Business Basics
Starbucks underwent a radical transformation in the early 1980s, founded in 1971 by Jerry Baldwin, Zev Siegl, and Gordon Bowker in Seattle’s Pike Place Market. It was purchased by Howard Schultz, who transformed Starbucks from a pure coffee bean shop to a place that provided amazing espresso after visiting Milan, Italy (Chuang, 2019).
Starbucks has its headquarters in Seattle, Washington. With its roots in the coffee shop industry, this company has become the world’s largest coffeehouse chain, with 35000 branches in 80 countries (Chuang, 2019). The enormous retail coffee market is dominated by three major players, including Starbucks, the most well-known brand due to its global presence. Reaching the scale and reach of Starbucks is an advantage for aid suppliers. However, it remains committed to the farmers who produce its coffee by continuing to be Fair Trade certified.
Types of Goods/Services
Starbucks specializes in high-quality coffee. The shop offers a variety of products, including tea, pastries, racks, and hot or cold coffee beverages. To go with this, it will also provide coffee equipment and packed coffee beans. Apart from coffee drinks, this cafe offers hot pastries like croissants and sandwiches, cold sandwiches, salads, breakfast, and snacks (Chuang, 2019). The menu could differ slightly at individual stores.
However, the satiable and sweet offerings will be accessible at any place. The business has expanded to include tumblers and mugs, differentiated from competitors by offering ground coffee beans and various materials. Starbucks is famous for its high-quality coffee and has created a sense of home among its customers, fostering community. Starbucks’ branding success is tied to the occupation concept, as it creates a friendly atmosphere and a sense of belonging in its shops. Superior Experience: Starbucks has demonstrated itself as a luxury coffee brand by flying the flag of quality and excellence.
Barriers to Entry/Exit
Barriers to Entry
One obstacle to entering is brand image, as Starbucks has established itself as a well-known, influential brand worldwide. New competitors would need significant resources to build a similar brand image (Chuang, 2019). Despite having a lower entry barrier than other businesses, Starbucks has established a solid, well-known brand over several decades. Because of this, it is difficult for recent entrants to build similar brand equity and consumer devotion swiftly. Starbucks can leverage economies of scale, making it difficult for smaller rivals to match its cost-effectiveness.
Starbucks has a substantial market share and has achieved economies of scale by cutting expenses. The bar is quite high as new rivals distinguish themselves from Starbucks’ exceptional product quality, eye-catching real estate locations, and welcoming in-store environment. Distribution channels pose another hurdle to entry for small businesses. Creating a global distribution network like Starbucks’s has proven an intricate and expensive undertaking for newcomers. Starbucks has a complex, well-organized supply chain that involves several partners, including farmers, suppliers, logistics providers, and retail shop employees, to deliver high-quality products to customers worldwide.
Barriers to Exit
Starbucks may find it expensive to exit a market due to the initial costs of setting up shops, purchasing supplies, and building its brand. It is possible that Starbucks signed long-term supply or leasing deals, which would have made leaving expensive. Abruptly withdrawing from markets might damage the company’s reputation as a global brand. Market pricing and profitability are driven down by intense industry rivalry. Due to the low barriers to entry and exit for businesses, Starbucks occasionally sees a large influx of new competitors in the fiercely competitive restaurant industry.
Market Structure
A market structure with perfect competition has several businesses, each controlling a small share of the market. In a highly competitive market, any company that can turn a profit will be swiftly joined by other businesses, reducing economic profit to zero (Chang & Lai, 2021). Monopolistic competition occurs when several companies in an industry produce similar but distinct products. None of the companies has a monopoly; instead, each is independent and does not depend on others’ decisions.
On the other hand, an oligopoly emerges when a small number of businesses wield significant influence over a specific market or industry. Despite their collective market power, these companies have yet to achieve dominance over competitors or secure a dominant market share. A monopoly characterizes a market with a single producer or seller, creating barriers to entry for competitors and restricting consumer choice (Chang & Lai, 2021). Such market dominance can lead to the adoption of unethical business practices.
