Case study on Starbucks Coffee

Introduction

The economy in trouble, the stock market tanking it is important to start your day with a good
cup of coffee to take on these challenges. Can Starbuck’s sustain it business model and place in
the market? The paper examines Starbucks business and it respective practices.

In 1971, the original Starbucks opened in Pike Place Market in Seattle, Washington by three
partners named Jerry Baldwin, Zev Siegal, and Gordon Bowker. Their focus was to sell coffee
beans and equipment. They purchased green coffee beans from Peet’s, a specialty coffee roaster
and retailer, during their first year of operation. Later, they began buying coffee beans directly
from the growers. In 1983, an entrepreneur by the name of Howard Schultz joined the company;
Schultz felt that the company should sell coffee and espresso drinks as well as coffee beans. The
partners felt that selling coffee and espresso drinks would take away from their primary focus of
selling coffee beans. Since the idea did not work, Schultz started his own company called II
Giornale coffee bar chain in 1985. In 1987, the original owners of Starbucks sold their chain to
Schultz’s II Giornale. Schultz changed II Giornale outlets to Starbucks chains and quickly began
to expand.

Starbucks coffee has grown into the largest coffeehouse company in the world with 16,120 stores
in 94 countries such as in Australia, Canada, China, Puerto Rico, etc. Starbucks has thirty blends
and single origin coffee. Starbucks brand coffee can also be purchased in local stores to brew at
home. Starbucks employs over 140,000 employees worldwide with over five million customers
a week. At one point they had typical customers coming in on an average of six times a month
while loyal customers come in on an average of eighteen times a month spending averaging $50.
Starbucks is one of Fortune magazine’s 100 Best Companies to work for in 2008 and is Business
Ethics 100 Best Corporate Citizens for the fourth year.

Case study on Starbucks Coffee

Product Analysis

Product Overview
Starbucks product line has grown to include fresh brewed coffee, hot and iced espresso
beverages, coffee and non coffee blended beverages, Tazo tea, baked pastries, sandwiches, and
salads. Starbucks paraphernalia includes coffee grinders, espresso machines, coffee brewers,
music CD’s, books, movies and gift cards. The global consumer products include bottled
Frappuccino, iced coffee, and espresso drinks, whole bean coffee, tea, coffee liqueurs and
premium ice cream.

Starbucks understands concepts of brand identity and product differentiation. They have tapped
in on what the consumer perceives and had managed to identifiable differentiate themselves
between other companies’ products or services. Starbucks realizes this success depends
significantly on the value of the Starbucks brand while relying on its excellent reputation for
their product quality, superior, and consistent customer service.

The management believes it must safeguard and develop the value and importance of the
Starbucks brand in order to bring continued success in the future. The perception of brand value
by the consumer is based on an array of personal qualities. Starbucks has been able to establish
an ambiance of sophistication and intellect. Loyal customers enter the retail chain as an escape
from their mundane lives into a serene, regal atmosphere where they proudly sip from their
branded mugs. Starbucks profits from the way they make their customers feel, allowing them to
portray a prominent image and feel like the upper crusted elite in society. Therefore, Starbucks
brand equity and quality is synonymous with high prices and a classy image. The Company
already owns and has also applied to register many service marks and trademarks both in the
United States and in many countries around the world. Some of the Company’s trademarks,
including Starbucks, the Starbucks logo, Frappuccino, Seattle’s Best Coffee and Tazo are all of
great value to the Company. Starbucks owns numerous copyrights for items such as product
packaging, promotional materials, in-store graphics, and training materials. In addition, the
company also holds patents on certain products, systems, and designs and has registered and
maintains numerous Internet domain names, including “Starbucks.com” and “Starbucks.net.

