Economics & Institutions

TReNDS Martin Pitek

MGMT - 7730 March 20, 2009

Starbucks Coffee

Table of Contents Starbucks Coffee..............................................................................................................1 Introduction ......................................................................................................................... !roduct "na#$sis.................................................................................................................. !roduct %&er&ie'............................................................................................................ (unkin (onuts.............................................................................................................9 Mc(ona#ds...................................................................................................................9 !anera )read..............................................................................................................10 *#asticit$ *sti+ates........................................................................................................10 !rice e#asticit$ of de+and +easures the e,tent to 'hich the -uantit$ of de+and of .ood chan.es 'hen the /rice of .ood chan.es. In order to deter+ine /rice e#asticit$ of de+and 'e co+/ared the chan.e in -uantit$ de+anded 'ith chan.e in /rice. ...10 " bi. i+/act on sa#es has to do 'ith /ricin. of /roducts and sa#es 'hich increase re&enue .ro'th. 0hen a /roduct beco+es acce/tab#e to consu+ers and is substituted b$ another that 'ou#d su..est Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts coffee strate.$ 'ou#d hurt and se&ere#$ da+a.e Starbucks. Starbucks coffee has an e#astic de+and e&en thou.h so+e +a$ be addicted to coffee Starbucks coffee 'i## decrease if the /rice .ro's on#$ because of the a&ai#abi#it$ fro+ other co+/anies such as Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts 'hich the$ 'i## offer a +uch chea/er /rice to attract the consu+ers. The other fir+2s /rices are three to four do##ars #ess then the coffee at Starbucks. The /rob#e+ #ies in Starbucks insistin. on sa$in. that the$ are in a different +arket /#ace then Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts. Starbucks c#ai+s that no one 'i## s'itch or e&en think about s'itchin. or so+eti+es .o to other co+/anies such as Mc(ona#ds or (unkin (onuts etc. That is 3ust foo#ishness because e&er$one kno's if $ou /refer Cook, occasiona##$ $ou 'i## ha&e a !e/si es/ecia##$ 'hen it co+es to sa&in.. If Starbucks 'ere to increase its /rice of a #atte fro+ 43 do##ars to 45 do##ars Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts 'ou#d decrease there /rices in order to co+/ete. ........................................12 !ricin. Strate.$..............................................................................................................12 6orecast..............................................................................................................................15 (eter+ents of (e+and .................................................................................................15 6orecastin......................................................................................................................17 Sa#es forecastin. is the /rocess of esti+atin. 'hat the business2s sa#es are .oin. to be in the future. Sa#es forecastin. is an i+/ortant /art of business +ana.e+ent. Starbucks cannot +ana.e in&entor$, cash f#o', or /#an for .ro'th 'ithout an idea of 'hat future sa#es are .oin. to be. " business2s sa#es re&enue fro+ the sa+e +onth in a /re&ious $ear, co+bined 'ith kno'#ed.e of .enera# econo+ic and industr$ trends, 'ork 'e## for /redictin. a business2s sa#es in a /articu#ar future +onth.......................17

There are &arious forecastin. +ode#s that can be used for forecastin. sa#es for coffee. T'o +ethods are -ua#itati&e and -uantitati&e. The -ua#itati&e +ethod uses sub3ecti&e 3ud.+ent based on non--uantifiab#e infor+ation, such as +ana.e+ent e,/ertise, industr$ c$c#es, research, de&e#o/+ent, and #abor re#ations. The -ua#itati&e +ethod does not re-uire a de+and histor$ for the /roduct or ser&ice. The -uantitati&e +ethod is a research +ethod that re#ies on inter&ie's, obser&ations, and a s+a## nu+ber of -uestionnaires, focus .rou/s, sub3ecti&e re/orts and case studies. Much of the focus is on co##ection and ana#$sis of nu+erica# data and statistics............................................17 Starbucks is sub3ect to a nu+ber of si.nificant risks throu.h -ua#itati&e and -uantitati&e +ethods that +i.ht cause the co+/an$2s actua# resu#ts to &ar$ +ateria##$ fro+ its forecasts, tar.ets, or /ro3ections. The si.nificant risks in&o#&ed are #o'er custo+er traffic or a&era.e &a#ue transactions. These ne.ati&e#$ i+/act co+/arab#e store sa#es, net re&enues, o/eratin. inco+e and earnin.s /er share. These risks are due to the i+/act of initiati&es b$ co+/etitors and increased co+/etition 'ith #ack of custo+er acce/tance of /rice increase to co&er costs of ne' /roducts. (e#a$ in store o/enin.s for reasons be$ond the co+/an$2s contro#, or #ack of desirab#e rea# estate #ocations a&ai#ab#e for #ease at reasonab#e rates, both of 'hich cou#d kee/ the co+/an$ fro+ +eetin. annua# store o/enin. tar.ets and in turn ne.ati&e#$ i+/act net re&enues, o/eratin. inco+e and earnin.s /er share. %ther risks are +ateria# interru/tions in the co+/an$ su//#$ chain be$ond its contro#, such as +ateria# interru/tion of roasted coffee su//#$ due to the casua#t$ #oss of an$ of the Starbuck2s roastin. /#ants or the fai#ures of third-/art$ su//#iers, or an$ interru/tions in ser&ice b$ co++on carriers that shi/ .oods 'ithin the co+/an$2s distribution channe#s................................................17 Su++ar$7Conc#usion.....................................................................................................17 0orks Cited.......................................................................................................................19

Introduction 0ith the econo+$ in troub#e, the stock +arket tankin. it is i+/ortant to start $our da$ 'ith a .ood cu/ of coffee to take on these cha##en.es. Can Starbuck2s sustain it business +ode# and /#ace in the +arket8 The /a/er e,a+ines Starbucks business and it res/ecti&e /ractices. In 1971, the ori.ina# Starbucks o/ened in !ike !#ace Market in Seatt#e, 0ashin.ton b$ three /artners na+ed 9err$ )a#d'in, :e& Sie.a#, and Gordon )o'ker. Their focus 'as to se## coffee beans and e-ui/+ent. The$ /urchased .reen coffee beans fro+ !eet2s, a s/ecia#t$ coffee roaster and retai#er, durin. their first $ear of o/eration. ;ater, the$ be.an bu$in. coffee beans direct#$ fro+ the .ro'ers. In 19<3, an entre/reneur b$ the na+e of =o'ard Schu#t> 3oined the co+/an$? Schu#t> fe#t that the co+/an$ shou#d se## coffee and es/resso drinks as 'e## as coffee beans. The /artners fe#t that se##in. coffee and es/resso drinks 'ou#d take a'a$ fro+ their /ri+ar$ focus of se##in. coffee beans. Since the idea did not 'ork, Schu#t> started his o'n co+/an$ ca##ed II Giorna#e coffee bar chain in 19<5. In 19<7, the ori.ina# o'ners of Starbucks so#d their chain to Schu#t>2s II Giorna#e. Schu#t> chan.ed II Giorna#e out#ets to Starbucks chains and -uick#$ be.an to e,/and. Starbucks coffee has .ro'n into the #ar.est coffeehouse co+/an$ in the 'or#d 'ith 1@,120 stores in 9 countries such as in "ustra#ia, Canada, China, !uerto Aico, etc. Starbucks has thirt$ b#ends and sin.#e ori.in coffee. Starbucks brand coffee can a#so be /urchased in #oca# stores to bre' at ho+e. Starbucks e+/#o$s o&er 1 0,000 e+/#o$ees 'or#d'ide 'ith o&er fi&e +i##ion custo+ers a 'eek. "t one /oint the$ had t$/ica# custo+ers co+in. in on an a&era.e of si, ti+es a +onth 'hi#e #o$a# custo+ers co+e in on an a&era.e of ei.hteen ti+es a +onth s/endin. a&era.in. 450. Starbucks is one of Fortune +a.a>ine2s 100 )est Co+/anies to 'ork for in 200< and is Business Ethics 100 )est Cor/orate Citi>ens for the fourth $ear. Product Analysis Product Overview Starbucks /roduct #ine has .ro'n to inc#ude fresh bre'ed coffee, hot and iced es/resso be&era.es, coffee and non coffee b#ended be&era.es, Ta>o tea, baked /astries, sand'iches, and sa#ads. Starbucks /ara/herna#ia inc#udes coffee .rinders, es/resso +achines, coffee bre'ers, +usic C(2s, books, +o&ies and .ift cards. The .#oba# consu+er /roducts inc#ude bott#ed 6ra//uccino, iced coffee, and es/resso drinks, 'ho#e bean coffee, tea, coffee #i-ueurs and /re+iu+ ice crea+. Starbucks understands conce/ts of brand identit$ and /roduct differentiation. The$ ha&e ta//ed in on 'hat the consu+er /ercei&es and had +ana.ed to identifiab#e differentiate the+se#&es bet'een other co+/anies2 /roducts or ser&ices. Starbucks rea#i>es this success de/ends si.nificant#$ on the &a#ue of the Starbucks brand 'hi#e re#$in. on its e,ce##ent re/utation for their /roduct -ua#it$, su/erior, and consistent custo+er ser&ice.

