sales. Maintaining the number of sales means that the customers’ spending is barely altered by variation in prices. Thus, the demand for coffee is not much affected by hiking prices. Although the change in prices may make a few customers, for instance, 10 out of 1000 look for alternative coffee, the demand for the same is not much affected.
The general price elasticity of demand in Starbucks may be elastic, but the company experiences inelastic demand from time to time. Schwartz (2018) mentions that Starbucks has inelastic demand customers, and some types of coffee with inelastic demand. Some customers believe that Starbucks does not have a substitute. Therefore, they purchase coffee from Starbucks whether the prices are high or low. Similarly, coffee such as frappuccino is only available in Starbucks: hence, the buyers will purchase it even when the prices go high (Pandey et al., 2021). All in all, the inelasticity of demand in Starbucks is smaller than elasticity. The general price elasticity of demand for Starbucks coffee is elastic.
Market Structure of Starbucks
Starbucks multinational company dominates an oligopoly type of market structure. An oligopoly market structure is whereby a few firms dominate the market (“Elasticity,” 2016). In this type of market structure, a few large firms may dominate the market, but there are also small ones. In the Starbucks coffee market, there is a high concentration of few firms which operate in large sizes. Some of these firms, Starbucks included, are McDonald’s, Maxwell House, Folgers, Dunkin Donuts, Costa Coffee, and Caribou Coffee (Pandey et al., 2021). The first food companies exist in large size, and although some may not be anywhere close to Starbucks, they are its competitors.
Starbucks might be in a highly concentrated market structure but remains at the top. In an oligopoly market structure, large firms have exceptional advantages, making it hard for small firms to enter the concentrated region (“Elasticity,” 2016). Starbucks has several unique benefits, thus making it stay at the top. One of the benefits is having one of the strongest brands. Starbucks has been in operation for many years, and there is no year it recorded reduced growth. According to Schwartz (2018), the company has opened at least 32,938 coffee stores worldwide.
The act of investing worldwide has made the Starbucks brand recognizable by both coffee drinkers and non-drinkers. The company records growth in stores, customers, and loyalty. It also expands its products every year to ensure relevance and innovation. The presence of many stores in various countries contributes to the retention of customers. When a company opens another branch, the customers understand that the product is good, hence more likely to stay loyal.
Starbucks, alongside the big firms, holds the advantage of economies of scale. The firm has a least 14 000 stores in the United States alone (Pandey et al., 2021). Consequently, lowering prices while increasing the level of production will help in achieving increased revenue. The economies of scale prevent a new firm from entering full production. Starbucks holds the benefit of economies of scale for both small and large organizations.
The best coffee-selling company stays at the top of the industry because, unlike its competitors, its revenue is not affected by lowered prices. Starbucks could cut down the costs compared to those of other large firms, but it will make equivalent revenue because its brand is powerful. Therefore, changes in prices barely change the demand for the company, hence maintaining the top position.
Conclusion
As illustrated by its economic characteristics, Starbucks is economically strong. The company’s coffee sales are barely affected by changes in demands and prices. Starbucks holds a strong position in the coffee selling industry because it is an established brand. The general demand and supply of Starbucks are interdependent. An increase in demand increases the supply of coffee beans.
Starbucks may slightly experience inelasticity of price demand, but that does not determine its position in elasticity. In general, the price elasticity of demand is proportionately elastic. The Starbucks Company holds the position of oligopoly market structure. The strength of the brand, customer loyalty, and the advantage of economies and scales are among many reasons why Starbucks stays at the top of the coffee industry.
References
Alicke, K., Rexhausen, D., & Seyfert, A. (2017). Supply chain 4.0 in consumer goods. Mckinsey & Company, 1-11. Web.
Elasticity: Demand and Supply. (2016). Cengage Learning.
Pandey, R., Ganatra, V., Jamnik, S., Goel, P., Goyal, P., Xuan, C. L. & Zen, L. J. (2021). An empirical study on customer satisfaction, perception, and brand image in Starbucks coffee in India, Asia. International Journal of Tourism and hospitality in the Asia Pacific (IJTHAP), 4(1), 53-63. Web.
Schwartz, E. (2018). Who will care about the Starbucks price hike?. Econlife. Web.