Market Structure

Starbucks, despite their inflated prices have been able to create a sense of brand loyalty with and
array of loyal followers. Coffee is a fairly homogeneous item which Starbucks has been able to
market their standards of portraying a luxurious lifestyle. Starbucks operates in a
monopolistically competitive market structure in which they have been able to maintain a control
over their inflated prices. They have been able to create a standard for their coffee and in which
they require their customer base to be exaggerated prices for a cup of their various brews. With
usage of the Starbucks logo, quality, and various trademarks, they differentiate their coffees from
their competitors. Starbucks prides itself on being completely different from any other coffee
house and its competitors, which is a reason why Starbucks has become so successful. The
company’s strategy to focus on their core competencies to differentiate themselves has made
Starbucks into a coffee powerhouse. Starbucks has mastered knowing how to benefit their
customer; leverage the company widely to many products and markets, and create ideas that are
hard for competitors to imitate.
Starbucks is not the only coffee shop on the market, others like Dunkin’ Donuts, McDonald’s,
and Panera Bread have an identical item with similar tastes and effect as the Starbucks brew, yet
they have been able to charge a premium for their blends by luring in customers with the aroma
of an inflated lifestyle. There are other homogenous coffee shops in the market, but their loyal
customers believe that the superior quality, taste, and aroma cannot be found from any other
coffee brewing entity. At one point, their customers were more interested in the pretense that
holding a Starbucks cup represented, but due to the current economic conditions, their customers
have began second thinking how they are affected by the extravagant price of the black gold they
have been sipping.

Operating in a monopolistic competitive society has caused the Starbucks effect to crumble. The
organization has been able to maintain customers in the short run that were more interested in
their details rather than price. When a business is making a profit in the short run, they will
eventually reach equilibrium in the long run because their demand will eventually decrease, as
we have seen in the recent times. Due to this, in the long run, this monopolistically competitive
firm will result in a zero economic profit. Because Starbucks has profited on their brand loyalty,
they know that some loyal customers will never depart despite the towering prices.

With the recent news of Starbucks closing six hundred store, it is evident that they have been
running in a marginally inefficient business model. Most monopolistically competitive firms are
marginally inefficient because production average total cost is not at the lowest point. In this
event, in the long run, the marginal cost is simply less than the price of the good. This translates
to the price of the Starbucks beverage to me marked up over the cost of production. The cost of
producing for Starbucks may not be the most cost-effective, but it is less than the price charged
for their gourmet brews. This could also explain why the price of Starbucks coffee is so high;
their production costs are high and must that cost onto the customers to increase their revenue
and decrease expenses.

Monopolistically competitive firms, like Starbucks are driven by mass advertising and the
establishment of brand names and logos. Starbucks ambiance and products are marketed by the
elevated, intellectual connotations. There are many coffee shops on the market that also offer
tasty aromatic coffees, but the advertising and atmosphere of the Starbucks shops draws
customers in. People are spending more on Starbucks brews because of the logo and status
attached to them. Because coffee many times is virtually identical, advertisers and producers
narrow in on what the consumer wants and allow their products to portray those ideals. To
differentiate between like coffees, consumers must sample all types and determine what suits
their tastes and lifestyles. Yet, there are too many coffee options on the market and consumers
do not have the time or the funds to sample various brands. Advertisers are aware of this and
therefore embark on targeted ad campaigns to attract more consumers. Starbucks attracts their
customers over their competitors by their ad campaigns and serene atmosphere of success.

Competition

Starbucks main competitors are quick-service restaurants and specialty coffee shops. There are
an abundant amount of competitors in the specialty coffee beverage industry. The company
believes that its customers choose among retailers primarily on the basis of product service,
service, price, and convenience. Starbucks, in recent times, has experienced drastic direct
competition from large US competitors from quick-service restaurants. These restaurants have
significantly greater marketing and operating resources than they do. Starbucks is also faced with
well-established competitors in the International markets with increased competition in the
U.S. ready-to-drink coffee beverage market.

Starbucks whole bean coffees compete directly against specialty coffees sold through
supermarkets, specialty retailers and a growing number of specialty coffee stores. Both their
whole bean coffees and coffee beverages compete indirectly against all other coffees on the
market. Starbucks Specialty Operations face significant competition from established wholesale
and mail order suppliers, some of whom have greater financial and marketing resources than the
Company. Starbucks faces intense competition from both restaurants and other specialty retailers
for prime retail locations and qualified personnel to operate both new and existing stores.

The intensity of rivalry increases as businesses try to improve their position in the industry. In
order to gain new customers, competitors may reduce prices, introduce new products or
substitutes, and increase marketing efforts.

For example, on February 26, 2008, Starbucks closed its operations for several hours across the
board to conduct employee training. Dunkin Donuts took advantage of this opportunity to gain
new customers. Dunkin Donuts offered a small latte, cappuccino or espresso drink for 99 cents
from 1 p.m. to 10 p.m. during Starbucks’ shutdown.

