State of Affairs in the Industry of Cafes and Coffee Shops in Australia - Case Study Example

Your name: Course name: Professors’ name: Date PROJECT TASK Scenario You are a Freelance Economics Consultant who has been commissioned by the Commonwealth Government to analyse the state of affairs in the industry of Cafes and Coffee Shops in Australia and report your findings to the Government. Task Access the IBIS World report on the industry of Cafés and Coffee Shops and answer the questions below, in your own words. To access the IBIS World Report, go to RMIT’s home page. Then select ‘Library’ and launch ‘Databases A-Z’. After this, select the popular database of ‘IBIS World.’ Once in the database, search for ‘Cafes and Coffee Shops in Australia.’ You can also use any other resources you find relevant during your research. 1. Overview and Market Structure I. Provide a brief overview of the industry i.e. a definition of this industry, its products and main activity. According to IBIS World, the cafes and Coffee shops industry in Australia is on the growth path. The rationale for this is because of the existing Australian culture which is passionate towards coffee, in 2014-2015, 2.4% growth was experienced (IBISWorld Australia 2008). There are limited barriers to entry in the Australian market, the regulatory body encourages new comers and hence making the coffee market dynamic and productive at the same time. The orientation of the coffee market structure in Australia is oligopoly, the rationale for this is because the market is dominated by small producers whose supply and pricing influence the market prices and consequently the competition. II. Identify the market structure of the industry. Explain how you reached your decision using economic theory. The market Cafes and Coffee Shops in Australia in Australia is largely shaped by the existing Australian culture, Australians love quality coffee. In economic theory perspective, social choice best describes the Cafes and Coffee Shops in Australia. This culture has fueled the growth of many small specialty coffee shops which have led to increased competition and diminished industry entry barriers (IBISWorld Australia 2008). As such, there is an increase in the number of small operators as compared to franchised chains of stores. As a result, independent operators dominate the Cafes and Coffee Shops industry in Australia. In terms of revenues, the industry generates about $4.2 Billion and an annual growth rate of 3.2 % (IBISWorld 2014, p.1). 2. Demand and Supply Analysis III. Using demand theory, analyse the conditions of demand that are prevailing in this industry. Essentially, as the demand of coffee related products increases, the price of the coffee products is also expected to increase, this is what the demand theory postulates. However in the Cafes and Coffee Shops industry in Australia, the demand for coffee and its products is on the increase, this explains the growing number of small specialty coffee shops which are on the increase to quench the thirst of the ever increasing demand for coffee products (Hutzschenreuter 2009, p.45). Nonetheless, the price of coffee is sensitive in that a slight increase in price as it would be expected as a result of a huge demand actually has negative impact on the consumer and demand of the product as well. As evidenced by the IBIS World report, the pressure on the margins have constantly pushed the profit margins down. As such, the coffee industry in Australia does not fully comply with the demand theory that speculates increased demand will increase prices, or the more available the product, the prices drop. In the Australian market, the demand is increasing as well as the supply and hence the slight variation of the prices. IV. Using supply theory, analyse the conditions of supply that are prevailing in this industry. The supply theory states that the supply of a product will increase in the market if the prevailing conditions are favorable for the product to be increased in production. It also states that the profitability of the product, the cost of production, the technological advancements, and the government restriction will influence the supply of the product to the market. In this case, there are several variables which are impacting positively on the supply of coffee products in the market (Gounder & Prasad 2011, p.49). There are no barriers to market entry in the coffee industry, the competition is stiff and there is no one dominant operator in the market, the demand for coffee products is on the increase without affecting its profitability. More so, there are numerous technology advanced supply systems which ensures that the market get quality variety of coffee in the industry. This is the rationale for the success of coffee industry in Australia so far. 3. Market Analysis V. Market for Coffee: A. So far, you examined the industry for Coffee and Related Products. Consider now the Market for Coffee specifically. Using a demand and supply diagram, illustrate the initial situation in the market for Coffee in Australia, clearly identifying the equilibrium price and quantity. Provide a brief explanation. In order to comprehend the situation in the Australian coffee industry, the use of the supply and demand curve is necessary. The supply curve implies the quantity of the