El Beit: company analysis - Term Paper Example

?A company analysis Table of Contents Company history 3 Major products 3 Location 3 Factors influencing demand 4 Factors influencing supply 4 Price elasticity and income elasticity of demand 5 Complements and substitutes 8 Nature of costs 8 Classification of type of business 9 Pricing strategy 10 Government regulations 11 Works cited 12 Company history Coffee is one of the most frequently consumed beverages in the United States. El Beit is one of the independent coffee shops that have their own baristas and serve quality coffee to the local people that visit this bar. The meaning of El Beit is home in Arabic and this coffee joint is well known locally for the calm atmosphere of the shop’s interior. The company was started in 2008 and has been running smoothly since then. Although this coffee shop is not as famous as the coffee bar chains, such as, Starbucks or Peaberry, it has a loyal fan base that queue into the shop for enjoying its serene atmosphere and quality coffee and pastries (Yelp, “Laughing Man Coffee & Tea”). Major products The major product offered by this coffee shop is coffee and tea among beverages as well as pastries, ginger loaf, pear bread and sandwiches. The coffee is prepared with the help of Clover machine or French press. The other solid eatables are prepared in a sister store of El Beit situated close by and served in the coffee shop. The company offers a good customer service and has free Wi-Fi facilities and outdoor seating arrangements. Location The shop is located at Brooklyn in New York. It is in the neighborhood of the north side of Williamsburg. The location is critically selected on the crossing of the Bedford Avenue and Lorimer Street, due to which the shop receives a continuous flow of customers. However, the place is not near the main road or any university or office locality. Therefore, the shop is not found to be overcrowded during any part of the day. Factors influencing demand There are a number of factors that influence demand for coffee, tea or other food item in El Beit. These are as follows; quality of food, seating arrangement, customer service and overall shop atmosphere, among factors other than reasonable price. Price is one of the biggest factors that affect the demand for any good. According to the law of demand, if price of a good rises, demand for the good falls. The corollary is also true. Hence, the price of the products offered by the coffee shop, El Beit, is a highly influential factor in determining the level of demand. The goods at El Beit are reasonably priced. An espresso coffee or hot tea served with hot ginger loaf or pear bread would cost nearly $6. Prices for other products such as iced tea and sandwiches are also reasonable. The baristas are pleasant and the offer customers certain privileges such as filling pots with hot water several times or chatting with the customer, while he or she is waiting for the order to be delivered. The inside of the cafe is small but has a quite spacious seating arrangement at the backyard overlooking a street. Customers that have the knack to spend a quiet afternoon over several cups of coffee or tea are attracted to this place. Young people also visit this place repeatedly to hang-out with friends. Factors influencing supply Supply of the products in El Beit depends on few factors. Such as, price of the products, availability of raw materials, price of raw materials, price of complementary and substitute goods. The primary raw material used for the production of coffee is coffee beans. Coffee beans are supplied by a roaster situated in Vancouver, near Canada. Other chief raw materials include wheat, spices, butter, milk, sugar and water. All these are received from local suppliers. The company has tie ups with local vendors who supply all these products to El Beit. Therefore, the company enters into deals with these suppliers who offer the raw materials at cheaper rates than the market rate. If prices of raw materials rise, the producer might be unwilling to offer the goods at the current price level. Alternatively, if due to some reason prices of the products offered rise, at par with the industry standard, the producer would be willing to supply more goods at the prevailing market price. Complementary goods (for instance, milk and sugar for coffee) act as raw materials for the final product. Hence, if price of complementary goods rises it negatively affects the supply of final products. If price of supplementary goods rises, it encourages the producer to offer more of the good at the existing price. This is because the producer faces more demand as a certain percentage of population that demanded the supplementary products earlier would shift to the other supplementary good. If price of coffee rises, customers might pose greater demand for tea. Price elasticity and income elasticity of demand The price elasticity of demand is a measure of the extent of “sensitivity of the quantity demanded to changes in price” (Landsburg 102). Demand for a normal good is directly proportional to the price of the good. Demand for the good is considered highly inelastic if it does not show much response against changes in price of the good. On the other hand, if the demand for a good is elastic, it implies that the with respect to change in price, demand for the good also changes considerably. One of the products