The types of food choices, pricing and restaurant ambiance create the diversity among
competitors. Customers may choose among competitors based on preference. Some competitors
offer a full menu while others offer a bakery-café menu. Pricing varies among competitors as
well. Starbucks pricing is considered to be higher than average. The ambiance among the
competitors varies from a fast-food chain where the objective is to get fast service, while the
coffeehouses ambiance is slow-paced and relaxed.

New entrants can increase the fight for market share, lowering prices, and the profitability of an
industry. Some existing competitors can retaliate against new entrants to deter them from
entering the industry in the first place. There are seven major barriers/obstacles to entry that
make it difficult for new entrants.

Economies of scale refer to the decline in unit costs as absolute production volume increases.
Starbucks can take advantage of reduced unit costs due to its specialization and expertise through
volume purchase discounts from their supplies.

Starbucks retail stores can generally be found in extremely busy, accessible locations including
being located directly off exit ramps to serve a wider range of customers and promote brand
awareness. The stores can also be found in downtown and suburban retail settings, shopping
malls, within office buildings and can even be found on university campuses. Drive Thru stores
continue to develop to reach non-pedestrian customers.
Starbucks relies a great deal on information technology systems in the operations of its supply
chain, point-of-sale processing, and many other business transactions. The management of these
transactions greatly affects the production, distribution, and sale of its products. Any technical
failure within these systems can cause delays in sales and decrease efficiency.

Starbucks utilized its Human Resources to its full capacity. Employees are required to follow
Starbucks comprehensive store operating procedures and attend training classes. Starbucks
realizes that its growth depends considerably on the knowledge, skills, and abilities of key
executives and other employees and its ability to recruit and retain those employees.

Government policy exists to manage entry into an industry with licensing requirements
regulations. Opening a coffee shop or restaurant will require obtaining certain licenses, i.e.,
business licenses, and tax id’s, among other possible licenses.

Despite all the barriers or obstacles associated with entry, the most significant barrier to entry is
catching a niche market. Name brand franchises have ultimately captured most of the market
share because of their own personal niche.

Looking for atmosphere, for a place to hang out, for velvet sofas. “We’ve known for a long time
now that Starbucks is more than just a wonderful cup of coffee. It’s the experience,” says
Howard Schultz. His genius understanding is that: modern brand-building is at least as much
about the customer experience as it is about the actual product. (Shultz)

The threat of substitute products or services that are produced in another industry that satisfy
similar needs. Starbucks experiences a high threat of substitution because any new product
could be the start of the next consumer trend or craze, creating an initial high demand for that
product. The highly caffeinated drinks such as Monster and Red Bull have certainly proven to
be big sellers among consumers. Some former coffee drinkers now prefer to get their caffeine
from the energy drinks rather than through coffee products. Soda also contains caffeine and can
serve as a substitute for coffee. Water can also be a substitute product as adverse public or
medical opinions about the health effects of consuming caffeine continue. While Starbucks has a
variety of beverage and food items that are low in caffeine and calories, some of the other
products contain high fat and calorie count have been the focus of adverse health effects. This
has caused a significant reduction in the demand for Starbucks products and an increase in the
demand for healthier products.

The bargaining power of buyers lowers the profitability of an industry by bargaining for more
services and perhaps higher quality.

More than 77 percent of all adults over 18 — or 161 million people — drink coffee on a daily or
occasional basis, the study reported. According to the 2007 National Coffee Drinking Trends
Report, 18- to-24-year olds have contributed to the increases in coffee consumption in the past
year (daily, weekly, and annual consumption). They are also the only age group that showed an
increase in daily gourmet coffee beverage consumption. People aged 40 and up showed the
largest growth in consumption of gourmet coffee beverages over the past year.
The buyers hold enough power to influence company pricing. The industry depends upon
consumer spending on specialty eatery products; a lack of demand will ultimately force a firm to
change its product line and to lower prices. Starbucks has recently introduced a 99 cent cup of
coffee; this move will help them to compete with the lower priced competitors and the sagging
economy.

Bargaining power is the capability to control the setting of prices. The more concentrated and
controlled the supply, the more power it leverages against the market.

While there are many competitors in the specialty eateries industry, Dunkin Donuts, McDonalds,
and Panera Bread are the main players in the industry.

Dunkin Donuts

The first Dunkin Donuts was opened in 1950 in Quincy, Massachusetts by William Rosenberg.
Today, there are over 13,000 Dunkin Donuts located in 50 countries worldwide with sales of
$6.4 billion in 2006. Dunkin’s headquarters is located in Canton, Massachusetts.