coffee product that the suppliers are willing to supply to the market at a given price. The demand curve on the other hand shows how the price of a product, coffee in this case affects the demand. The lower the price, the higher the demand as depicted in the diagram above. The point of intersection is called the equilibrium price where the supply and the demand meet. In Australian situation, the demand for coffee products is high, a factor that is shifting the demand curve in favor of the supply, according to statistics, the $1.0 coffee beans per pound which equals to 10 billion of coffee beans pounds is the equilibrium price. At this point, it is worth to note that the equilibrium price varies with respect to the prevailing market conditions which impact on both the demand and supply at different levels (Kotler, & Burton 2012, p.34). B. Based on the information available about the market, decide on the overall changes to demand and/or supply in the next few years and illustrate these in the graph clearly labelling the changes clearly. Explain your answer in part A above as to how you came to those conclusions. The expected scenario is the Australian coffee industry is a shift in both the demand and supply. As evidenced in the diagram above, the shift is expected to be an increase in both cases. The reason for this assertion is because of the existing Australian culture, the love for coffee and vibrant specialty coffee products (Zineldin 2007, p.365). The growing population is expected to increase the demand for coffee. On the other hand, the growing means and technology advanced processes of importing and exporting coffee is expected to increase variety of coffee products in the Australian market. As such, the demand curve will shift towards the right in the coming years. This is further fueled by the IBIS World report which predicts an annual increase in the range of 3% or more (Macoustra 2009). The supply for the same will shift downwards in order to meet the increasing demand as there are no predictions on the price changes as a result of new regulations. The regulations are expected to remain the same for the next five years and hence allowing the influence of market variables to dictate the price of the product for a longer period. VI. Elasticity A. Define and briefly explain the concepts of price and income elasticity. Price and income elasticity explain the changes in demand for specific products as income increases. The price and income elasticity are better explained in two scenarios, a positive income elasticity and a negative income elasticity. A positive income elasticity is normally related to superior goods which their demand increases when the income of the population increases. An example of this is the demand of expensive coffee specialty in a given area which experiences higher income (Pascucci 2014, p.46). On the contrary, negative income elasticity is normally related to less superior products which their demand diminishes as the income of the population increases. An example of this is generic food products. B. Using economic theory and facts discuss and explain the probable price sensitivity of coffee. Based on economic theory, the social choice best explains the scenario evident in the coffee industry in Australia. Australians love coffee and specialty coffee products, this is the reason for the increased independent coffee products in the country. The consumption of coffee is integrated into the Australian culture. Nonetheless a significant variation of the coffee prices could impact on its demand (Zhang, Jacobs & Witteloostuijin, 2007,p.48). In essence, coffee products are sensitive to price changes, consumers may opt for alternative beverages such as tea in the event that the coffee prices increase significantly. This means that there is a tolerable point of coffee prices which if exceeded could affect the demand of the same. C. Would a rise in the price of coffee have any impact on cigarettes? Explain. To some extent, the rise in the price of coffee could have an impact on the cigarettes consumption. Both of these products contain caffeine, a stimulant that is addictive. Coffee consumption tends to quench the desire to take a cigarette and vice versa. In the population that intakes both of these products, there will be an effect if the price of coffee goes up. Smokers and occasional smokers may opt to quench their thirst by smoking cigarette (Reinert 2009). VII. Government intervention. A. Outline the existing level of government intervention in this industry of Coffee and Related Products based on the information available. Give two examples of government intervention noted in the report. The government manages and controls the food and beverage industry through regulations and compliances. An example of food safety regulation which directly affects the coffee industry and related products is the Food Standards Australia New Zealand (FSANZ). This standard affects all the businesses involved in handling foods for public consumption in Australia. The government also regulates the provision of licenses for operations through food safety compliance (Robbins & Bergman 2011). FSANZ and food safety compliance are two ways in which government intervenes on the coffee products availed in the market (World Trade Organisation 2014). The reason for these