The +ana.e+ent be#ie&es it +ust safe.uard and de&e#o/ the &a#ue and i+/ortance of the Starbucks brand in order to brin. continued success in the future. The /erce/tion of brand &a#ue b$ the consu+er is based on an arra$ of /ersona# -ua#ities. Starbucks has been ab#e to estab#ish an a+biance of so/histication and inte##ect. ;o$a# custo+ers enter the retai# chain as an esca/e fro+ their +undane #i&es into a serene, re.a# at+os/here 'here the$ /roud#$ si/ fro+ their branded +u.s. Starbucks /rofits fro+ the 'a$ the$ +ake their custo+ers fee#, a##o'in. the+ to /ortra$ a /ro+inent i+a.e and fee# #ike the u//er crusted e#ite in societ$. Therefore, Starbucks brand e-uit$ and -ua#it$ is s$non$+ous 'ith hi.h /rices and a c#ass$ i+a.e. The Co+/an$ a#read$ o'ns and has a#so a//#ied to re.ister +an$ ser&ice +arks and trade+arks both in the Bnited States and in +an$ countries around the 'or#d. So+e of the Co+/an$2s trade+arks, inc#udin. Starbucks, the Starbucks #o.o, 6ra//uccino, Seatt#e2s )est Coffee and Ta>o are a## of .reat &a#ue to the Co+/an$. Starbucks o'ns nu+erous co/$ri.hts for ite+s such as /roduct /acka.in., /ro+otiona# +ateria#s, in-store .ra/hics, and trainin. +ateria#s. In addition, the co+/an$ a#so ho#ds /atents on certain /roducts, s$ste+s, and desi.ns and has re.istered and +aintains nu+erous Internet do+ain na+es, inc#udin. CStarbucks.co+D and CStarbucks.net. Market Structure Starbucks, des/ite their inf#ated /rices ha&e been ab#e to create a sense of brand #o$a#t$ 'ith and arra$ of #o$a# fo##o'ers. Coffee is a fair#$ ho+o.eneous ite+ 'hich Starbucks has been ab#e to +arket their standards of /ortra$in. a #u,urious #ifest$#e. Starbucks o/erates in a +ono/o#istica##$ co+/etiti&e +arket structure in 'hich the$ ha&e been ab#e to +aintain a contro# o&er their inf#ated /rices. The$ ha&e been ab#e to create a standard for their coffee and in 'hich the$ re-uire their custo+er base to be e,a..erated /rices for a cu/ of their &arious bre's. 0ith usa.e of the Starbucks #o.o, -ua#it$, and &arious trade+arks, the$ differentiate their coffees fro+ their co+/etitors. Starbucks /rides itse#f on bein. co+/#ete#$ different fro+ an$ other coffee house and its co+/etitors, 'hich is a reason 'h$ Starbucks has beco+e so successfu#. The co+/an$2s strate.$ to focus on their core co+/etencies to differentiate the+se#&es has +ade Starbucks into a coffee /o'erhouse. Starbucks has +astered kno'in. ho' to benefit their custo+er? #e&era.e the co+/an$ 'ide#$ to +an$ /roducts and +arkets, and create ideas that are hard for co+/etitors to i+itate. Starbucks is not the on#$ coffee sho/ on the +arket, others #ike (unkin2 (onuts, Mc(ona#d2s, and !anera )read ha&e an identica# ite+ 'ith si+i#ar tastes and effect as the Starbucks bre', $et the$ ha&e been ab#e to char.e a /re+iu+ for their b#ends b$ #urin. in custo+ers 'ith the aro+a of an inf#ated #ifest$#e. There are other ho+o.enous coffee sho/s in the +arket, but their #o$a# custo+ers be#ie&e that the su/erior -ua#it$, taste, and aro+a cannot be found fro+ an$ other coffee bre'in. entit$. "t one /oint, their custo+ers 'ere +ore interested in the /retense that ho#din. a Starbucks cu/ re/resented, but due to the current econo+ic conditions, their custo+ers ha&e be.an second thinkin. ho' the$ are affected b$ the e,tra&a.ant /rice of the b#ack .o#d the$ ha&e been si//in..

%/eratin. in a +ono/o#istic co+/etiti&e societ$ has caused the Starbucks effect to cru+b#e. The or.ani>ation has been ab#e to +aintain custo+ers in the short run that 'ere +ore interested in their detai#s rather than /rice. 0hen a business is +akin. a /rofit in the short run, the$ 'i## e&entua##$ reach e-ui#ibriu+ in the #on. run because their de+and 'i## e&entua##$ decrease, as 'e ha&e seen in the recent ti+es. (ue to this, in the #on. run, this +ono/o#istica##$ co+/etiti&e fir+ 'i## resu#t in a >ero econo+ic /rofit. )ecause Starbucks has /rofited on their brand #o$a#t$, the$ kno' that so+e #o$a# custo+ers 'i## ne&er de/art des/ite the to'erin. /rices. 0ith the recent ne's of Starbucks c#osin. si, hundred store, it is e&ident that the$ ha&e been runnin. in a +ar.ina##$ inefficient business +ode#. Most +ono/o#istica##$ co+/etiti&e fir+s are +ar.ina##$ inefficient because /roduction a&era.e tota# cost is not at the #o'est /oint. In this e&ent, in the #on. run, the +ar.ina# cost is si+/#$ #ess than the /rice of the .ood. This trans#ates to the /rice of the Starbucks be&era.e to +e +arked u/ o&er the cost of /roduction. The cost of /roducin. for Starbucks +a$ not be the +ost cost-effecti&e, but it is #ess than the /rice char.ed for their .our+et bre's. This cou#d a#so e,/#ain 'h$ the /rice of Starbucks coffee is so hi.h? their /roduction costs are hi.h and +ust that cost onto the custo+ers to increase their re&enue and decrease e,/enses. Mono/o#istica##$ co+/etiti&e fir+s, #ike Starbucks are dri&en b$ +ass ad&ertisin. and the estab#ish+ent of brand na+es and #o.os. Starbucks a+biance and /roducts are +arketed b$ the e#e&ated, inte##ectua# connotations. There are +an$ coffee sho/s on the +arket that a#so offer tast$ aro+atic coffees, but the ad&ertisin. and at+os/here of the Starbucks sho/s dra's custo+ers in. !eo/#e are s/endin. +ore on Starbucks bre's because of the #o.o and status attached to the+. )ecause coffee +an$ ti+es is &irtua##$ identica#, ad&ertisers and /roducers narro' in on 'hat the consu+er 'ants and a##o' their /roducts to /ortra$ those idea#s. To differentiate bet'een #ike coffees, consu+ers +ust sa+/#e a## t$/es and deter+ine 'hat suits their tastes and #ifest$#es. Eet, there are too +an$ coffee o/tions on the +arket and consu+ers do not ha&e the ti+e or the funds to sa+/#e &arious brands. "d&ertisers are a'are of this and therefore e+bark on tar.eted ad ca+/ai.ns to attract +ore consu+ers. Starbucks attracts their custo+ers o&er their co+/etitors b$ their ad ca+/ai.ns and serene at+os/here of success. Competition Starbucks +ain co+/etitors are -uick-ser&ice restaurants and s/ecia#t$ coffee sho/s. There are an abundant a+ount of co+/etitors in the s/ecia#t$ coffee be&era.e industr$. The co+/an$ be#ie&es that its custo+ers choose a+on. retai#ers /ri+ari#$ on the basis of /roduct ser&ice, ser&ice, /rice, and con&enience. Starbucks, in recent ti+es, has e,/erienced drastic direct co+/etition fro+ #ar.e BS co+/etitors fro+ -uick-ser&ice restaurants. These restaurants ha&e si.nificant#$ .reater +arketin. and o/eratin. resources than the$ do. Starbucks is a#so faced 'ith 'e##-estab#ished co+/etitors in the Internationa# +arkets 'ith increased co+/etition in the B.S. read$-to-drink coffee be&era.e +arket.