Dunkin Donuts is known for their doughnuts and coffee. Over the years, Dunkin has introduced
new products such as bagels, muffins, breakfast sandwiches. In order to compete with the lunch
crowd, Dunkin expanded their product menu to include pizzas and sandwiches. In order to
compete with the specialty coffeehouses, Dunkin expanded their coffee offerings to include
flavored coffees, lattes, coolattas, flavored hot chocolate and teas.

McDonalds

The first McDonald’s restaurant was opened in 1940 in San Bernardino, California by two
brothers named Dick and Mac McDonald. As of December 31, 2007, there were 31,377
McDonald’s restaurants in 118 countries serving 54 million people each day. McDonald’s is the
world’s largest fast-food chain restaurant.

While Starbucks is the leader in the specialty coffeehouse market, McDonalds is becoming an
emerging competitor when it first upgraded its coffee in 2006. McDonald’s coffee sales
increased 15% in 2006, and plans to grow coffee sales with the plan to install coffee bars in all
14,000 U.S. locations. The McDonald’s new specialty drinks, which are now in about half of the
company’s nearly 14,000 US stores, already, have a following among some former Starbucks
customers.

McDonalds has a larger customer demographic than Starbucks. Starbucks coffee is considered
to be a luxury for the affluent, while McDonald’s caters to families with children, teenagers,
adults, and senior citizens with it well-established menu offerings. Like Starbucks, McDonalds
has a strong brand recognition and loyal customer base. The advantage McDonald’s has over
Starbucks is that is has a considerably larger volume of traffic compared to Starbucks. While
customers are stopping for a quick breakfast, lunch or dinner, they may get a specialty coffee to
go too.
Panera Bread

Panera Bread was founded by Louis Kane and Ron Shaich in 1981. It was originally name Au
Bon Pain Co., Inc., and later changed its name to Panera Bread Company in 1998. Today, there
are more than 1160 Panera Bread bakery-cafes in 40 states in the U.S and the headquarters is
located in Richmond Heights, Missouri.

Panera’s Mission Statement, “A loaf of bread in every arm.” Their strategy is to compete
successfully in the breakfast, lunch, evening and take-out dinner restaurant segments.

Panera’s product line consists of baked goods, artisan and specialty breads, custom roasted
coffee and espresso drinks, soups, salads, made-to-order sandwiches and gourmet pizzas. In
order to compete with the breakfast competitors, Panera will be offering breakfast sandwiches in
addition to bagels and muffins in March 2008.

Panera’s ambiance of casual dining is the closest competitor to Starbucks. Like Starbucks and
Caribou Coffee, Panera Bread offers free WiFi to its customers. Panera’s pricing is designed so
customers perceived good value with high quality food at reasonable prices which will hopefully
encourage repeat customers.

Elasticity Estimates

Price elasticity of demand measures the extent to which the quantity of demand of good changes
when the price of good changes. In order to determine price elasticity of demand we compared
the change in quantity demanded with change in price.

Suppose Starbucks raises the price of latte from $3 dollars to $5 dollars a cup the quantity of
demand would decrease. If Starbucks were to increase its price of a latte McDonalds, Panera
Bread, Krispy Kreme, and Dunkin Donuts would decrease there prices in order to compete.
When price rises, quantity demanded decreases along with the demand curve. This will allow
price and quantity to always change in opposite directions.

Starbucks coffee has an elastic demand, some may be addicted to coffee but Starbucks coffee is a
luxury not a necessity. The demand for Starbucks coffee will decrease if prices grow because of
the huge market of competitor we have that offers the same good and at a cheaper price. For
example “McDonalds and Dunkin’ Donuts is offering coffee at three to four dollars less than the
coffee at Starbucks”. Now with the value of U.S dollars gradually falling, the incomes of
consumers have diminished. As income fall, the demand of normal goods will decrease and will
cause a shift in the demand curve. Starbucks is measured on luxurious good both high quality
and high price.

