Starbucks Corporation - an Industry Leader Thanks to the Strategic Management Approach - Case Study Example

Demand Estimation Executive Summary After long industry domination, Starbucks could soon or later lose significant market share as a result of various factors affecting demand. However, past statistics show that the company has had positive gains with respect to sales and income. Notably, sales and income of the company is a primary consequence of demand for its products and services. However, the economy and changing times have been forcing Starbucks to reduce their prices in order to match with close competitors. This is of much essence on the pricing strategy of the company considering that its products exhibit elastic demand. If the company increases prices for its products it will mean that daily consumers will opt for alternatives from other companies trading at cheaper prices. Consequently, demand for Starbucks’ products thus significant loss of market share. The pricing strategy of the company also ought to keep into consideration the decline of consumers’ income. This will have the implication of low purchasing power among consumers thus less demand for Starbucks’ services and products. Ideally, several factors threaten to minimize demand for Starbucks’ services and products. According to this demand estimate, people have come to the realization that there are alternatives to Starbucks’ products; indeed, the blends can still be brewed at home. Therefore, Starbucks ought to reinvent itself with emergent tastes and lifestyles in order to remain a significant player in the market of coffee shop. Introduction Starbucks Corporation is an international coffee company with headquarter in Seattle, Washington, DC. Operating as Starbucks Coffee, the company is also an outstanding example of coffeehouse chain (Starbucks, 2015). According to the current ranking, Starbucks is the most outsized coffeehouse corporation in the globe leading the second placed Costa Coffee of the United Kingdom. Ideally, the company boasts of 21,536 stores across 64 territories and countries with the leading countries being inclusive of The US, People’s Republic of China, Canada, Japan, and the United Kingdom. Particularly, locations of the company are characteristic of serving cold and hot beverages, full-leaf teas, snacks, micro ground instant coffee, whole-bean coffee, and pastries. A good number of the company’s stores are also characteristic of selling cold and hot sandwiches, pre-packaged food, tumblers, and mugs. The company has evening’s locations offering a wide variety of appetizers, beers and wines after 4pm. In addition, the company has Hear Music brand and an entertainment division via which films, music, and books are marketed. The company exhibits an enormous deal of market segmentation with most of its products being either seasonal or specific to regions. Grocery stores also offer coffee and Starbucks-brand ice cream (Geereddy nd). Starbucks has exhibited a rapid growth since its 1971 establishment as a retailer and Seattle coffee bean roaster. The period between the years 1987 and 2007, serves as a substantial illustration of the company’s rapid growth as it managed to open at least two stores on a daily basis. The company recorded high profits in the early 1980s being a local company in the Seattle, but profits declined as a result of money losses associated with its expansion of the 1980s into British Columbia and the Midwest. Starbucks opened its first store, external to the US or Canada, in the year 1996 in Tokyo; at the moment at least a third of the company’s stores are accounted for by overseas stores. The aim of the report is to estimate demand for Starbuck’s coffee in the United Arab Emirates. A multi-variate demand regression model (the case of Starbucks) can be created with the aid of such measures as prices, income, sales, advertising, alongside other socio-economic variables. The paper will thus attempt to find out the relationship between various socioeconomic factors and demand of services and goods dealt with by Starbucks Corporation (Geereddy nd). Choice of Variables (Determinants of Demand) This model makes use of demand as the dependent variable, where else; income, price, sales, and advertising are independent variables. The choice of these independent variables is subject to their huge deal of effect on demand. Notably, these variables have the capability of changing quantity demanded at a given price alongside determining the location of the demand curve. Sales: The number of sales being made by a company is also likely to affect the demand of services and commodities provided by the particular company. Particularly, a high number of sales might have the implication of less supply at some time. In the event that consumers have the expectation of low supply of a certain commodity, they may stock up on the commodity while stocks last. This translates to increase demand for the product at that given tie. In reverse, consumers tend to be reluctant with buying commodities whose supply is ever high (Lynch, 1989). This has the implication of low demand for those particular commodities Price: An increase in price leads to a fall in demand while a fall in price increases demand, holding all other things constant. This has an implication that an increase in the price of Starbucks coffee will have the consequence of a fall in demand of the specific brand. As a result, there might be a likelihood of several people choosing not to use Starbucks product and, instead, shifting to less expensive alternatives. For instance, in the event that the price of a coffee cup at a Starbucks outlet goes up by $0.25, there