offered by El Beit is “flat white”. It is one variety of hot coffee among several others. It is served with chocolate bits and topped with cream (Yelp, “Laughing Man Coffee & Tea”). This coffee is a specialty product offered by the cafe and is favored by most of its customers. Coffee is very common in New York and is available in most of the places in the urban as well as sub urban areas. There are also other substitutes of coffee (although there are no direct substitute, considering the flavor and taste), the closest substitute being tea. However, the “flat white” variety is unique to El Beit. It has a special flavor and taste. The way it is presented by the baristas in El Beit also adds a touch of difference to the coffee. Customers that are accustomed to this kind of coffee and that love the taste of it do not have much choice. Hence, there are not many close substitutes for the product and no direct substitute. Thus, the price elasticity of El Beit’s coffee is low. It implies that if the price of the coffee offered by the cafe changes, it would not make the demand for the product fluctuate much. This is a case of low demand price elasticity. The following figure demonstrates a case of low demand price elasticity. Figure: Demand price elasticity (A) Elastic demand (B) Inelastic demand (Source: Lindeman 48) In the above illustration, in case (A) the percentage change in quantity demanded is less than the percentage change in price. Hence, it represents low demand price elasticity. In case (B) there is high positive demand price elasticity since percentage change in quantity demanded is more than the percentage change in price. Income elasticity of demand refers to the extent of change in quantity demanded as a result of change in income. If quantity demand of a good responses to the change in income of the individual this extent of change is measured by the value of income elasticity of demand. The ratio of percentage change in quantity demanded of a good and the percentage change in real income of the consumer gives the value of income elasticity of demand (Lindeman 53). Coffee that is offered by specialized coffee shops is not necessary goods. They are categorized as luxury goods (Tucker 68). Hence according to economic theory of income elasticity of demand, if the good is a luxury good, consumers would spend proportionally higher if their income rises, i.e., they would demand more quantity of the particular good than the amount they used to consume before rise in income. Therefore, “flat white” faces a highly income elastic demand. The total revenue is dependent on the price of the good as well as price elasticity of demand. If price elasticity of demand of demand is high, total revenue would decrease with increase in price. However, if price elasticity of demand is low, then total revenue would increase with rise in price. The total revenue test is a method in which price elasticity of demand is estimated (Mankiw 79). As demand price elasticity is capable of impacting total revenue, it can be estimated by studying the movement of total revenue. It has been identified though the discussion presented above that demand for “flat white” is price in elastic but income elastic. This implies that if price of the good increases, total revenue also increases. In this case, price and total revenue of a product moves in the same direction. Total revenue is given by product of price and quantity of a good. By running a total revenue test (TR test) it can be said recommended that the cafe owner might increase price since in order to increase total revenue (“Total revenue test”). If price of the good rises, sales would not be affected adversely to any large extent, such that it might lower total revenue. Complements and substitutes Coffee is a beverage with very few close substitutes. Some of the substitutes of coffee are hot and iced tea and hot chocolate. The complements of the product are milk, sugar and cream. The cross price elasticity between the supplementary goods and coffee is positive. If price of the substitute rises, demand for coffee would rise. Cross price elasticity between the complementary goods is negative. If price of the complementary good rises, price of the good (coffee) would also rise. Therefore, quantity demanded of the good (coffee) would fall (Boyes and Melvin 56). As a seller of the good, I would keep track of the prices of the raw materials used for the production of the good, such as, milk, cream, sugar, wheat flour and spices as well as the price of the similar goods offered by other producers. Nature of costs The every business organization has to bear several types of cost. These are fixed cost and variable cost, explicit and implicit costs and sunk cost. Each of these costs has a definite nature and it varies from business to business. Fixed cost refers to the type of cost that the entrepreneur has to bear irrespective of the fact whether any quantity of good produced. This cost is not affected by the quantity of good produced and is therefore known as fixed cost. For El Beit, there is moderate fixed cost since the cafe owner has to pay rent, electricity and broadband bills as well as bear other overhead charges, irrespective of how much coffee it sells per day (Winston and Albright 18). Variable cost is the cost borne by the entrepreneur for production of each unit of the good. Hence, for El Beit, this cost