Consumers are thinking more about necessity versus luxury. Necessity tends to have inelastic
demand and it is unresponsive price change. Where as luxuries have more elastic demands
quantity demand is more responsive to price change and Starbucks coffee is elastic.
Income elasticity impacts change in demand curve. When income increases the quantity of
demand increases and when income decrease quantity of demand decreases. An article from
Business week states “according to Oct. 5, 2006 presentation to analysts, customers who shopped
Starbucks for the first time in the last year had an average income of $ 80,000 a year vs. the $ 92,
000 a year average for those who first visited five years ago. As incomes increase, some goods,
for some people, become “inferior.” This just means that as income increases, these people
consume more this good. Consumers will switch into a more expensive or more-prestigious good
the more money they make. So if Starbucks coffee price is high customer that make enough
money won’t mind the high luxury price and will still consume the latte’s Starbucks provide.

The concept of cross-price elasticity of demand measures the responsiveness of consumers of

one good or service to the change in price of another. If two goods are substitutes, we expect to
see consumers purchase more of the good when the price of its substitute increases. If they
complement each other we should see a price rise in on good cause demand for both goods to
fall. Basically impact of prices changes substitutes and complements when the price of related
good changes. Cross-price elasticity of demand is used to see how sensitive the demand for a
good is to a price change of another. High positive cross-price elasticity tells us that if the price
of one good goes up, the demand for the good goes up as well. A negative tells us the opposite
increase in the price of one good cause a drop in the demand for the other good. A small value
either negative or positive would tell us that there is little relation between the two. If the cost of
milk goes that would impact on the cost of latte because milk is a complement to coffee.

A big impact on sales has to do with pricing of products and sales which increase revenue
growth. When a product becomes acceptable to consumers and is substituted by another that
would suggest McDonalds, Panera Bread, Krispy Kreme, and Dunkin Donuts coffee strategy
would hurt and severely damage Starbucks. Starbucks coffee has an elastic demand even though
some may be addicted to coffee Starbucks coffee will decrease if the price grows only because of
the availability from other companies such as McDonalds, Panera Bread, Krispy Kreme, and
Dunkin Donuts which they will offer a much cheaper price to attract the consumers. The other
firm’s prices are three to four dollars less then the coffee at Starbucks. The problem lies in
Starbucks insisting on saying that they are in a different market place then McDonalds, Panera
Bread, Krispy Kreme, and Dunkin Donuts. Starbucks claims that no one will switch or even
think about switching or sometimes go to other companies such as McDonalds or Dunkin Donuts
etc. That is just foolishness because everyone knows if you prefer Cook, occasionally you will
have a Pepsi especially when it comes to saving. If Starbucks were to increase its price of a latte
from $3 dollars to $5 dollars McDonalds, Panera Bread, Krispy Kreme, and Dunkin Donuts
would decrease there prices in order to compete.

In comparison “vastly increase competition in coffee market. McDonalds entered into the
Premium coffee selling for $1.39 for a small compare to Starbucks $1.75.” McDonalds has been
aggressively markets its coffee winning breakfast time from the consumers and includes
promotional items to allure them in. To which Consumer Reports indicate that they are head-to-
head comparisons with the coffee from Starbucks.

Starbucks faces three major obstacles first competition especially with U.S being the fast pace
economy that it is. Starbucks would have to adapt to change of the constantly growing and
recession with in the industries in order to draw consumers. With competition the price of
Starbucks coffees and products sales will be the central point for buying power of the consumers.
Starbucks would have to make sure that the products they sell and the price are beneficial to
them and the consumers. In the middle of last year I read that Starbucks is in trouble. They
announced that they will close 600 stores. With the price of gas climbing Americans are making
wiser choices in finance. Consumers are skipping the $4 dollars latte and going to competitors
and spending less and making easier choices.

Pricing Strategy

Starbucks positions itself as a specialty premium coffee retailer and has a strong and well known
brand image. As Starbucks is a premium coffee brand, its target market has always been middle
and upper class with the disposable income needed to frequent the coffeehouse. One of the main
reasons Starbucks has been so successful is because they focus on quality and experience rather
than price. The Starbucks’ image and experience has been one of the key elements to their
success. Starbucks has succeeded in giving coffee a new cachet and established themselves as a
price setter through product differentiation. Consumers have been willing to pay for what they
consider an elite lifestyle and many believe that the higher the price, the better the quality.
Although premium brand coffee makers have some market power to set prices above the generic
value brands, Starbucks operates under monopolistic completion where there are many small
firms that sell similar products, therefore they do not exert complete market power in the
industry.