is a likelihood of consumers replacing it with a cup of tea (Darby, 2008). Income: Income has an immense deal of impact on the demand of a commodity. An increase in income results to an increase in demand. On the other hand, a decline in income has demand decline as one of its consequences. The contemporary economy is characteristic of people losing jobs or having their incomes reduced via a number of ways. The primary consequence of reduced income is consumers cutting back on such non-essential as high end coffees, with Starbucks being an example. Ideally, several consumers will be unable to afford specialty beverage costing $4-5. As income increases, consumers tend to have disposable income thus the capability of treating them to such specialty beverages as Starbucks. Advertising: Advertising modes have an enormous deal of effect on the preferences for particular services and goods. In return, changes of preferences for certain services and goods increase demand for those items. If advertisement makes people believe that Starbucks coffee is stronger tasting than that of competitors, the will tend to develop preference for Starbucks coffee. Consequently, they will tend to purchase more implying increased demand for the product. Otherwise, if consumers have a negative perception of Starbucks coffee they will purchase less implying that demand for the product will have decreased (Flight, 2007). Sale and expansion The sales made by Starbucks Corporation over the years have greatly been influenced by expansion and advertisement. Starbuck’s sales have recorded a significant increase since the 1980s. Ideally, an upward trend of the company’s sales was signified by the 1984 purchase of Peets by Jerry Baldwin alongside other owners of the company. Notably, in the course of the 1980s, US total coffee sales were experiencing a downward trend though specialty coffee sales recorded a 10% market increase in the year 1989. The company’s increase in sales draws substantial illustration from the fact that by the year 1986 Starbucks boasted of six stores in Seattle (Delsalvo, Kennon & Koch, 2005). This was a significant increase considering that the company started as an espresso coffee joint. The year 1987 saw the sale of Starbucks chain being sold out to Howard Schultz (a former employee); this resulted to the rebranding of Mr.Howard’s Giornale coffee outlets (to be outlets of Starbucks) thus the start of the company’s expansion. The same year saw the opening of the first outlets external to Seattle which were located at Chicago, Vancouver, Illinois, Canada, and British Columbia. There was thus some rapid expansion of the company with number of Starbuck’s stores reaching 46 in the Midwest and Northwest. In the course of Starbuck’s IPO (initial public offering), of 1992, on the stock market the company had 140 outlets characterized by $73.5 of revenue. At the same time, the company had a market value of $271 million. The company had sold 12% of its portion raising $25 million intended for further expansion of the company-it hoped to double the number of its stores in two years’ time. This can, therefore, be attributed to a 70% rise of the company’s share price in the year 1992 as compared to 1991. In the year 2013, the Starbucks app. (via customers’ mobile devices) facilitated more than 10% of the total in store purchases. In the month of October the same year the company made another utilization of mobile platform following the launch of the promotion by the name “Twee-a-Coffee”. This promotion was inclusive of Twitter with customers having the capability of purchasing gifts cards for friends worth $5 per card. This was done via the entry in a handle of a friend (in a tweet) and ‘@tweetacoffee’ (Geereddy nd). According to a research done by Keyhole, the campaign had received the participation of 27,000 people with purchases worth $180,000 being made (Starbucks, 2015). A comparison between 2012 and 2013 saw an increase in same-store sales as follows: there was 7% increase system wide, 8% increase in America’s sales, 2% increase in Middle East/Europe/Africa, and 8% increase in Asia Pacific/China (Geereddy nd). Income Data Used For Estimation The company’s income has been on an increase as illustrated by the period between the year 2012 and 2014. The company’s figures of gross profit were $7,463,500, $8,484,500, and $9,589,000 for 2012, 2013, and 2014 respectively. The company’s figures for net income were $1,594,500, $2, 259,700, and $2,336,400 respectively (Geereddy nd). Statistical Results Interpretation This estimation is based on Almost Ideal Demand System model. There is an assumption that the company’s net income is directly proportional to the demand of Starbucks’ coffee in the UAE. An immense deal of Starbucks sales concerns products’ pricing and sales with the capability of increasing revenue growth. In case of products becoming acceptable to customers and are substituted by others, it has the implication strategies by competing outlets would significantly hurt Starbucks. Ideally, Starbucks is characteristic of an elastic demand; despite several individuals being addicted to the company’s coffee, sales will go down after an increase in price considering that such other providers as Panera Bread, Dunking Donuts, McDonalds, ad Krispy Kreme will provide much more attractive prices (Gillespie, 2008). In most cases, these firms have prices that are $3-4 less than the prices offered by Starbucks. The company, however, maintains that the difference in prices is as a result of operating in different market places with the close competing firms. Indeed, the company has been claiming that none of its product consumers will