Tuesday, August 9, 2011

Supply and Demand of Starbucks Coffee during Economic Recession

Coffee is the second most traded commodity on worldwide markets next to oil.

 It has gained mass popularity in the last several decades and investors can use Coffee investments to trade stock markets just about anywhere today. Coffee is grown in more than 50 countries in a band around the equator and provides a living for more than 20 million farmers. One of the major corporations today that is trying to control a large portion of the supply of coffee is Starbucks. Starbucks Corporation is one of the leading retailer, roaster and brand of specialty coffee in the world. Starbucks purchases, roasts, and sells whole bean and rich brewed coffees, espresso beverages, cold blended beverages, an assortment of food items, coffee-related accessories and equipment, a selection of quality teas and a line of compact discs. Starbucks has locations in North America, Latin America, Europe, the Middle East and the Pacific Rim. When coffee is considered, Starbucks has developed a worldwide name for itself and has become a huge success.

In the 1990’s the coffee consumption patterns had changed in the United States to about 1.7 cups per day per person. Compared to the two or three cups a day in the 1960’s and 1970’s, 1.7 cups is a significant decrease. However, coffee consumption has been on the rise since the 1990’s. First, consumers adopted a healthier lifestyle that led North Americans to replace alcohol with coffee. Next, coffee bars offered a place where people could meet and specialty coffee became an affordable luxury.

Starbucks built its business as the anti-fast-food joint. 

The economic downturn and growing competition are forcing the coffeehouse giant to see the virtues of behaving more like its streamlined competitors. The Seattle Company is facing heightened competition from McDonald’s and Dunkin Donuts trying to lure customers with new, cheaper specialty-coffee drinks.

The recession has resulted in a new thrift among consumers.

In April 2009 poll of 1,500 people, research company WSL Strategic Retail found 28% said they were putting more money into savings, up from 19% six months earlier (Jargon). Starbucks has had to change up their corporate strategy to weather the recession. The demand for a luxury coffee experience declines in periods of economic downturn. Consumers look to lean down spending habits and get it quickly it periods of economic stress. These two factors has had to make Starbucks readjust their corporate model.

Starbucks’ efficiency quest is an example of how even premium brands have to re-re-engineer how they do business amid economic crisis. Unlike in boom times, offering ever-fancier products and opening new stores is no longer a recipe for growth. After years of broadening its customer base and making forays into entertainment, Starbucks has now made its top priorities to retain its existing patrons and running leaner business models. “The issue at hand… is the cost of losing your core customer,” (Howard Schultz CEO, wsj.com). “It’s very hard to get them back.” Analysts say that Starbucks has seen the most pronounced drops in customers during afternoons and weekends, and that the company’s Frappuccino drinks have been particularly hard hit (Adamy, Wingfield).

The first response Starbucks has had to the loss in revenue is executing leaner business models throughout its 10,000+ stores in the nation. Drink preparation was becoming a bottleneck at Starbuck stores along with other time consuming processes at Starbucks. In an economic downturn consumers tend to have less leisure time to chat and sip coffee among friends. Most consumers work longer during times of economic distress to avoid job loss and also monitor where their money is spent. So Starbucks was losing customers to price inertia and customer satisfaction.

Management at Starbucks began to identify these trends and in the middle of 2008 they implemented a leaner business model by moving all but the most commonly ordered syrup flavors and now store pitchers closer to where the drinks are made. After learning that topping the drinks with whipped cream and chocolate or caramel drizzle at the drink station was slowing down production, they moved those items closer to where drinks are handed to customers. These changes shaved eight seconds off the 45-second process and cut their drive through time to an average of 23 seconds. Starbucks estimates that stores have experienced a 10% increase in transactions between September 2008 and June 2009 just from a leaner business model (Jargon).

The other answer to keeping it’s customers in an economic downturn is obviously, money. Starbucks entered the instant-coffee market with a version called, Via, that the company bills as offering a cup of Starbucks coffee for less than a $1. It has also introduced pairings of breakfast sandwiches and drinks priced at $3.95, or about $1 less than when bought individually. A combo pricing strategy that has been unanimous with McDonald’s and Dunkin Donut’s to stay competitive.

*Sorry, Could not reproduce supply and demand graph on here.*

The two graphs above model the theories described in this paper. Graph 1 depicts the change in the demand curve for luxury coffee in times of economic stress. Supply will stay the same in this scenario and the demand curve will decline. Graph 2 demonstrates the second theory to how Starbucks is going to be able to whether this recession. It is a profit maximizing efficiency output chart showing as Starbucks began to utilize the resources they already had and begun to get more organized and run a leaner business model they were able to increase production and profits without increasing any business costs.

Adamy, Janet. Wingfield, Nick. Starbucks to Present Recession Strategy. 17 March. 2009. Wall Street Journal. http://online.wsj.com/article/SB123723335325646025.html.

Jargon, Julie. Recession Forces Starbucks to think Lean. 6 August. 2009. Wall Street Journal. http://articles.moneycentral.msn.com/Investing/Extra/recession-forces-starbucks-to-think-lean.aspx?.

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