Starbucks has, up until now, been able to take advantage of premium pricing but according to an
article in Business week, “Starbucks is looking to rebound from dismal US sales as more
consumers cut back on spending. In its first-quarter report last week, same-store sales – a key
indicator of a retailer’s performance – dropped 10 percent. That’s worse than the 8 percent
decline in the fiscal fourth quarter.”

Because there are a lot of options for the more cost conscious consumer looking to save money
on coffee purchases, Starbucks felt the need to make a price change. After all McDonald’s Corp
is offering new, lower-priced specialty coffee drinks and Dunkin’ Donuts is advertising value-
minded deals. So when Starbucks founder ,Howard Schultz, decided to offer a $1 cup of coffee
in certain stores to compete with McDonald’s and to increase existing store sales, some critics
thought it may have done more harm than good. Their thoughts were that the decrease in price
may have implied that there is nothing more to Starbucks than coffee. By offering a cheap cup of
coffee, Schultz may be reducing the company to commodity status, and the natural result being a
price war. No longer is buying a cup of Starbucks coffee an experience. But because coffee is an
elastic product in which price controls demand, Starbucks may want to consider a small decrease
in their price to increase demand which will increase revenue and allow them to be more
competitive.

Pricing decisions also serve as a marketing tool and is one of the most compelling attributes of
product positioning. It makes a very clear statement about how a consumer should perceive a
product. Starbucks cannot become the low price leader; it takes away from the brand image and
ambience that they are known for.
When Starbucks became a major competitor, it was because the company’s environment was like
none other and focuses on the benefit of the customer. People considered Starbucks as a “third
place” after home and work. Howard Schultz’s vision was not to build a coffee shop, but instead
build a company that treats people with dignity and respect. He wanted to establish a place
where you can go relax and have a delicious coffee and smother yourself in a comfortable seat
that makes you feel like you’re sitting on your living room couch. Ear pleasuring music will be
consuming your background and make a customer feel as if they are at their home away from
home. Or a place where you can bring your laptop and get some work done if there were any
distractions at home or work. Starbucks is also the type of place where you can meet a friend,
stay and talk for hours, and feel like you’re the only two people in the place.

Customers and employees as well receive an experience for Starbucks, in which Starbucks
constantly strives to pleasure everyone around them. The environment is so inviting, relaxed,
and probably trendier than most people’s living room, and at the same time, quick paced if you
need a coffee to-go. Starbucks has set an environment where the relationship between customers
and employees sets the company apart from other coffee shops. Starbucks sets a different type
of trend than any other coffee house that seems to be contagious to customers and even other
companies.

One area of business that Starbucks spends the least amount of their money on is its
advertisements compared to competitors. Schultz believes that experience beats ads. In an
article from Businessweek.com “Starbucks: Keeping the Brew Hot”, explains that given that
philosophy of experience beats ads, conventional advertising has been no real significance to the
growth of the Starbucks brand. Rather, it has been the store experience that has defined the
brand. This begins with the quality and intense flavor of the coffee. But equally influential are
the store design and ambiance as well as the recruitment and training of the “baristas,” the
counter staff whom Schultz regards as his brand ambassadors.

Instead of putting millions into image-building campaigns, Starbucks has chosen to spend its
money on employee benefits. Starbucks was one of the first companies to offer part-time
employees equity and health benefits, unlike its competitors in which it’s hard for them to
imitate.

Starbucks has also created projects that have given back to the community, created recyclable
products, and has branched off into different brands, which has brought the company to another
level. Starbucks constantly strives to be different and better than everyone else and if they stick
to their core competencies, the company will continue to be successful.

Since Dunkin Donuts is a privately held company, no financial information is available to

determine its share of the market. But based on the amount of stores that Dunkin Donuts has, it
would be safe to assume that they have captured much of the market. And because McDonalds
serves many more products than the other key competitors, it may be extremely difficult to report
accurate market share information.

Based on the information that is available, McDonald is the market leader. Starbucks market
share has been increasing steadily over the last couple years, but Panera Bread has the largest
increase in market share over the past year. Meanwhile, McDonalds, Krispy Kreme, and
Caribou Coffee have been decreasing.

There are four ways that companies can do to improve market share. Make a better product than
that of the competitors, change the price or offer special incentives for buyers, such as discounts
or sales, find new distribution channels to reach more consumers, advertise and promote the
products. Although the price appears to be higher than most of their competitors, the fact that the
coffee contains more caffeine per cup, that one cup may be enough for the entire day. This could
actually save both time and money opposed to having to buy more than one cup.