Starbucks 'ho#e bean coffees co+/ete direct#$ a.ainst s/ecia#t$ coffees so#d throu.h su/er+arkets, s/ecia#t$ retai#ers and a .ro'in. nu+ber of s/ecia#t$ coffee stores. )oth their 'ho#e bean coffees and coffee be&era.es co+/ete indirect#$ a.ainst a## other coffees on the +arket. Starbucks S/ecia#t$ %/erations face si.nificant co+/etition fro+ estab#ished 'ho#esa#e and +ai# order su//#iers, so+e of 'ho+ ha&e .reater financia# and +arketin. resources than the Co+/an$. Starbucks faces intense co+/etition fro+ both restaurants and other s/ecia#t$ retai#ers for /ri+e retai# #ocations and -ua#ified /ersonne# to o/erate both ne' and e,istin. stores. The intensit$ of ri&a#r$ increases as businesses tr$ to i+/ro&e their /osition in the industr$. In order to .ain ne' custo+ers, co+/etitors +a$ reduce /rices, introduce ne' /roducts or substitutes, and increase +arketin. efforts. 6or e,a+/#e, on 6ebruar$ 2@, 200<, Starbucks c#osed its o/erations for se&era# hours across the board to conduct e+/#o$ee trainin.. (unkin (onuts took ad&anta.e of this o//ortunit$ to .ain ne' custo+ers. (unkin (onuts offered a s+a## #atte, ca//uccino or es/resso drink for 99 cents fro+ 1 /.+. to 10 /.+. durin. Starbucks2 shutdo'n. The t$/es of food choices, /ricin. and restaurant a+biance create the di&ersit$ a+on. co+/etitors. Custo+ers +a$ choose a+on. co+/etitors based on /reference. So+e co+/etitors offer a fu## +enu 'hi#e others offer a baker$-cafF +enu. !ricin. &aries a+on. co+/etitors as 'e##. Starbucks /ricin. is considered to be hi.her than a&era.e. The a+biance a+on. the co+/etitors &aries fro+ a fast-food chain 'here the ob3ecti&e is to .et fast ser&ice, 'hi#e the coffeehouses a+biance is s#o'-/aced and re#a,ed. Ge' entrants can increase the fi.ht for +arket share, #o'erin. /rices, and the /rofitabi#it$ of an industr$. So+e e,istin. co+/etitors can reta#iate a.ainst ne' entrants to deter the+ fro+ enterin. the industr$ in the first /#ace. There are se&en +a3or barriers7obstac#es to entr$ that +ake it difficu#t for ne' entrants.

*cono+ies of sca#e refer to the dec#ine in unit costs as abso#ute /roduction &o#u+e increases. Starbucks can take ad&anta.e of reduced unit costs due to its s/ecia#i>ation and e,/ertise throu.h &o#u+e /urchase discounts fro+ their su//#ies. Starbucks retai# stores can .enera##$ be found in e,tre+e#$ bus$, accessib#e #ocations inc#udin. bein. #ocated direct#$ off e,it ra+/s to ser&e a 'ider ran.e of custo+ers and /ro+ote brand a'areness. The stores can a#so be found in do'nto'n and suburban retai# settin.s, sho//in. +a##s, 'ithin office bui#din.s and can e&en be found on uni&ersit$ ca+/uses. (ri&e Thru stores continue to de&e#o/ to reach non-/edestrian custo+ers. Starbucks re#ies a .reat dea# on infor+ation techno#o.$ s$ste+s in the o/erations of its su//#$ chain, /oint-of-sa#e /rocessin., and +an$ other business transactions. The +ana.e+ent of these transactions .reat#$ affects the /roduction, distribution, and sa#e of its /roducts. "n$ technica# fai#ure 'ithin these s$ste+s can cause de#a$s in sa#es and decrease efficienc$.

Starbucks uti#i>ed its =u+an Aesources to its fu## ca/acit$. *+/#o$ees are re-uired to fo##o' Starbucks co+/rehensi&e store o/eratin. /rocedures and attend trainin. c#asses. Starbucks rea#i>es that its .ro'th de/ends considerab#$ on the kno'#ed.e, ski##s, and abi#ities of ke$ e,ecuti&es and other e+/#o$ees and its abi#it$ to recruit and retain those e+/#o$ees. Go&ern+ent /o#ic$ e,ists to +ana.e entr$ into an industr$ 'ith #icensin. re-uire+ents re.u#ations. %/enin. a coffee sho/ or restaurant 'i## re-uire obtainin. certain #icenses, i.e., business #icenses, and ta, id2s, a+on. other /ossib#e #icenses. (es/ite a## the barriers or obstac#es associated 'ith entr$, the +ost si.nificant barrier to entr$ is catchin. a niche +arket. Ga+e brand franchises ha&e u#ti+ate#$ ca/tured +ost of the +arket share because of their o'n /ersona# niche. ;ookin. for at+os/here, for a /#ace to han. out, for &e#&et sofas. H0eI&e kno'n for a #on. ti+e no' that Starbucks is +ore than 3ust a 'onderfu# cu/ of coffee. ItIs the e,/erience,D sa$s =o'ard Schu#t>. =is .enius understandin. is thatJ +odern brandbui#din. is at #east as +uch about the custo+er e,/erience as it is about the actua# /roduct. KShu#t>L The threat of substitute /roducts or ser&ices that are /roduced in another industr$ that satisf$ si+i#ar needs. Starbucks e,/eriences a hi.h threat of substitution because an$ ne' /roduct cou#d be the start of the ne,t consu+er trend or cra>e, creatin. an initia# hi.h de+and for that /roduct. The hi.h#$ caffeinated drinks such as Monster and Aed )u## ha&e certain#$ /ro&en to be bi. se##ers a+on. consu+ers. So+e for+er coffee drinkers no' /refer to .et their caffeine fro+ the ener.$ drinks rather than throu.h coffee /roducts. Soda a#so contains caffeine and can ser&e as a substitute for coffee. 0ater can a#so be a substitute /roduct as ad&erse /ub#ic or +edica# o/inions about the hea#th effects of consu+in. caffeine continue. 0hi#e Starbucks has a &ariet$ of be&era.e and food ite+s that are #o' in caffeine and ca#ories, so+e of the other /roducts contain hi.h fat and ca#orie count ha&e been the focus of ad&erse hea#th effects. This has caused a si.nificant reduction in the de+and for Starbucks /roducts and an increase in the de+and for hea#thier /roducts. The bar.ainin. /o'er of bu$ers #o'ers the /rofitabi#it$ of an industr$ b$ bar.ainin. for +ore ser&ices and /erha/s hi.her -ua#it$. More than 77 /ercent of a## adu#ts o&er 1< -- or 1@1 +i##ion /eo/#e -- drink coffee on a dai#$ or occasiona# basis, the stud$ re/orted. "ccordin. to the 2007 Gationa# Coffee (rinkin. Trends Ae/ort, 1<- to-2 -$ear o#ds ha&e contributed to the increases in coffee consu+/tion in the /ast $ear Kdai#$, 'eek#$, and annua# consu+/tionL. The$ are a#so the on#$ a.e .rou/ that sho'ed an increase in dai#$ .our+et coffee be&era.e consu+/tion. !eo/#e a.ed 0 and u/ sho'ed the #ar.est .ro'th in consu+/tion of .our+et coffee be&era.es o&er the /ast $ear.

