Cost of Production
Coffee and tea are highly dependent on weather conditions because they are both agricultural products. Weather conditions can harm the supplies which would result in a shortage and the prices would increase. Examples of these weather conditions are heavy rain, storms, early frost, and droughts. On the other hand, an unexpected surplus would result with ideal weather which would drive the price of the commodity to decrease. Arabica coffee prices fluctuated a good bit in the last five years and between 2014 and 2015, it showed two record prices. The first prices showed $4.72 per kilogram and the second showed $4.97 per kilogram (“Coffee Arabica Price”, 2017). Arabica coffee is priced at $3.67 per kilogram as of February (“Coffee Arabica Price”, 2017). In the past five years, Robusta coffee also varied, however, unlike the Arabica coffee experiencing peaks, Robusta coffee experienced two noticeable dips. In 2014, the first price was at $1.76 per kilogram and in 2016 the second price was at $1.63 (“Coffee Robusta Price”, 2017). Robusta coffee is currently selling for $2.35 per kilogram (“Coffee Robusta Price”, 2017).
With extremely low yields, experts suggest that the price of Robusta coffee would eventually reach a four and a half year high (Toovey, 2017). Another key ingredient for coffee which is milk is experiencing a change from dairy to alternatives milks. The dairy industry is struggling with falling prices while the alternative milk is growing in sales and in popularity (Shah, 2016). In 2014, alternative milks hit $5.8 billion and by 2019 the milk is expected to almost double the price according to the BBC Research (Shah, 2016). Starbucks carries a variety of milk supply, for example, soy, whole, two-percent milk, nonfat, almond, and coconut (Cullum, 216). The demand for non-dairy milk is the second-highest consumer request stated by the company (Ayoub, 2015). Non-dairy milk usually does cost more than dairy milk. Starbucks will likely experience higher expenses within the growing market, and they will experience their profit margin shrinking as a result.
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Unless, Starbucks is planning to rise costing pricing to the customers again like the company did when the price of coffee increased. However, throughout the years, dealing with the price hikes, Starbucks has proven that there doesn’t need to be a price spike in commodities to increase its menu prices. In fact, when Starbucks experienced a two-year low within the coffee prices declining, the company’s product prices stayed the same citing that the decrease would help offset the growing operational expenses, for example, marketing, labor cost, and rent (Gillespie, 2016). Due to high rent, Starbucks closed some of the locations in New York in 2015 (Green, 2015). It is important to note that this decision was not made due to Starbuck’s inability to afford the price increase, but because it wasn’t worth the money since other surrounding locations are just as effective as the locations that were closed (Green, 2015). Rent prices soared 20% in Manhattan, a location where Starbucks obtains nine stores per square mile (Green, 2015). Varying between 5 to 15 percent in 2016, “baristas” received a raise (Isidore, 2016). Coffee beans account for approximately 20 percent of the overall cost within the Starbuck’s industry per analysts (Gillespie, 2016).
The company’s variable cost include milk, syrup, coffee, straws, beverage cups, and heat sleeves (Lonen, 2014). The cost of those items will vary based off production activity. Spending cost will increase to keep up with demand because of the high output activity and while that is happening low activity will decrease spending due to the company’s adjustment to reduce the output. Regardless of the level of output, the fixed costs will remain the same with rent, advertising, and wages.
Overall Market
With their McCafé line, McDonalds and Dunkin Donuts remains Starbuck’s two leading competitors within the premium coffee industry in 2016 (White, 2016). Within the nation’s market, last year statistics showed that Starbucks had control of 40 percent, Dunkin Donuts with 22 percent, and an “other” category with 38 percent (Statista, 2016). It is possible that their market share is within the latter from the assist of the McCafé’s launch back in 2009. When comparing, in 2014 Starbucks and Dunkin Donuts obtained 85 percent which is a 27 percent drop within the two years (Brownell, 2014).
The barriers of entry to get into the coffee market are low, accepting Starbucks’s status level and attempting to become one of their competitors would prove to be difficult which would make the overall barriers of entry high. First, Starbucks obtains massive economies within their scale which results in cutting the cost of coffee and dairy, and non-dairy products. Furthermore, the company obtains a strong-brand name along with a loyal-customer base, who still stops in the stores and make purchases even after the price hikes occur. In the premium coffee market within the U.S. and globally, Starbucks hold the leading contender, however, Starbucks once started out as a single store located in Seattle, Washington before the company took off and became one of the most recognized chains.
Within the premium coffee market, there are a small number of competitors making Starbucks’s market structure oligopoly. Currently, Starbucks only hold two competitors which as stated before is McDonalds and Dunkin Donuts, however, Starbucks may see some other players in the mix soon. Burger King Worldwide Incorporated received Tim Hortons Incorporated in 2014, which is a fast food restaurant that is Canadian-based and known for their donuts and coffee; they plan to expand the locations within the U.S. (Shaw, 2014). When it comes to oligopolies, participants can “set prices, rather than take them” which allows companies to make profit margins higher rather than what a free market would allow (Investopedia, 2017). The product pricing of Starbucks remained the same when coffee beans priced went down, the competitors let their hopes down of luring customers away from the company’s “premium prices”. The “cheating” company could be isolated and put under financial strain if Starbucks would decide to implement another increase to product prices, which according to the trends, its likely to happen (Investopedia, 2017). To compete for a larger market share, Starbucks relies on methods, for example, product differentiation and branding since the company’s appeal is obviously not its prices.
Recommendations
Clearly Starbucks remains the dominant player when it comes to the premium coffee market, however, there is always rooms for improvement within any company. The company’s “Mobile Ordering App” has made Starbucks deal with some dissatisfied customers due to problems related to the app. Starbucks’s sale were negatively affected because when customer would enter the store and it would be crowed and the customer would have to experience a longer than normal wait time which resulted in customers exiting the store immediately (Taylor, 2017). The company must forecast the impact that these ongoing problems may have on the future demand so Starbucks can adjust the schedule of their supply and production to maximize the profits. Ongoing, the company must take advantage of the growing consumption of tea and specialty beverages. In 2016 the tea market reached $14.5 billon and data suggest that in 2024 it should reach $21.3 billion (Gebely, 2017). Considering that it is relevancy to the firm, another recommendation would be to invest interest in the alternative milk market. The scarcity and pricing would have a tremendous impact since the company has the second-highest request for the non-dairy milk.
Over Dunkin Donut, Starbucks is the leader in the market share by 20 percent as of 2016. If the mobile ordering app causes the sale to drop any further than what they already have or a possible boycott, the company could very much so lose market share. However, when it comes time to focus on the growing popularity over the tea (due to recent health trends) and specialty drinks, Starbucks could balance any potential losses that they may run into. Additionally, by Starbucks investing some interest in alternative milks, the company will ensure the availability of commodity in the future.
There is a small consumer response to the company’s price hikes that was revealed by the demand trends and price of elasticity of demand. Starbucks’s total revenue presented a very sturdy come up for the past five years even throughout increasing price several times. This result probably come about due to the fact that the price increases only account for small portions of consumers’ income and purchasing power of the Millennials. The companies that commit social and environmental responsibility obtain purchases from the Millennials because they are conscientious shopper and will be willing to pay more for goods and services from these companies. It is highly important that Starbucks continues their role in making a difference in the world.
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