Starbucks functions within a monopolistic competition market structure. In the coffeehouse industry, numerous firms coexist, each offering distinct products, contributing to a diverse market landscape (Chang & Lai, 2021). Starbucks determines its products through its brand, the quality of its coffee, and the ambiance of its stores. Additionally, it sets itself apart through superior quality, a high-caliber clientele, and a dedication to sustainability.
Similarly, to attract and retain clients, businesses should recognize and highlight their distinctive advantages and value propositions. Despite the large number of rivals, each has some degree of market dominance due to its unique products. Starbucks thus satisfies the majority of the requirements for monopolistic competition. It competes on non-price grounds, produces fantastic products, and works with several other businesses in the market. Despite having some market power, it has little influence over the market.
Demand Elasticity
The demand for coffee beverages at Starbucks is generally inelastic. Regular coffee users often form addictions or habits that make the market less price-sensitive. The $3 price elasticity for Starbucks coffee reflects the presence of other coffee products in the market and an elastic market; this implies that consumers allocate little of their income budget to the product.
The math: percentage of price change (difference/base) 100. In this case, a $3 cup of coffee rises to $5, so the rate of price change is (5 – 3)/3 × 100 = 66.67% (Musonera, 2021). Furthermore, Starbucks is a well-known brand, and consumers may be willing to pay higher prices for its high-quality products, increasing the inelasticity of demand for these goods.
There can be an elastic demand for food items at Starbucks. Customers have more food options than coffee options, and they can be more price-conscious when making purchases. But if Starbucks sells unusual or extraordinary foods that are difficult to substitute, demand could be more inelastic (Musonera, 2021). The market for tumblers, mugs, and other branded goods will probably be elastic. These are often discretionary purchases that consumers can readily replace with other options. Price adjustments or promotions may significantly affect demand for such products.
Factors Influencing Elasticity
One factor that affects elasticity is substitutability: demand is more elastic when more substitutes are available. The core idea behind the price elasticity of demand is substituted. Demand is more flexible when it’s simple to discover a replacement product when its price increases (Musonera, 2021). There will be less elastic demand if there are few or no alternatives.
Another element is the distinction between needs and luxuries; demand for essentials is typically more elastic than for luxuries or discretionary products. Businesses that offer these products may set their prices more freely, since demand for them does not respond to price fluctuations.
High levels of brand loyalty may increase demand inelasticity. Additionally, brand loyalty may affect the price elasticity of demand. Brand-loyal clients could be less likely to switch to alternatives even as costs rise, leading to inelastic demand. The time horizon is an additional factor that can affect demand elasticity in the short and long term. Long-term supply and demand typically exhibit higher long-term elasticities and lower short-term elasticities. However, this is not always the case.
Overall Elasticity for Starbucks
Starbucks’ product demand is comparatively inelastic. It is a result of Starbucks’ potent brand and devoted clientele. There are plenty of places to get black coffee, but few compare to a Starbucks Java Chip Frappuccino. These items have more inelastic demand. Coffee is often freely accessible and of a quality that most consumers may be satisfied with (Musonera, 2021).
Given the perceived quality of Starbucks’ products and the lack of comparable alternatives, many customers are willing to pay higher prices for the brand, even if price increases may result in a slight decline in demand. It can be due to several things, such as the brand’s standing for producing high-quality coffee, the atmosphere in its shops, and its emphasis on the customer experience. Customers of Starbucks are less price-sensitive, as they are willing to pay more for a complete understanding and believe the brand offers greater value.
Externalities
Externalities are unexpected repercussions or side effects of economic activity that affect parties who did not choose to experience them. There are both benefits and harms associated with Starbucks’ business practices. Overspending on costs results in a negative externality. A benefit accruing to others is a positive externality. Therefore, externalities arise when a transaction’s costs or benefits are borne by parties other than the company that produces it or the consumer.