<

The bu$ers ho#d enou.h /o'er to inf#uence co+/an$ /ricin.. The industr$ de/ends u/on consu+er s/endin. on s/ecia#t$ eater$ /roducts? a #ack of de+and 'i## u#ti+ate#$ force a fir+ to chan.e its /roduct #ine and to #o'er /rices. Starbucks has recent#$ introduced a 99 cent cu/ of coffee? this +o&e 'i## he#/ the+ to co+/ete 'ith the #o'er /riced co+/etitors and the sa..in. econo+$. )ar.ainin. /o'er is the ca/abi#it$ to contro# the settin. of /rices. The +ore concentrated and contro##ed the su//#$, the +ore /o'er it #e&era.es a.ainst the +arket. 0hi#e there are +an$ co+/etitors in the s/ecia#t$ eateries industr$, (unkin (onuts, Mc(ona#ds, and !anera )read are the +ain /#a$ers in the industr$. Dunkin Donuts The first (unkin (onuts 'as o/ened in 1950 in Muinc$, Massachusetts b$ 0i##ia+ Aosenber.. Toda$, there are o&er 13,000 (unkin (onuts #ocated in 50 countries 'or#d'ide 'ith sa#es of 4@. bi##ion in 200@. (unkin2s head-uarters is #ocated in Canton, Massachusetts. (unkin (onuts is kno'n for their dou.hnuts and coffee. %&er the $ears, (unkin has introduced ne' /roducts such as ba.e#s, +uffins, breakfast sand'iches. In order to co+/ete 'ith the #unch cro'd, (unkin e,/anded their /roduct +enu to inc#ude /i>>as and sand'iches. In order to co+/ete 'ith the s/ecia#t$ coffeehouses, (unkin e,/anded their coffee offerin.s to inc#ude f#a&ored coffees, #attes, coo#attas, f#a&ored hot choco#ate and teas. McDonalds The first Mc(ona#d2s restaurant 'as o/ened in 19 0 in San )ernardino, Ca#ifornia b$ t'o brothers na+ed (ick and Mac Mc(ona#d. "s of (ece+ber 31, 2007, there 'ere 31,377 Mc(ona#dIs restaurants in 11< countries ser&in. 5 +i##ion /eo/#e each da$. Mc(ona#d2s is the 'or#d2s #ar.est fast-food chain restaurant. 0hi#e Starbucks is the #eader in the s/ecia#t$ coffeehouse +arket, Mc(ona#ds is beco+in. an e+er.in. co+/etitor 'hen it first u/.raded its coffee in 200@. Mc(ona#d2s coffee sa#es increased 15N in 200@, and /#ans to .ro' coffee sa#es 'ith the /#an to insta## coffee bars in a## 1 ,000 B.S. #ocations. The Mc(ona#dIs ne' s/ecia#t$ drinks, 'hich are no' in about ha#f of the co+/an$Is near#$ 1 ,000 BS stores, a#read$, ha&e a fo##o'in. a+on. so+e for+er Starbucks custo+ers. Mc(ona#ds has a #ar.er custo+er de+o.ra/hic than Starbucks. Starbucks coffee is considered to be a #u,ur$ for the aff#uent, 'hi#e Mc(ona#d2s caters to fa+i#ies 'ith chi#dren, teena.ers, adu#ts, and senior citi>ens 'ith it 'e##-estab#ished +enu offerin.s. ;ike Starbucks, Mc(ona#ds has a stron. brand reco.nition and #o$a# custo+er base. The ad&anta.e Mc(ona#d2s has o&er Starbucks is that is has a considerab#$ #ar.er &o#u+e of

traffic co+/ared to Starbucks. 0hi#e custo+ers are sto//in. for a -uick breakfast, #unch or dinner, the$ +a$ .et a s/ecia#t$ coffee to .o too. Panera Bread !anera )read 'as founded b$ ;ouis 1ane and Aon Shaich in 19<1. It 'as ori.ina##$ na+e "u )on !ain Co., Inc., and #ater chan.ed its na+e to !anera )read Co+/an$ in 199<. Toda$, there are +ore than 11@0 !anera )read baker$-cafes in 0 states in the B.S and the head-uarters is #ocated in Aich+ond =ei.hts, Missouri. !anera2s Mission State+ent, C" #oaf of bread in e&er$ ar+.D Their strate.$ is to co+/ete successfu##$ in the breakfast, #unch, e&enin. and take-out dinner restaurant se.+ents. !anera2s /roduct #ine consists of baked .oods, artisan and s/ecia#t$ breads, custo+ roasted coffee and es/resso drinks, sou/s, sa#ads, +ade-to-order sand'iches and .our+et /i>>as. In order to co+/ete 'ith the breakfast co+/etitors, !anera 'i## be offerin. breakfast sand'iches in addition to ba.e#s and +uffins in March 200<. !anera2s a+biance of casua# dinin. is the c#osest co+/etitor to Starbucks. ;ike Starbucks and Caribou Coffee, !anera )read offers free 0i6i to its custo+ers. !anera2s /ricin. is desi.ned so custo+ers /ercei&ed .ood &a#ue 'ith hi.h -ua#it$ food at reasonab#e /rices 'hich 'i## ho/efu##$ encoura.e re/eat custo+ers.

Elasticity Estimates
!rice e#asticit$ of de+and +easures the e,tent to 'hich the -uantit$ of de+and of .ood chan.es 'hen the /rice of .ood chan.es. In order to deter+ine /rice e#asticit$ of de+and 'e co+/ared the chan.e in -uantit$ de+anded 'ith chan.e in /rice. Su//ose Starbucks raises the /rice of #atte fro+ 43 do##ars to 45 do##ars a cu/ the -uantit$ of de+and 'ou#d decrease. If Starbucks 'ere to increase its /rice of a #atte Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts 'ou#d decrease there /rices in order to co+/ete. 0hen /rice rises, -uantit$ de+anded decreases a#on. 'ith the de+and cur&e. This 'i## a##o' /rice and -uantit$ to a#'a$s chan.e in o//osite directions. Starbucks coffee has an e#astic de+and, so+e +a$ be addicted to coffee but Starbucks coffee is a #u,ur$ not a necessit$. The de+and for Starbucks coffee 'i## decrease if /rices .ro' because of the hu.e +arket of co+/etitor 'e ha&e that offers the sa+e .ood and at a chea/er /rice. 6or e,a+/#e CMc(ona#ds and (unkin2 (onuts is offerin. coffee at three to four do##ars #ess than the coffee at StarbucksD. Go' 'ith the &a#ue of B.S do##ars .radua##$ fa##in., the inco+es of consu+ers ha&e di+inished. "s inco+e fa##, the de+and of nor+a# .oods 'i## decrease and 'i## cause a shift in the de+and cur&e. Starbucks is +easured on #u,urious .ood both hi.h -ua#it$ and hi.h /rice. Consu+ers are thinkin. +ore about necessit$ &ersus #u,ur$. Gecessit$ tends to ha&e ine#astic de+and and it is unres/onsi&e /rice chan.e. 0here as #u,uries ha&e +ore e#astic de+ands -uantit$ de+and is +ore res/onsi&e to /rice chan.e and Starbucks coffee is e#astic.