Starbucks relies on its relationships with coffee producers, outside trading companies, and
exporters for its supply of green coffee. The company is dedicated to selling only the finest
whole bean coffees and coffee beverages therefore it purchases green coffee beans from coffee-
producing regions around the world. Because the supply and price of coffee are subject to
significant unpredictability, the company tends to trade on a negotiated basis at a significant
premium above commodity coffee prices. The amount negotiated depends on the supply and
demand at the time of purchase. Supply and price can also be affected by other factors in the
producing countries, including weather, political and economic conditions. Agreements
establishing export quotas or by restricting coffee supplies have also affected price. Due to
unpredictability in the prices, the company has largely used fixed-price purchase commitments to
be sure they have enough of a supply of quality green coffee and control the price. This contract
states the quality, quantity, and delivery of the coffee.

Forecast

Determents of Demand

Determinants of demand consist of 1) price, 2) the incomes of consumers, 3) the prices of

related goods and services, 4) the tastes of preferences patterns of consumers, 5) the expected
price of the product in future periods, and 6) the number of consumers in the market. These
variables change the quantity demanded at each price and determine where the demand curve is
located.

Price—with all other things remaining constant, as the price rises, the demand will fall and
inversely, as the price falls, the demand will rise.

As the price of Starbucks coffee increases, the demand for that particular brand of coffee will
decrease. In this event, many people may choose not to drink Starbucks coffee and decide to
switch to a less costly alternative such as frequenting a lower cost coffeehouse, purchasing
coffee at a gas station, or perhaps even brewing their coffee at home. Other alternatives to coffee,
such as teas, energy drinks, or any caffeinated beverage may also take the place of coffee. As the
price of Starbucks coffee falls, consumers will demand more of the coffee because it will be
more affordable.

For example, if the price of a cup of coffee went up by $0.25, consumers could replace their
morning caffeine with a cup of tea. However, if the price of caffeine were to go up as a whole,
we would probably see little change in the consumption of coffee or tea because there are few
substitutes for caffeine. Most people are not willing to give up their morning cup of caffeine no
matter what the price.

Income — as income increases the demand for a product will increase as well. As income
declines, the demand for the goods will go down as well.

In today’s economy, many people have been losing their jobs or have had their income reduced.
As a result, consumers have had to cut back on non-essential items such as higher end coffees
like Starbucks. Many people will no longer be able to afford the $4-5.00 specialty beverage.
When income increases, people have more disposable income therefore are able to treat them to
a specialty beverage.

Complements –If the price of the complement rises, the demand for the product falls. If prices of
the complements go down there will be a higher demand for the product. Complements of
Starbucks coffee can be milk, cream, sugar, sugar substitutes, and flavored syrups. For example,
if the price of sugar should increase, many consumers may be unwilling or unable to purchase it
and opt for another alternative, which would decrease the demand for coffee. On the other hand,
if the price of sugar goes down, consumers will be able use it for many more things including
sweeten their coffee.

Substitutes– As the price of the substitute rises, the demand for the product rises. As the price of
the substitutions goes down, the demand for them will increase.

Substitutes for Starbucks coffee could include cheaper coffees, teas, hot cocoa, water, energy
drinks, soda, and caffeine pills. If the price of any of these substitutes should rise, the demand for
coffee will rise because consumers will be unable or unwilling to pay the additional price and
switch back to coffee.

Tastes— As preferences for a particular good or service changes, so will the demand for the
item. If people enjoy drinking and develop a preference for the stronger tasting Starbucks
coffee, they will want more of it. If consumer do not like the stronger tasting Starbucks coffee,
the will want less of it. Income changes and lower priced substitutions could affect their tastes
and a cheaper priced alternative could become a new preference.

Expected prices— If a consumer expects that a price of a certain commodity will rise than they
may opt to stock up on the product as the lower price before it goes up. Inversely, consumers
may believe that a price of a good will be reduced, they will hold off on purchasing the product
until the price goes down to the lower rate. Many consumers may stock up on Starbucks coffee
beans if they know that the price is going to be increasing in the near future. On the other hand,
consumers may wait to make their Starbucks purchase if they know the prices are going to drop
in the near future.

Number of consumers– If there are more buyers than there must be more of a market demand.
The more consumers, the more demand. The higher the demand for a good the higher the prices
will rise.