Positive Externalities
As a place for social contact, meetings, and work, Starbucks offers a social milieu that is one of the positive externalities that may be observed there. A positive externality is fostering a social climate that benefits people and those who directly purchase items. Starbucks is dedicated to giving back to the communities it serves and being a good neighbor. The company’s reputation for social responsibility is bolstered by its emphasis on community development.
Addressing Positive Externalities
Starbucks could aggressively support neighborhood projects or activities to encourage community and constructive social connections. The firm has established a sense of community and connection with its patrons through programs such as its “Third Place” concept and a pleasant store environment. Organizing events in collaboration with nearby companies or groups may increase beneficial externalities. Starbucks organized many collaborative meetings with partners nationwide in 2022, building on its long history of listening to and learning from them to gather feedback on how to rethink best practices and influence the experiences we provide in their locations.
Negative Externalities
Starbucks’ actions, including the generation of waste from disposable cups and the emissions of greenhouse gases from its operations and supply chain, raise environmental concerns. The company utilizes approximately four billion paper cups annually, equivalent to about 8,000 cups per minute, leading to the annual depletion of millions of trees to produce these non-recyclable cups coated with plastic (Musonera, 2021). Despite their lack of recyclability, four American cities currently accept Starbucks’ paper cups for recycling, but they are still sent to landfills.
The environmental impact of Starbucks’ waste extends to our waterways, oceans, and overall public health. A decade ago, the company pledged a transformative commitment to introduce a fully recyclable cup by 2015 and to provide at least 25% of its beverages in reusable containers (Musonera, 2021).
However, only 1.6% of Starbucks’ beverages are ordered in mugs or other non-disposable options, and the promised recyclable cup is yet to be developed (Musonera, 2021). Despite falling short of the goals set in 2008, the company recommends a negative vote on a shareholder-driven proposal calling for a report on its initiatives to establish a comprehensive plan for environmentally friendly packaging at the 2018 shareholders meeting in March.
Addressing Negative Externalities
The brand could address its environmental challenges by shifting its strategies, such as encouraging customers to use reusable cups instead of disposable ones and minimizing its carbon footprint. Starbucks is committed to sourcing coffee beans from ethically sustainable sources (Musonera, 2021). The enterprise will provide customers with fully environmentally friendly, ethically sourced coffee by implementing a comprehensive Coffee and Farmer Equity Practices program.
The detrimental environmental effects can be reduced by funding effective waste management initiatives, such as recycling schemes. Appropriate waste management techniques help prevent contamination of air, water, and soil. Additionally, recycling reduces the need to burn and to use landfills, which can release dangerous environmental toxins. Furthermore, recycling can reduce carbon emissions and conserve energy used to create new items.
Role of Larger Companies
Large ventures are much more likely than other companies to challenge inequalities, poverty, and diversity. The entire Starbucks endeavors to create an atmosphere and conditions where all the employees feel comfortable and can achieve maximum efficiency, collectively and individually (Musonera, 2021). They recognize that each partner has unique and specialized skills, a different outlook on the same issues, and a different experience, which then contributes to Starbucks’ business success. They may do this by implementing inclusive recruitment procedures, offering equitable promotion opportunities, paying fair salaries, and investing in the areas where they do business. They can also do this by enacting laws that support inclusion and diversity in the workplace.
Organizations’ decision to implement this policy must be emphasized to foster an inclusive, diverse, and fair work environment. The document should address the complaint channel and reviewing processes (both involve the company’s monitoring and evaluation of policy implementation), policy development, and best practices. Starbucks, for instance, offers programs to hire young individuals without jobs, education, or training, as well as immigrants and veterans (Musonera, 2021). Additionally, it offers its staff a college tuition reimbursement program, which may reduce poverty by expanding educational opportunities.
References
Chang, C. W., & Lai, C. C. (2021). Optimal fiscal policies and market structures with monopolistic competition. International Tax and Public Finance, 1-27.
Chuang, H. J. (2019). Starbucks in the World. HOLISTICA–Journal of Business and Public Administration, 10(3), 99-110.
Musonera, E. (2021). Strategic marketing case analysis: Starbucks. Journal of Business and Social Science Review, 2(11), 12-22.