Microeconomics and Starbucks

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Topic: An examination into the rise and fall of Starbucks Coffee Company and its relationship to certain microeconomic principles.

Thesis: While Starbucks has been an industry leader in the specialty coffee market, rapid overexpansion and current economic conditions have caused it to lose its market dominance. Is the company strong enough to recover?

I. The origins of Starbucks

A. 1971 Beginnings

B. Starbucks goes public in 1992

C. Rapid expansion from mid-1990s to mid-2000s

II. Starbucks provides microeconomic principles

A. Supply and demand

1. Few stores and high demand

2. Oversaturation of stores and low demand

B. Price elasticity

1. The good ol’ days

2. All good things must come to an end

C. Income elasticity

III. Competitors (aka substitutes)

A. Dunkin Donuts

B. Tim Horton’s

C. McDonald’s

IV. What the future holds

In doing the research for my original topic, I found much more information on Starbucks as they have been around for longer than McDonald’s McCafe. Every article I read that compared the two brands raised questions in my mind about Starbucks’ price elasticity and how long the company could continue at their current pace. My hunch is that Starbucks will lose sales during the recession as people are not able to justify spending $4 for a daily latte. However, their experiential reputation will eventually win in the end.

Introduction

Starbucks Coffee Company revolutionized the coffee-drinking habits of millions of Americans. Starbucks, whose bright green-and-white logo is almost as familiar as the golden arches of McDonald’s, began in Seattle in 1971 when it opened its first location in Seattle’s Pike Place Market. It operated as the sole Starbucks coffee shop until 1984 and quickly became the world’s leading retailer, roaster and brand of specialty coffee. In 2007, Americans were willingly paying $3 or more for a cappuccino or a latté, and Starbuck’s had grown to become an international chain, with over 16,000 stores around the world.

The change in American consumers’ taste for coffee and the profits raked in by Starbucks lured other companies to get into the game. Retailers such as Seattle’s Best Coffee and Caribou Coffee entered the market, and today there are thousands of coffee bars, carts, drive-thrus, and kiosks in downtowns, malls, and airports all around the country. Even McDonald’s began selling specialty coffees (A Modest Construct).

But over the last decade the price of coffee beans has been quite volatile. Just as consumers were growing accustomed to their cappuccinos and lattés, in 1997, the price of coffee beans shot up. Excessive rain and labor strikes in coffee-growing areas of South America had reduced the supply of coffee, leading to a rise in its price. In the early 2000s, Vietnam flooded the market with coffee, and the price of coffee beans plummeted. More recently, weather conditions in various coffee-growing countries reduced supply, and the price of coffee beans went back up (Waves).

Further adding to the troubles facing Starbucks is the current economic recession our country is in. With unemployment in the double digits and the amount of foreclosed homes hitting record highs, the days of $3 and $4 lattes may be over.

This paper will examine the rise and fall of Starbucks in terms of supply and demand, elasticity and substitutes and then give a forecast for the future of this coffee giant.

Supply and Demand

Markets, the institutions that bring together buyers and sellers, are always responding to events, such as bad harvests and changing consumer tastes that affect the prices and quantities of particular goods. The demand for some goods increases, while the demand for others decreases. The supply of some goods rises, while the supply of others falls. As such events unfold, prices adjust to keep markets in balance (Miller, 51, 62).

While different variables play...
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