State technology—Producers will search for advanced, economical technology so the cost of
producing Starbucks coffee will decrease. The lower the cost in production of the coffee results
in a higher supply due to the cost effectiveness of the production. According to Starbucks 10k
report, Starbucks relies heavily on information technology systems across its operations,
including for management of its supply chain, point-of-sale processing in its stores, and various
other processes and transactions. The Company’s ability to effectively manage its business and
coordinate the production, distribution and sale of its products depends significantly on the
reliability and capacity of these systems. The failure of these systems to operate effectively,
problems with transitioning to upgraded or replacement systems, or a breach in security of these
systems could cause delays in product sales and reduced efficiency of the Company’s operations,
which results in higher production costs.

Expected price of the good—Producers may withhold production of Starbucks coffee in the
current period if they expect the price of coffee to rise. They will be more willing to sell the
coffee at a higher price rather then selling and producing at the lower price.

Number of firms— The higher the number of coffee suppliers in the industry the higher the
supply of coffee in the industry. There will be more coffee to go around for the consumers. If
there are more buyers than there must be more of a market demand. The more consumers, the
more the demand. The higher the demand for a good the higher the prices will rise.

Forecasting

Sales forecasting is the process of estimating what the business’s sales are going to be in the
future. Sales forecasting is an important part of business management. Starbucks cannot
manage inventory, cash flow, or plan for growth without an idea of what future sales are going to
be. A business’s sales revenue from the same month in a previous year, combined with
knowledge of general economic and industry trends, work well for predicting a business’s sales
in a particular future month.

There are various forecasting models that can be used for forecasting sales for coffee. Two
methods are qualitative and quantitative. The qualitative method uses subjective judgment based
on non-quantifiable information, such as management expertise, industry cycles, research,
development, and labor relations. The qualitative method does not require a demand history for
the product or service. The quantitative method is a research method that relies on interviews,
observations, and a small number of questionnaires, focus groups, subjective reports and case
studies. Much of the focus is on collection and analysis of numerical data and statistics.

Starbucks is subject to a number of significant risks through qualitative and quantitative methods
that might cause the company’s actual results to vary materially from its forecasts, targets, or
projections. The significant risks involved are lower customer traffic or average value
transactions. These negatively impact comparable store sales, net revenues, operating income
and earnings per share. These risks are due to the impact of initiatives by competitors and
increased competition with lack of customer acceptance of price increase to cover costs of new
products. Delay in store openings for reasons beyond the company’s control, or lack of desirable
real estate locations available for lease at reasonable rates, both of which could keep the
company from meeting annual store opening targets and in turn negatively impact net revenues,
operating income and earnings per share. Other risks are material interruptions in the company
supply chain beyond its control, such as material interruption of roasted coffee supply due to the
casualty loss of any of the Starbuck’s roasting plants or the failures of third-party suppliers, or
any interruptions in service by common carriers that ship goods within the company’s
distribution channels.

The qualitative method is best used for forecasting the next three years since it emphasizes on
real time expert’s research and analysis. The numbers are variable and subject to change based
on opinions from consumers and by far the economical changes that have the greatest impact on
sales!

Conclusion

Starbucks has had much market power in the gourmet coffee industry. They have attracted
customers by an experience of an upscale French coffee shop with a neighborhood feel. All are
welcome to join the bandwagon as long as they are willing to pay the price for premium. In the
current economic state, their prices have caught up to them causing their demand to decrease.
Peopledo not want to spend their limited income on premium coffees that they can get from any
of their competitors, like Dunkin’ Donuts, McDonalds and Panera Bread

Starbucks has been forced with the changing times and the economy to drive down their prices to
compete in the industry. The closing of stores and the reduction of staff proves that their pricing
model only projected a short term profit, as in the case of any firm operating in a monopolistic
competition. Whatever forecasting models Starbucks has projected does not hold true as the
income effect and added popularity of their competitors began monopolizing the premium coffee
market. This proves that the price of coffee is elastic and if prices are high than the demand for
the good will decrease.

Many outside factors also contribute to Starbucks losing its brand appeal. People have begun to
realize that they have alternatives to purchasing Starbucks coffee and still sample the luxurious
blend by brewing it at home themselves. Customers no longer follow the hype supported by the
Starbucks name and are becoming more price/value oriented. To remain a major player in the
coffee shop market, Starbucks must reinvent themselves with the changing lifestyles, tastes and
react to the alternatives within the market.