10

htt/J77'e#kers'ikino+ics.co+ Inco+e e#asticit$ i+/acts chan.e in de+and cur&e. 0hen inco+e increases the -uantit$ of de+and increases and 'hen inco+e decrease -uantit$ of de+and decreases. "n artic#e fro+ )usiness 'eek states Caccordin. to %ct. 5, 200@ /resentation to ana#$sts, custo+ers 'ho sho//ed Starbucks for the first ti+e in the #ast $ear had an a&era.e inco+e of 4 <0,000 a $ear &s. the 4 92, 000 a $ear a&era.e for those 'ho first &isited fi&e $ears a.o. "s inco+es increase, so+e .oods, for so+e /eo/#e, beco+e Cinferior.D This 3ust +eans that as inco+e increases, these /eo/#e consu+e +ore this .ood. Consu+ers 'i## s'itch into a +ore e,/ensi&e or +ore-/resti.ious .ood the +ore +one$ the$ +ake. So if Starbucks coffee /rice is hi.h custo+er that +ake enou.h +one$ 'on2t +ind the hi.h #u,ur$ /rice and 'i## sti## consu+e the #atte2s Starbucks /ro&ide. The conce/t of cross-/rice e#asticit$ of de+and +easures the res/onsi&eness of consu+ers of one .ood or ser&ice to the chan.e in /rice of another. If t'o .oods are substitutes, 'e e,/ect to see consu+ers /urchase +ore of the .ood 'hen the /rice of its substitute increases. If the$ co+/#e+ent each other 'e shou#d see a /rice rise in on .ood cause de+and for both .oods to fa##. )asica##$ i+/act of /rices chan.es substitutes and co+/#e+ents 'hen the /rice of re#ated .ood chan.es. Cross-/rice e#asticit$ of de+and is used to see ho' sensiti&e the de+and for a .ood is to a /rice chan.e of another. =i.h /ositi&e cross-/rice e#asticit$ te##s us that if the /rice of one .ood .oes u/, the de+and for the .ood .oes u/ as 'e##. " ne.ati&e te##s us the o//osite increase in the /rice of one .ood cause a dro/ in the de+and for the other .ood. " s+a## &a#ue either ne.ati&e or /ositi&e 'ou#d te## us that there is #itt#e re#ation bet'een the t'o. If the cost of +i#k .oes that 'ou#d i+/act on the cost of #atte because +i#k is a co+/#e+ent to coffee. '''.business'eek.co+

11

" bi. i+/act on sa#es has to do 'ith /ricin. of /roducts and sa#es 'hich increase re&enue .ro'th. 0hen a /roduct beco+es acce/tab#e to consu+ers and is substituted b$ another that 'ou#d su..est Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts coffee strate.$ 'ou#d hurt and se&ere#$ da+a.e Starbucks. Starbucks coffee has an e#astic de+and e&en thou.h so+e +a$ be addicted to coffee Starbucks coffee 'i## decrease if the /rice .ro's on#$ because of the a&ai#abi#it$ fro+ other co+/anies such as Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts 'hich the$ 'i## offer a +uch chea/er /rice to attract the consu+ers. The other fir+2s /rices are three to four do##ars #ess then the coffee at Starbucks. The /rob#e+ #ies in Starbucks insistin. on sa$in. that the$ are in a different +arket /#ace then Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts. Starbucks c#ai+s that no one 'i## s'itch or e&en think about s'itchin. or so+eti+es .o to other co+/anies such as Mc(ona#ds or (unkin (onuts etc. That is 3ust foo#ishness because e&er$one kno's if $ou /refer Cook, occasiona##$ $ou 'i## ha&e a !e/si es/ecia##$ 'hen it co+es to sa&in.. If Starbucks 'ere to increase its /rice of a #atte fro+ 43 do##ars to 45 do##ars Mc(ona#ds, !anera )read, 1ris/$ 1re+e, and (unkin (onuts 'ou#d decrease there /rices in order to co+/ete. In co+/arison C&ast#$ increase co+/etition in coffee +arket. Mc(ona#ds entered into the !re+iu+ coffee se##in. for 41.39 for a s+a## co+/are to Starbucks 41.75.D Mc(ona#ds has been a..ressi&e#$ +arkets its coffee 'innin. breakfast ti+e fro+ the consu+ers and inc#udes /ro+otiona# ite+s to a##ure the+ in. To 'hich Consu+er Ae/orts indicate that the$ are head-to-head co+/arisons 'ith the coffee fro+ Starbucks. Starbucks faces three +a3or obstac#es first co+/etition es/ecia##$ 'ith B.S bein. the fast /ace econo+$ that it is. Starbucks 'ou#d ha&e to ada/t to chan.e of the constant#$ .ro'in. and recession 'ith in the industries in order to dra' consu+ers. 0ith co+/etition the /rice of Starbucks coffees and /roducts sa#es 'i## be the centra# /oint for bu$in. /o'er of the consu+ers. Starbucks 'ou#d ha&e to +ake sure that the /roducts the$ se## and the /rice are beneficia# to the+ and the consu+ers. In the +idd#e of #ast $ear I read that Starbucks is in troub#e. The$ announced that the$ 'i## c#ose @00 stores. 0ith the /rice of .as c#i+bin. "+ericans are +akin. 'iser choices in finance. Consu+ers are ski//in. the 4 do##ars #atte and .oin. to co+/etitors and s/endin. #ess and +akin. easier choices. Pricing Strategy Starbucks /ositions itse#f as a s/ecia#t$ /re+iu+ coffee retai#er and has a stron. and 'e## kno'n brand i+a.e. "s Starbucks is a /re+iu+ coffee brand, its tar.et +arket has a#'a$s been +idd#e and u//er c#ass 'ith the dis/osab#e inco+e needed to fre-uent the coffeehouse. %ne of the +ain reasons Starbucks has been so successfu# is because the$ focus on -ua#it$ and e,/erience rather than /rice. The Starbucks2 i+a.e and e,/erience has been one of the ke$ e#e+ents to their success. Starbucks has succeeded in .i&in. coffee a ne' cachet and estab#ished the+se#&es as a /rice setter throu.h /roduct differentiation. Consu+ers ha&e been 'i##in. to /a$ for 'hat the$ consider an e#ite #ifest$#e and +an$ be#ie&e that the hi.her the /rice, the better the -ua#it$. "#thou.h

12

/re+iu+ brand coffee +akers ha&e so+e +arket /o'er to set /rices abo&e the .eneric &a#ue brands, Starbucks o/erates under +ono/o#istic co+/#etion 'here there are +an$ s+a## fir+s that se## si+i#ar /roducts, therefore the$ do not e,ert co+/#ete +arket /o'er in the industr$. Starbucks has, u/ unti# no', been ab#e to take ad&anta.e of /re+iu+ /ricin. but accordin. to an artic#e in )usiness 'eek, CStarbucks is #ookin. to rebound fro+ dis+a# BS sa#es as +ore consu+ers cut back on s/endin.. In its first--uarter re/ort #ast 'eek, sa+e-store sa#es - a ke$ indicator of a retai#erIs /erfor+ance - dro//ed 10 /ercent. ThatIs 'orse than the < /ercent dec#ine in the fisca# fourth -uarter.D )ecause there are a #ot of o/tions for the +ore cost conscious consu+er #ookin. to sa&e +one$ on coffee /urchases, Starbucks fe#t the need to +ake a /rice chan.e. "fter a## Mc(ona#d2s Cor/ is offerin. ne', #o'er-/riced s/ecia#t$ coffee drinks and (unkinI (onuts is ad&ertisin. &a#ue-+inded dea#s. So 'hen Starbucks founder ,=o'ard Schu#t>, decided to offer a 41 cu/ of coffee in certain stores to co+/ete 'ith Mc(ona#d2s and to increase e,istin. store sa#es, so+e critics thou.ht it +a$ ha&e done +ore har+ than .ood. Their thou.hts 'ere that the decrease in /rice +a$ ha&e i+/#ied that there is nothin. +ore to Starbucks than coffee. )$ offerin. a chea/ cu/ of coffee, Schu#t> +a$ be reducin. the co+/an$ to co++odit$ status, and the natura# resu#t bein. a /rice 'ar. Go #on.er is bu$in. a cu/ of Starbucks coffee an e,/erience. )ut because coffee is an e#astic /roduct in 'hich /rice contro#s de+and, Starbucks +a$ 'ant to consider a s+a## decrease in their /rice to increase de+and 'hich 'i## increase re&enue and a##o' the+ to be +ore co+/etiti&e. !ricin. decisions a#so ser&e as a marketing tool and is one of the +ost co+/e##in. attributes of /roduct /ositionin.. It +akes a &er$ c#ear state+ent about ho' a consu+er shou#d /ercei&e a /roduct. Starbucks cannot beco+e the #o' /rice #eader? it takes a'a$ fro+ the brand i+a.e and a+bience that the$ are kno'n for. 0hen Starbucks beca+e a +a3or co+/etitor, it 'as because the co+/an$2s en&iron+ent 'as #ike none other and focuses on the benefit of the custo+er. !eo/#e considered Starbucks as a Cthird /#aceD after ho+e and 'ork. =o'ard Schu#t>2s &ision 'as not to bui#d a coffee sho/, but instead bui#d a co+/an$ that treats /eo/#e 'ith di.nit$ and res/ect. =e 'anted to estab#ish a /#ace 'here $ou can .o re#a, and ha&e a de#icious coffee and s+other $ourse#f in a co+fortab#e seat that +akes $ou fee# #ike $ou2re sittin. on $our #i&in. roo+ couch. *ar /#easurin. +usic 'i## be consu+in. $our back.round and +ake a custo+er fee# as if the$ are at their ho+e a'a$ fro+ ho+e. %r a /#ace 'here $ou can brin. $our #a/to/ and .et so+e 'ork done if there 'ere an$ distractions at ho+e or 'ork. Starbucks is a#so the t$/e of /#ace 'here $ou can +eet a friend, sta$ and ta#k for hours, and fee# #ike $ou2re the on#$ t'o /eo/#e in the /#ace. Custo+ers and e+/#o$ees as 'e## recei&e an e,/erience for Starbucks, in 'hich Starbucks constant#$ stri&es to /#easure e&er$one around the+. The en&iron+ent is so in&itin., re#a,ed, and /robab#$ trendier than +ost /eo/#e2s #i&in. roo+, and at the sa+e ti+e, -uick /aced if $ou need a coffee to-.o. Starbucks has set an en&iron+ent 'here the