regulations is to ensure that the food supplied is safe and of the expected quality. B. In your opinion, explain whether you believe the level of government intervention is impacting the industry and how. Consider both the firm and the consumer perspectives. The level of government intervention is not significantly affecting the industry. The government is concerned mainly with maintaining a level playing ground and ensuring that the products sold in the market are safe for consumption (Welch, Benito & Peterson 2008). The consumer is the main beneficiary of the government intervention, the customer is assured of quality products that meets accepted Australian standards and safe for consumption. The firms on the other hand are regulated to conduct their business within the accepted Australian standards, the level playing ground benefits firms, especially small independent specialty coffee shops that focus on gaining a niche in the competitive environment. Further Analysis of the Market VIII. In your opinion, explain whether you believe there is any type of externality present in the market for Coffee. If an externality is present, describe what action is available to the government in order to eliminate the externality. Illustrate both situations using a graph clearly labelling the initial situation and the one after government intervention. In the coffee market, there is an externality that is evident. This externality is depicted in the manner in which the coffee production is done. The production part is done in developing countries such as Papua New Guinea. The case of forced labor, child labor and poor working conditions in coffee firms in Papua New Guinea is an externality that affects the industry in varying ways (Trebilcock, Howse & Eliason 2013, p.3). The positive aspect of the externality is reduced process of the supplies because of unscrupulous means of getting the end product while the negative impact of this externality is the derailed image of the Australian government because of its support of poor working conditions in developing countries by consuming their products. The government needs to stop this externality by working closely with foreign governments in developing countries to improve working conditions. The countries affected in this case are Asian and African, Papua New Guinea is an example of this (Verbeke 2013). The other option for the Australian government is to increase incentive that supports fair production of coffee beans in these affected countries in order to manage the tainted international image. The third option which the Australian government has already put in place is shunning products from areas with poor working conditions. This will force these government to comply with international laws such as the human rights laws in the production of their coffee products. The graphs below depict the two scenarios, before the government intervention and after the government intervention. (maximum 450 words) Before the government intervention on externality After the government intervention References Gounder, N., & Prasad, B., 2011. Regional trade agreements and the new theory of trade: Implications for trade policy in Pacific Island countries. Journal of International Trade Law and Policy , 10 (1), pp.49-63. Hutzschenreuter, T., 2009. Temporal and Geographical Patterns of Internationalization: An Exploratory Analysis. Multinational Business Review , 17 (4), pp.45-76. IBISWorld Australia 2008, Tea, Coffee and Other Food Manufacturing in Australia, IBIS World, Sydney. IBISWorld 2014, Cafes and Coffee Shops in Australia: Market Research Report, IBIS World, Sydney. Retrieved from http://www.ibisworld.com.au/industry/default.aspx?indid=2015 Kotler, P, Burton, S 2012, Marketing, Pearson Higher Education AU, Thausand Oaks. Macoustra, J 2009, Global Research Without Leaving Your Desk: Travelling the World with your Mouse as Companion, Elsevier, Melbourne.pp.123-56. Pascucci, G 2014, Il ritorno alla competitività dell'espresso italiano. Situazione attuale e prospettive future per le imprese della torrefazione di caffè: Situazione attuale e prospettive future per le imprese della torrefazione di caffè, FrancoAngeli, Melbourne. p.45-46. Reinert, K., Rajan, R., Glass, A., & Davis, L., 2009. The Princeton Encyclopedia of the World Economy (Vol. 1). Princeton University Press. Robbins, S & Bergman, R 2011, Pearson Higher Education AU, Sydney. p.351-58. Trebilcock, M., Howse, R., & Eliason, A., 2013. The Regulation of International Trade. Routledge. Verbeke, A.,2013. International Business Strategy (2 ed.). Cambridge University Press. Welch, L., Benito, G., & Peterson, B., 2008. Foreign Operation Methods: Theory, Analysis, Strategy. Edward Elgar Publishing. World Trade Organisation. 2014. Who we are: WTO. [online] Available at: WTO: http://www.wto.org/english/thewto_e/whatis_e/who_we_are_e.htm [Accessed 31st October 2014] Zhang, J., Jacobs, J., & Witteloostuijin, A., 2007. Multinational Enterprises, Foreign Direct Investment and Trade in China: the Chain of Causalty in 1980-2003. Journal of Asia Business Studies , 2 (1), pp.48-57. Zineldin, M., 2007. International business relationship and entry modes: A case of Swedish automotive industry Scania and Volvo in Mexico. Cross Cultural Management: An International Journal , 14 (4), pp.365-386. Read More