Starbucks is on the top chains, no doubt, if not the leader of the chain for coffee and tea beverage industry. The organization’s total revenue exceeded $21 billion for the 2016-year fiscal (“Market Watch”, 2017). Based on a report conducted by Trefis, Starbucks will increase to 750 customers per day by 2020, as in 2013 the store was getting an average of 500 customers a day 4 (Lutz, 2013). Starbucks aims their target market towards adults ages 25 to 40, typically maintained an annual income of 45,000 and 49 percent of that was accounted for total sales (O’Farrell, 2017), with Starbucks holding a magnificent customer base.
The young adults ages 18 to 24 came trailing behind at 40 percent with an annual income of $25,000 to $60,000 in 2014 (National Center for Education Statistics, 2016). Furthermore, shown by statistics, the primary visitors were the Asian-Americans with a 49 percent within the last six months of Starbucks stores within the U.S. (“Statista, 2016), this is no surprise considering that Starbucks held the highest median income for the country at $77,166 in 2015 (United States Census Bureau, 2016). Hispanics were the secondary visitor at 33 percent, following by White Caucasian at 28 percent, and next came the African Americans at a 21 percent (“Statista”, 2016).
The daily consumption for specialty beverages (example, mochas, lattes, and cappuccinos) tripled since 2008 according to the 2016 National Coffee Drinking Trends report which was performed by the National Coffee Association (National Coffee Association USA, 2016). Even with the increase, there is data that presents that the gourmet beverages declined by two percent in the consumption of coffee among the younger generation (National Coffee Association USA, 2016). There are expectations made by the Specialty Coffee Association of America that specialty drinks consumption is going to increase in 2017 (Hubbell, 2016).
Even after the Great Recession, the coffee sales stayed steady which in that time, the experts was expecting the market’s retail profits to decrease dramatically (National Coffee Association USA, 2016). There are many individuals that believe is was proven how much the Millennials honored and valued coffee beverages by the purchasing behaviors during the economic downfall (National Coffee Association USA, 2016). Due to the recent health trend, there is a tiny decline in the coffee intake that came along with the tea consumption increasing (Mitchell, 2015).
On any day of the week, the specialty drinks are the reason for 75 percent of Starbucks’s sales (Gaille, 2016). Contributing to 15 percent in sales throughout the recent years came from the iced teas and lattes known as Starbucks’s Teavana line (Zillman, 2015). For Starbucks to succeed in future growth in the market, it would be essential to analyze the trends for supply and demand because expected to increase is the gourmet coffee drinks and the popularity of the tea drink.
Starbucks, presents a spectacular increase in their sales, in the past ten years, the company has doubled the total revenue. However, in 2009, Starbucks did experience a slight drop by 5.8 percent in sales. Furthermore, the company was able to recover with a 9 percent increase in the following year.
A purchase of 428 pounds of coffee beans was made by Starbucks in 2011 (“Starbucks”, 2011). Per year, Starbucks uses over 93 million gallons of milk, which includes all alternative milks, for example, coconut, almond, and soy milk (Lepore, 2011). The company have made reports that stated the second-highest request from customers is to inquire non-diary milk (Ayoub, 2015). Starbucks is looking at another price increase within production based off the last two factors. Considering that the cost of these supplies has increased and will continue to increase, the customers of Starbucks are also looking at a possible price increase.
The Arabica coffee price is currently at $1.46 per pound but is expected to rise to $1.50 later this year. The price for the Arabica coffee was up 20 percent in June of 2016 (Lorenzetti, 2016). Within the same time last year, the price for Robusta coffee increased by 4.2 percent, however, from the deficiency within production at coffee plantations in Brazil can limit supply making the price increase even more (Lorenzetti, 2016). Furthermore, reaching $5.8 billion in 2014 by alternative-milk, it is expected to double this year (2019) in revenue reaching 10.9 billion (BBC Research, 2016)
. In previous years, the company administered various price hikes, for example, product prices increased 1 percent in 2013, the following year, 2014, another price hike of 5 to 20 cents reflected on some if not most of all beverages, fast forward a couple years to 2016, baked goods, cold drinks and brews suffered a price increase of 10 to 30 cents (Ciura, 2015); nevertheless, the company’s revenue continues to expand. For a 16-ounce cup of coffee, Starbucks had the most expensive cup when comparing it to their competitors, Dunkin Donuts was right behind that standing at 14 ounces for $2.05, and for 16 ounces from McDonalds it id $1.49 (White, 2014). Although, when it comes to Starbucks, the cost per milligram of caffeine is under Starbucks’s competitors making them the winner (White, 2014).
Price Elasticity of Demand
In general, coffee does contain few substitutes, but some products that Starbucks sell at their locations for example, sandwiches, pastries, beverages, gourmet beverages may be assessable at other coffee shops (e.g. McDonalds, Dunkin Donuts, Sheetz, Brio) or, it may be available at your own home with the assist of a fancy machine and a little effort. These items may not contain the same quality that an individual might expect from a Starbucks location, they are however substitute.
When looking at caffeine, coffee is very distant from the only source of stimulant. The amount does however vary, energy drinks, chocolate, soda, hot coco, and ice cream all carry caffeine. As stated earlier, not affecting the total revenue as it continues to expand, Starbucks did experience a few price increases in the recent years. Customers could easily discharge the hike of the price that is a result of its insignificance or they think the purchase is “necessary” when it is not, it is more of a luxury choice.
The overall coffee market inelastic was reckoned by the determinations of price elasticity of demand and substitutes are maintainable hence its elasticity since Starbucks has competitors. Within time, customers of Starbucks would have time to make adjustments to their purchasing behavior rather quickly because the prices going up would be minimal and still only deem a small portion of the customer’s income making the price elasticity low.
When individuals say that they “need” coffee, if the prices of coffee were to increase by a good amount and become extremely distinguishable, the habits of the behaviors may cause a decrease in spending and consumption of Starbucks’s coffee, or both; resulting that the coffee and gourmet beverages from Starbucks are elastic.
Millennials contain a specific power when it comes to purchasing and the market is starting to now realize that which that could not be more relevant to the company. Specialty drinks are more likely to be drank by individuals between the ages of 25 to 39 (National Coffee Association USA, 2016). When it comes to being mindful shoppers that support companies that have the same interest to personnel values along with goods and services that bring more value to their lives it’s the millennials (National Coffee Association USA, 2016). Companies that commit to environmental and social responsibility attract more consumers that agree to pay more for the products and services within that company by 66 percent (National Coffee Association USA, 2016), Starbucks is one of these companies and does exceeding well with it.
Looking at the financial data from Starbucks, the increases from the past didn’t affect their revenue for the fiscal year in a negative way, a small decrease in consumption is certainly possibly. Starbucks still raised menu prices due to increases in operating expenses, for example, the rent, and the payroll even though the company experienced the price of coffee declining by 33 percent (Gillespie, 2016).
Starbucks’s goods are inelastic because of the small responsiveness to increasing cost and this comes from the purchasing behavior of the company’s highest profitable consumer, leaving the price of elasticity of demand of the company elastic. There are many American individuals that are always searching for deals or a cheaper route, there are also plenty of individuals that don’t mind paying more money for an item that they consider a worthy and valued cost.