think of switching to the competing firms. The progressive increase in number of sales by Starbucks can in a way be understood as an addiction of coffee among populations. Over 77% of people above the age of 18 years have the habit of drinking coffee every day. The 2007 National Coffee Drinking Trends Report indicates that the age group 18-24 years has significantly influenced the increasing rates of coffee consumption (Goldman, 2008). Indeed, this is the only age group exhibiting increased gourmet coffee beverage consumption on a daily basis. The age group 40 years plus exhibits the greatest margin of growth in gourmet coffee consumption (Mizrahi, 2008). The high levels of coffee addiction among people of various age groups are well reflected in the results that show gradual increase of Starbucks sales and income over the years. Analysis for alternative scenarios Alternative scenarios exist and attitude substantial challenge to Starbucks. This ideally refers to the threat resulting from substitute services and products provided by other industries to satisfy the same needs (IBIS World, 2013). Notably, Starbucks has been experiencing significant substitution threat as a result of emergent products that could signify the beginning of the next consumer trend, thus the creation of devastating initial demand for the particular product. Such caffeinated drinks as Red Bull and Monster have emerged as big sellers thus significant alternatives for Starbucks products (IBIS World, 2013). Notably, a number of former coffee drinkers have developed the habit of seeking caffeine from energy drinks rather than coffee. In addition, Starbucks is also characteristic of products containing high calorie and fat that are said to have adverse effects on health. This could influence some coffee drinkers to look for alternatives to satisfy their needs. Interpretation of the elasticity and the implication to pricing strategy The pricing strategy employed by Starbucks ought to keep into consideration that the company’s services and products exhibit an immense deal of demand elasticity. Demand price elasticity has the capability of measuring the extent of goods’ demand changes in the event of price change. The determination of demand price elasticity is subject to the comparison of change in price and change of demanded quantity. For instance, if Starbucks imposes a price increase on latte from $3 to $5), the quantity of demanded cups would decrease (Starbucks, 2013). In addition, the event of price increase on latte by Starbucks would a see a decrease of price by Dunkin Donuts, Krispy Kreme, McDonalds, and Panera Bread. In doing so, the alternative firms will be aiming to gain competitive advantage on Starbucks. An increase in price leads to a consequent decrease in demand along with the demand curve. This has the implication that quantity and price keep on changing in opposite directions. The elastic nature of demand of Starbuck’s coffee draws illustration from the fact that some individuals have addiction to coffee yet the company’s product is not a necessity but a luxury. A growth in prices will lead to a low demand for Starbuck’s coffee as a result of huge competitor’s market; ideally, close competitors will be providing consumers with similar products at cheaper prices. Notably, consumer’s incomes are gradually declining as a result of diminishing value of the USD (Starbucks, 2013). Falling incomes will have the implication of decline of demanded goods thus shifting the demand curve. Consumers of coffee tend to think about luxury versus necessity. Necessity is characteristic of inelastic demand thus being unresponsive to change of price. On the other hand, luxuries are characteristic of elastic demand thus being responsive to change of price. Implication of results to business policy The measures of socio-economic factors and their effect on demand call for careful formulation of business policies in order to ensure that Starbucks maintains its market share in the coffee industry. It emerges from this analysis thus price changes and fluctuating income of consumers could have significant effects on the demand for Starbucks’ services and products (Parnell, 2006). Thus the formulation of business policies by the company ought to have the objective of enhancing its market share. This could possibly be achieved in a number of ways. The company ought to develop products of higher quality than its competitors, offer competitive prices accompanied by offers, intensify promotions and advertisement campaigns, alongside changing distribution channels of services and products. Conclusion Starbucks Corporation has been an industry leader for long thanks to the company’s strategic management approach. Indeed, over the past years, the company has been gaining substantial with respect to such socio-economic aspects as sales, income, and demand for its products. The company’s domination has apparently been at a time when Starbucks offers products and services at a higher price than its competitors. Sales and income of the company is a primary consequence of demand for its products and services; yet these factors will draw an immense deal of influence from price. It can thus be concluded that, the company’s pricing strategy will be among the principal determinants of the company’s position against its close competitors. This will much be aided by a hint on how the company’s sales might be like in some years to come. The company will thus need an estimate of demand to have an idea of how various factors might affect its performance in the future. This explains why demand estimation is an essential economic component for any business organization Read More