13

re#ationshi/ bet'een custo+ers and e+/#o$ees sets the co+/an$ a/art fro+ other coffee sho/s. Starbucks sets a different t$/e of trend than an$ other coffee house that see+s to be conta.ious to custo+ers and e&en other co+/anies. %ne area of business that Starbucks s/ends the #east a+ount of their +one$ on is its ad&ertise+ents co+/ared to co+/etitors. Schu#t> be#ie&es that e,/erience beats ads. In an artic#e fro+ )usiness'eek.co+ CStarbucksJ 1ee/in. the )re' =otD, e,/#ains that .i&en that /hi#oso/h$ of e,/erience beats ads, con&entiona# ad&ertisin. has been no rea# si.nificance to the .ro'th of the Starbucks brand. Aather, it has been the store e,/erience that has defined the brand. This be.ins 'ith the -ua#it$ and intense f#a&or of the coffee. )ut e-ua##$ inf#uentia# are the store desi.n and a+biance as 'e## as the recruit+ent and trainin. of the Cbaristas,D the counter staff 'ho+ Schu#t> re.ards as his brand a+bassadors. Instead of /uttin. +i##ions into i+a.e-bui#din. ca+/ai.ns, Starbucks has chosen to s/end its +one$ on e+/#o$ee benefits. Starbucks 'as one of the first co+/anies to offer /artti+e e+/#o$ees e-uit$ and hea#th benefits, un#ike its co+/etitors in 'hich it2s hard for the+ to i+itate. Starbucks has a#so created /ro3ects that ha&e .i&en back to the co++unit$, created rec$c#ab#e /roducts, and has branched off into different brands, 'hich has brou.ht the co+/an$ to another #e&e#. Starbucks constant#$ stri&es to be different and better than e&er$one e#se and if the$ stick to their core co+/etencies, the co+/an$ 'i## continue to be successfu#. Since (unkin (onuts is a /ri&ate#$ he#d co+/an$, no financia# infor+ation is a&ai#ab#e to deter+ine its share of the +arket. )ut based on the a+ount of stores that (unkin (onuts has, it 'ou#d be safe to assu+e that the$ ha&e ca/tured +uch of the +arket. "nd because Mc(ona#ds ser&es +an$ +ore /roducts than the other ke$ co+/etitors, it +a$ be e,tre+e#$ difficu#t to re/ort accurate +arket share infor+ation. )ased on the infor+ation that is a&ai#ab#e, Mc(ona#d is the +arket #eader. Starbucks +arket share has been increasin. steadi#$ o&er the #ast cou/#e $ears, but !anera )read has the #ar.est increase in +arket share o&er the /ast $ear. Mean'hi#e, Mc(ona#ds, 1ris/$ 1re+e, and Caribou Coffee ha&e been decreasin.. There are four 'a$s that co+/anies can do to i+/ro&e +arket share. Make a better /roduct than that of the co+/etitors, chan.e the /rice or offer s/ecia# incenti&es for bu$ers, such as discounts or sa#es, find ne' distribution channe#s to reach +ore consu+ers, ad&ertise and /ro+ote the /roducts. "#thou.h the /rice a//ears to be hi.her than +ost of their co+/etitors, the fact that the coffee contains +ore caffeine /er cu/, that one cu/ +a$ be enou.h for the entire da$. This cou#d actua##$ sa&e both ti+e and +one$ o//osed to ha&in. to bu$ +ore than one cu/. Starbucks re#ies on its re#ationshi/s 'ith coffee /roducers, outside tradin. co+/anies, and e,/orters for its su//#$ of .reen coffee. The co+/an$ is dedicated to se##in. on#$ the finest 'ho#e bean coffees and coffee be&era.es therefore it /urchases .reen coffee beans

fro+ coffee-/roducin. re.ions around the 'or#d. )ecause the su//#$ and /rice of coffee are sub3ect to si.nificant un/redictabi#it$, the co+/an$ tends to trade on a ne.otiated basis at a si.nificant /re+iu+ abo&e co++odit$ coffee /rices. The a+ount ne.otiated de/ends on the su//#$ and de+and at the ti+e of /urchase. Su//#$ and /rice can a#so be affected b$ other factors in the /roducin. countries, inc#udin. 'eather, /o#itica# and econo+ic conditions. ".ree+ents estab#ishin. e,/ort -uotas or b$ restrictin. coffee su//#ies ha&e a#so affected /rice. (ue to un/redictabi#it$ in the /rices, the co+/an$ has #ar.e#$ used fi,ed-/rice /urchase co++it+ents to be sure the$ ha&e enou.h of a su//#$ of -ua#it$ .reen coffee and contro# the /rice. This contract states the -ua#it$, -uantit$, and de#i&er$ of the coffee.

orecast Determents of Demand Determinants of demand consist of 1L /rice, 2L the inco+es of consu+ers, 3L the /rices of re#ated .oods and ser&ices, L the tastes of /references /atterns of consu+ers, 5L the e,/ected /rice of the /roduct in future /eriods, and @L the nu+ber of consu+ers in the +arket. These &ariab#es chan.e the -uantit$ de+anded at each /rice and deter+ine 'here the de+and cur&e is #ocated. !riceO'ith a## other thin.s re+ainin. constant, as the /rice rises, the de+and 'i## fa## and in&erse#$, as the /rice fa##s, the de+and 'i## rise. "s the /rice of Starbucks coffee increases, the de+and for that /articu#ar brand of coffee 'i## decrease. In this e&ent, +an$ /eo/#e +a$ choose not to drink Starbucks coffee and decide to s'itch to a #ess cost#$ a#ternati&e such as fre-uentin. a #o'er cost coffeehouse, /urchasin. coffee at a .as station, or /erha/s e&en bre'in. their coffee at ho+e. %ther a#ternati&es to coffee, such as teas, ener.$ drinks, or an$ caffeinated be&era.e +a$ a#so take the /#ace of coffee. "s the /rice of Starbucks coffee fa##s, consu+ers 'i## de+and +ore of the coffee because it 'i## be +ore affordab#e. 6or e,a+/#e, if the /rice of a cu/ of coffee 'ent u/ b$ 40.25, consu+ers cou#d re/#ace their +ornin. caffeine 'ith a cu/ of tea. =o'e&er, if the /rice of caffeine 'ere to .o u/ as a 'ho#e, 'e 'ou#d /robab#$ see #itt#e chan.e in the consu+/tion of coffee or tea because there are fe' substitutes for caffeine. Most /eo/#e are not 'i##in. to .i&e u/ their +ornin. cu/ of caffeine no +atter 'hat the /rice. Inco+e -- as inco+e increases the de+and for a /roduct 'i## increase as 'e##. "s inco+e dec#ines, the de+and for the .oods 'i## .o do'n as 'e##. In toda$2s econo+$, +an$ /eo/#e ha&e been #osin. their 3obs or ha&e had their inco+e reduced. "s a resu#t, consu+ers ha&e had to cut back on non-essentia# ite+s such as hi.her end coffees #ike Starbucks. Man$ /eo/#e 'i## no #on.er be ab#e to afford the 4 5.00 s/ecia#t$ be&era.e. 0hen inco+e increases, /eo/#e ha&e +ore dis/osab#e inco+e therefore are ab#e to treat the+ to a s/ecia#t$ be&era.e. Co+/#e+ents --If the /rice of the co+/#e+ent rises, the de+and for the /roduct fa##s. If /rices of the co+/#e+ents .o do'n there 'i## be a hi.her de+and for the /roduct. Co+/#e+ents of Starbucks coffee can be +i#k, crea+, su.ar, su.ar substitutes, and f#a&ored s$ru/s. 6or e,a+/#e, if the /rice of su.ar shou#d increase, +an$ consu+ers +a$ 15