varies according to the amount of the coffee and other food items prepared daily. Explicit cost refers to the cost that the entrepreneur might directly account for. These costs can be identified as the cost of repairs and maintenance and various other kinds of recurring cost. Implicit cost on the other hand is the cost that is not visible directly. It is the cost that is represents the lost opportunity of a company's usage of its own resources. The cost incurred due to recruitment of workers in El Beit, taxes paid to the state and opportunity costs of using the firm’s own capital are some of the implicit costs. Finally, sunk costs are the expenses incurred by the firm that it cannot recover once the firm incurs it. Sunk costs include expenses that the company incurs on activities, such as, advertisements or public relation development. El Beit incurs such cost in preparing various signage and depreciation cost of coffee vending machines. Classification of type of business There are various forms of market structure; competitive, monopoly, oligopolistic or monopolistic competition. Each of these market structures has certain specific characteristics. The competitive market structure is characterized by infinite number of buyers and infinite number of sellers. The product is homogeneous and the sellers are price takers in the market. Each seller has a small market share and buyers have several options to choose from. The products face perfectly elastic demand. Monopoly market structure is characterized by existence of single seller and infinite number of buyers. The seller faces the entire market demand and therefore enjoys full market power. It sets the price of the product that it sells. There are very few or no close substitutes. Therefore, buyers do not have any other option but to buy the product from the particular seller. In general, the products sold by a monopolist have inelastic price elasticity. Oligopolistic market structure is characterized by a number of buyers (but lesser than competitive market) and the products have close substitutes. However, the products sold by each seller are differentiated form the products of others thorough some form of branding. Buyers, therefore, have lesser choice than in competitive market structure, since they are attracted to one of few products of some particular brands. Monopolistic market is a form of market in which there are only few (countable number of) sellers, but, many buyers. In this market, goods are highly differentiated and buyers have only few choices. Each seller enjoys greater market share than in oligopoly market. They can, therefore, influence price and there are severe price wars in this form of market (J. B. Taylor and A. Weerapana 17). El Beit is an independent coffee shop located in New York that offers beverages and supplementary food to the local customers. The cafe belongs to the coffee shop industry in the city. There are several such coffee shops dotted in the City area of New York. Considering the characteristics of each of the market structures, it can be concluded that the El Beit belongs to oligopolistic competition market structure. From the point of view of the manager, the decision variables that affect firm’s profit are quantity demanded and price. Pricing strategy The company follows a particular pricing strategy for its products. Bundling is the basic pricing strategy followed by the company. It offers various goods in bundles, such as, espresso coffee coupled with ginger bread, or flat white with extra cheese beef sandwiches cost less than if the goods are bought together. Besides, it offers coupons that allow the customer to get a discount of 5% on the next purchase. Every coupon also adds points which can be redeemed after a total amount of purchase of $50. Government regulations Government regulations affect the prices of the products and therefore, quantities demanded of the products are affected (J. B. Taylor and A. Weerapana 46). If the government of USA increases taxes on imports, cost of the producer in importing the coffee beans from Canada would rise. Hence, price of the product would rise in order to compensate the increased cost of production. This might affect quantity demanded, although price elasticity of demand is low. Since El Beit is a small company, it faces credit constraint. If the government tightens monetary policy, increase in interest rate would make it difficult for the company to avail credit for further investment. Works cited Boyes, William J. and Michael Melvin. Microeconomics. Connecticut: Cengage Learning, 2012. Print. Landsburg, Steven. Price Theory and Applications. Connecticut: Cengage Learning, 2011. Print. Lindeman, J. Bruce. Microeconomics. Arkansas: Barron's Educational Series, 2002. Print. Mankiw, N. Gregory. Principles of Microeconomics. Connecticut: Cengage Learning, 2012. Print. Taylor, John B. and Akila Weerapana. Economics. Connecticut: Cengage Learning, 2008. Print. Taylor, John B. and Akila Weerapana. Microeconomics. Connecticut: Cengage Learning, 2011. Print. “Total revenue test.” Fullcoll. Fullerton College, 2013. Web. 1 Nov. 2013. Tucker, Irvin B. Survey of Economics. Connecticut: Cengage Learning, 2008. Print. Winston, Wayne L. and S. Christian Albright. Practical Management Science. Connecticut: Cengage Learning, 2011. Print. Yelp. Laughing Man Coffee & Tea. Yelp. Yelp Inc., 2013. Web. 1 Nov. 2013. Read More