Supply vs Demand of Coffee and the Reasons for Starbucks’ Success Daria Lexi Gabai
American Public University Systems
Professor Medani Adhikari
Coffee has historically been one of the most favorite beverages available. Almost every country in the world consumes coffee in some shape, way or form. Interest in this drink has increased even more over the last century. According to Talbot (2004), from 1970 to 2000 coffee was “the second most valuable commodity exported by developing countries" (p. 50). Since then, there have been some changes in the supply and demand of this product. This essay will analyze the steady growth in demand for specialty coffee, the change in supply available, and present a case as to why the Starbucks Corporation is successful. The demand for coffee and specialty coffee products have been steadily increasing. One of the leading factors affecting the demand for coffee beans is an increase in specialty coffee shops, such as Starbucks. Starbucks has become one of the most favorite coffee spots with over 21,160 stores in 63 countries and territories, including the United States, China, Canada, Japan and the United Kingdom (Starbucks Corporation 2013 Fiscal Report). Their locations serve hot and cold infusions, ranging from a regular Americano to Frappuccino’s and a whole array of whole-bean coffee, micro ground instant coffee, full-leaf teas among other goodies. It is no surprise that Starbucks has become a significant success, controlling a high percentage of the coffee supply. In the early 2000s, Vietnam had flooded the market with coffee, and overproduction held prices low for quite some time. Recently, however, the price of coffee has increased; Starbucks has raised its prices by almost a whole dollar per cup. According to an article in PS Mag, “Folgers, Kraft Food Groups, and Dunkin’ Donuts have all raised their coffee prices over the past year as well”. Various environmental and weather changes have affected the supply of coffee beans exported from Latin American countries. Brazil has been experiencing severe drought, many farmers were forced to quit coffee bean production entirely, and this means half as many harvests. Other Latin American countries are also experiencing a fungus that is affecting most of the beans and ruining crops, which has cut the supply of coffee in the past few years by a staggering third. According to The U.S. Department of Agriculture, total annual production of coffee for the 2014-2015 periods has dropped by 1.5 million bags. Starbucks Corporation happens to be one of the top vendors of specialty coffee in the entire market. Starbucks Corporation buys their product from private farmers, with whom they set up annual contracts. They pay almost double the wholesale commodity price, which guarantees higher quality beans. The CEO of Starbucks has previously stated “his company's effort is to pass on the "high price" of a cup of coffee to farmers.” The idea is that if the consumer pays the high price for a cup of coffee, Starbucks will be able to continue paying a premium price to specialty coffee farmers for their harvests. However, this is not always the case. Considering the changes in supply, Starbucks has essentially found a way to circumvent the possible shortage of coffee and avoid any price-elasticity that could drastically affect their business. It is good to the consumer but leaves the farmers to pick up the slack. As the price for beans keep growing, and production becomes more difficult, small time farmers find themselves “locked in” to sell the specialty beans at a lower price than they are worth.
With all factors considered, the fluctuation in the price of coffee beans is nothing new, and Starbucks will continue to pay top dollar for better quality beans. A dollar increase in the overall price is not going to reduce demand. The average person does not mind spending a dollar or so more on what is already considered a luxury....
References: Coffee cravers ignoring bean-price surge for caffeine fix. (2014, March 13). Retrieved February 16, 2015, from http://www.bloomberg.com/news/articles/2014-03-12/coffee-cravers-ignoring-bean-price-surge-for-caffeine-fix
Starbucks Corporation 2013 Fiscal Report (2013, January 1). Retrieved February 16, 2015, from http://news.starbucks.com/uploads/documents/Starbucks_Fiscal_2013_Annual_Report_-_FINAL.PDF
Starbucks in alliance to maintain coffee supply - seattlepi.com. (n.d.). Retrieved from http://www.seattlepi.com/business/article/Starbucks-in-alliance-to-maintain-coffee-supply-1155279.php
Talbot, John M. (2004). Grounds for Agreement: The Political Economy of the Coffee Commodity Chain. Rowman & Littlefield. p. 50.
Why coffee shortages won 't change the price of your Frappuccino. (n.d.). Retrieved from http://theweek.com/articles/444832/coffee-shortages-wont-change-price-frappuccino
Please join StudyMode to read the full document