be un'i##in. or unab#e to /urchase it and o/t for another a#ternati&e, 'hich 'ou#d decrease the de+and for coffee. %n the other hand, if the /rice of su.ar .oes do'n, consu+ers 'i## be ab#e use it for +an$ +ore thin.s inc#udin. s'eeten their coffee. Substitutes-- "s the /rice of the substitute rises, the de+and for the /roduct rises. "s the /rice of the substitutions .oes do'n, the de+and for the+ 'i## increase. Substitutes for Starbucks coffee cou#d inc#ude chea/er coffees, teas, hot cocoa, 'ater, ener.$ drinks, soda, and caffeine /i##s. If the /rice of an$ of these substitutes shou#d rise, the de+and for coffee 'i## rise because consu+ers 'i## be unab#e or un'i##in. to /a$ the additiona# /rice and s'itch back to coffee. TastesO "s /references for a /articu#ar .ood or ser&ice chan.es, so 'i## the de+and for the ite+. If /eo/#e en3o$ drinkin. and de&e#o/ a /reference for the stron.er tastin. Starbucks coffee, the$ 'i## 'ant +ore of it. If consu+er do not #ike the stron.er tastin. Starbucks coffee, the 'i## 'ant #ess of it. Inco+e chan.es and #o'er /riced substitutions cou#d affect their tastes and a chea/er /riced a#ternati&e cou#d beco+e a ne' /reference. *,/ected /ricesO If a consu+er e,/ects that a /rice of a certain co++odit$ 'i## rise than the$ +a$ o/t to stock u/ on the /roduct as the #o'er /rice before it .oes u/. In&erse#$, consu+ers +a$ be#ie&e that a /rice of a .ood 'i## be reduced, the$ 'i## ho#d off on /urchasin. the /roduct unti# the /rice .oes do'n to the #o'er rate. Man$ consu+ers +a$ stock u/ on Starbucks coffee beans if the$ kno' that the /rice is .oin. to be increasin. in the near future. %n the other hand, consu+ers +a$ 'ait to +ake their Starbucks /urchase if the$ kno' the /rices are .oin. to dro/ in the near future. Gu+ber of consu+ers-- If there are +ore bu$ers than there +ust be +ore of a +arket de+and. The +ore consu+ers, the +ore de+and. The hi.her the de+and for a .ood the hi.her the /rices 'i## rise. State techno#o.$O!roducers 'i## search for ad&anced, econo+ica# techno#o.$ so the cost of /roducin. Starbucks coffee 'i## decrease. The #o'er the cost in /roduction of the coffee resu#ts in a hi.her su//#$ due to the cost effecti&eness of the /roduction. "ccordin. to Starbucks 10k re/ort, Starbucks re#ies hea&i#$ on infor+ation techno#o.$ s$ste+s across its o/erations, inc#udin. for +ana.e+ent of its su//#$ chain, /oint-of-sa#e /rocessin. in its stores, and &arious other /rocesses and transactions. The Co+/an$2s abi#it$ to effecti&e#$ +ana.e its business and coordinate the /roduction, distribution and sa#e of its /roducts de/ends si.nificant#$ on the re#iabi#it$ and ca/acit$ of these s$ste+s. The fai#ure of these s$ste+s to o/erate effecti&e#$, /rob#e+s 'ith transitionin. to u/.raded or re/#ace+ent s$ste+s, or a breach in securit$ of these s$ste+s cou#d cause de#a$s in /roduct sa#es and reduced efficienc$ of the Co+/an$2s o/erations, 'hich resu#ts in hi.her /roduction costs. *,/ected /rice of the .oodO!roducers +a$ 'ithho#d /roduction of Starbucks coffee in the current /eriod if the$ e,/ect the /rice of coffee to rise. The$ 'i## be +ore 'i##in. to se## the coffee at a hi.her /rice rather then se##in. and /roducin. at the #o'er /rice. Gu+ber of fir+sO The hi.her the nu+ber of coffee su//#iers in the industr$ the hi.her the su//#$ of coffee in the industr$. There 'i## be +ore coffee to .o around for the consu+ers. If there are +ore bu$ers than there +ust be +ore of a +arket de+and. The +ore consu+ers, the +ore the de+and. The hi.her the de+and for a .ood the hi.her the /rices 'i## rise.

1@

Forecasting Sa#es forecastin. is the /rocess of esti+atin. 'hat the business2s sa#es are .oin. to be in the future. Sa#es forecastin. is an i+/ortant /art of business +ana.e+ent. Starbucks cannot +ana.e in&entor$, cash f#o', or /#an for .ro'th 'ithout an idea of 'hat future sa#es are .oin. to be. " business2s sa#es re&enue fro+ the sa+e +onth in a /re&ious $ear, co+bined 'ith kno'#ed.e of .enera# econo+ic and industr$ trends, 'ork 'e## for /redictin. a business2s sa#es in a /articu#ar future +onth. There are &arious forecastin. +ode#s that can be used for forecastin. sa#es for coffee. T'o +ethods are -ua#itati&e and -uantitati&e. The -ua#itati&e +ethod uses sub3ecti&e 3ud.+ent based on non--uantifiab#e infor+ation, such as +ana.e+ent e,/ertise, industr$ c$c#es, research, de&e#o/+ent, and #abor re#ations. The -ua#itati&e +ethod does not re-uire a de+and histor$ for the /roduct or ser&ice. The -uantitati&e +ethod is a research +ethod that re#ies on inter&ie's, obser&ations, and a s+a## nu+ber of -uestionnaires, focus .rou/s, sub3ecti&e re/orts and case studies. Much of the focus is on co##ection and ana#$sis of nu+erica# data and statistics. Starbucks is sub3ect to a nu+ber of si.nificant risks throu.h -ua#itati&e and -uantitati&e +ethods that +i.ht cause the co+/an$2s actua# resu#ts to &ar$ +ateria##$ fro+ its forecasts, tar.ets, or /ro3ections. The si.nificant risks in&o#&ed are #o'er custo+er traffic or a&era.e &a#ue transactions. These ne.ati&e#$ i+/act co+/arab#e store sa#es, net re&enues, o/eratin. inco+e and earnin.s /er share. These risks are due to the i+/act of initiati&es b$ co+/etitors and increased co+/etition 'ith #ack of custo+er acce/tance of /rice increase to co&er costs of ne' /roducts. (e#a$ in store o/enin.s for reasons be$ond the co+/an$2s contro#, or #ack of desirab#e rea# estate #ocations a&ai#ab#e for #ease at reasonab#e rates, both of 'hich cou#d kee/ the co+/an$ fro+ +eetin. annua# store o/enin. tar.ets and in turn ne.ati&e#$ i+/act net re&enues, o/eratin. inco+e and earnin.s /er share. %ther risks are +ateria# interru/tions in the co+/an$ su//#$ chain be$ond its contro#, such as +ateria# interru/tion of roasted coffee su//#$ due to the casua#t$ #oss of an$ of the Starbuck2s roastin. /#ants or the fai#ures of third-/art$ su//#iers, or an$ interru/tions in ser&ice b$ co++on carriers that shi/ .oods 'ithin the co+/an$2s distribution channe#s. The -ua#itati&e +ethod is best used for forecastin. the ne,t three $ears since it e+/hasi>es on rea# ti+e e,/ert2s research and ana#$sis. The nu+bers are &ariab#e and sub3ect to chan.e based on o/inions fro+ consu+ers and b$ far the econo+ica# chan.es that ha&e the .reatest i+/act on sa#esP

Summary/Conclusion
Starbucks has had +uch +arket /o'er in the .our+et coffee industr$. The$ ha&e attracted custo+ers b$ an e,/erience of an u/sca#e 6rench coffee sho/ 'ith a

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nei.hborhood fee#. "## are 'e#co+e to 3oin the band'a.on as #on. as the$ are 'i##in. to /a$ the /rice for /re+iu+. In the current econo+ic state, their /rices ha&e cau.ht u/ to the+ causin. their de+and to decrease. !eo/#edo not 'ant to s/end their #i+ited inco+e on /re+iu+ coffees that the$ can .et fro+ an$ of their co+/etitors, #ike (unkin2 (onuts, Mc(ona#ds and !anera )read. Starbucks has been forced 'ith the chan.in. ti+es and the econo+$ to dri&e do'n their /rices to co+/ete in the industr$. The c#osin. of stores and the reduction of staff /ro&es that their /ricin. +ode# on#$ /ro3ected a short ter+ /rofit, as in the case of an$ fir+ o/eratin. in a +ono/o#istic co+/etition. 0hate&er forecastin. +ode#s Starbucks has /ro3ected does not ho#d true as the inco+e effect and added /o/u#arit$ of their co+/etitors be.an +ono/o#i>in. the /re+iu+ coffee +arket. This /ro&es that the /rice of coffee is e#astic and if /rices are hi.h than the de+and for the .ood 'i## decrease. Man$ outside factors a#so contribute to Starbucks #osin. its brand a//ea#. !eo/#e ha&e be.un to rea#i>e that the$ ha&e a#ternati&es to /urchasin. Starbucks coffee and sti## sa+/#e the #u,urious b#end b$ bre'in. it at ho+e the+se#&es. Custo+ers no #on.er fo##o' the h$/e su//orted b$ the Starbucks na+e and are beco+in. +ore /rice7&a#ue oriented. To re+ain a +a3or /#a$er in the coffee sho/ +arket, Starbucks +ust rein&ent the+se#&es 'ith the chan.in. #ifest$#es, tastes and react to the a#ternati&es 'ithin the +arket.

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!orks Cited 2 6eb. 200< Qhtt/J77'''.+hhe.co+7business7+ana.e+ent7tho+/son711e7case7starbucks2.ht+#R. H2007 Gationa# Coffee (rinkin. Trends Ae/ort.H htt/J77theshot.coffeeratin.s.co+. 19 9u#$ 2007. H)usiness S Co++erce.D BniT;. 01 6eb. 200< Qhtt/J77'''.uni,#.co+R. HC.".6.* !ractices.H '''.starbucks.co+. 10 6eb. 200<. Coffee Ta#k Su//#ier Guide#ines at Starbucks. 2 6eb. 200< Qhtt/J77'''..reenbi>.co+7ne's7re&ie'sUthird.cf+8Ge'sI(V2@@91R. HCor/orate B/date.D B)S. 30 9an. 200< Q'''.ubs.co+7inde/edentresearchR. (arb$, Se$'ard. H!o#ish Ai&a#s Shru. %ff Starbucks "rri&a#.H )usiness 0eek. 13 6eb. 200<. 7 Mar. 200< Qhtt/J77business'eek.co+R. (e#sa#&o, (., 9. 1ennon, and *. 1och. The Co+/#ete Idiots Guide to In&estin. 3rd *dition. Ge' Eork, GEJ "#/ha )ooks, 2005. 6#i.ht, Geor.ia. HGrindin. %ut Success Ge,t to Starbucks.H '''.cnn.+one$.co+. 15 Mar. 2007. Gi##es/ie, *#i>abeth M. HStarbucks ",es Sand'iches as !art of 6i,.H Eahoo. 31 9an. 200<. 7 Mar. 200< Qhtt/J77bi>.$ahoo.co+R. Go#d+an, (a&id, ed. HStarbucks !uts the )rakes on Ge' Stores.H CGGMone$.Co+. 12 6eb. 200< Qhtt/J77+one$.co+7200<7017307ne's7co+/anies7strabucksUearnin.s7inde,.ht+#R. Gro//ee##i, "., and *. Gikbakht. 6inance 5th *dition. =au//au-e, GEJ )arronIs, 200@. =o#+es, Stan#e$. HStarbucksJ 1ee/in. the )re' =ot.H )usiness 0eek. @ "u.. 2001. 7 Mar. 200< Qhtt/J77'''.business'eek.co+R. htt/J77'''.-uick+ba.co+7+arketin.7+arket-share7. H1e$ Statistics.H Eahoo 6inance.Co+. 7 Mar. 200< Qhtt/J77finance.$ahoo.co+7-7ks8 sVS)BTR. H;iabi#ities.H 0iki/edia. 23 6eb. 200< Q'''.'iki/edia.co+R.

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;$nch, !eter. %ne B/ on 0a## Street. Ge' EorkJ Si+on S Schuster !a/erbacks, 19<9. Mi>rahi, Char#es. HStarbucks Ws. Mc(ona#s.H Gurufocus.Co+. 12 6eb. 200< Qhtt/J77'''..urufocus.co+7ne's./h/8idV21@77R. HGationa# Coffee (rinkin. Trends.H The Gationa# Coffee "ssociation of BS", Inc. 10 6eb. 200< Qhtt/J77'''.ncausa.or.R. HGe' Starbucks %/en in Aest Aoo+ of *,istin. Starbucks.H The %nion. 13 6eb. 200< Q'''.theonion.co+R. !arne##, 9ohn. Strate.ic Mana.e+ent. 2nd ed. CincinnatiJ "to+ic (o., 200@. !ress, "ssociated, and )' Staff. HStarbucksI C*% Aefi##.H )usiness 0eek. 7 Mar. 200< Qhtt/J77'''.business'eek.co+R. !ress+an, "aron. HStarbucksJ Troub#e in ;atte ;and.H )usiness 0eek. 1@ Go&. 2007. 13 6eb. 200< Qhtt/J77business'eek.co+R. !ress Ae#ease. HStarbucks ;aunches the H=ear Music Media )arHH Starbucks. 1 %ct. 200 . 25 6eb. 200< Qhtt/J77starbucks.co+R. HS)BT "nnua# Ae/ort.H Market0atch. 31 9an. 200< Qhtt/J77+arket'atch.co+R. Se##ers, !atricia. H" (oub#e Shot of !roducti&it$.H CGGMone$.Co+. 12 6eb. 200< Qhtt/J77+one$.cnn.co+7+a.a>ines7fortune7fortuneUarchi&e7200@71071@7<3903177i nde,.ht+R. Starbucks.Co+. 200<. 9 6eb. 200< Qhtt/J77'''.starbucks.co+7aboutus7en&iron+ent.as/R. HStarbucks Co+/an$ !rofi#e.H In&estor.uide. 31 9an. 200< Qhtt/J77'''.in&estor.uide.co+R. Starbucks Cor/oration 6isca# 2007 "nnua# Ae/ort on 6or+ 10-1. 0ashin.ton, (CJ Bnited States Securities and *,chan.e Co++ission, 2007. 9 6eb. 200< Qhtt/J77+edia.cor/orate-ir.net7+ediaUfi#es7iro#79979951<72007101./dfR. HStarbucks In&estor Ae#ations.H '''.starbucks.co+. 05 6eb. 200<. HSu//#ier Code of Conduct.H '''.starbucks.co+. 20 6eb. 200< Q'''.starbucks.co+R. HSu//#ier (i&ersit$.H '''.starbucks.co+. 0@ 6eb. 200<. HThe Wa#ue Chain.H 02 6eb. 200< Q'''.net+ba.co+7strate.$7&a#uechainR.

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H0hat "+erica (rinks.H )e&era.e Marketin. "ssociation. 1@ 6eb. 200< Qhtt/J77'''.a+eribe&.or.R. :e#+an, 1ath#een M. H0hatIs the )u>> "bout *ner.$ (rinks8H 0ebM(. 10 6eb. 200< Qhtt/J77'''.'eb+d.co+7diet7.uide7'hats-the-bu>>-about-ener.$-drinksR.

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