Economics And Starbucks

Thursday, 24 October 2013

Reference List

BYU IDAHO Monopolistic Competition.
Available from: https://courses.byui.edu/econ_150/econ_150_old_site/lesson_09.htm [Accessed 23 October 2013]

Freebies Land Malaysia (2013) Starbucks Malaysia Special: Enjoy Free Upsize for Grande Frappucino!! Available from: http://freebiesland.com.my/2013/08/starbucks-merdeka-special-enjoy-free-upsize-for-grande-frappuccino.html [Accessed 23 October 2013]

Goldenberg, S. / The Guardian (2011) Starbucks Concerned World Coffee Supply Is Threatened by Climate Change.
Available from: http://www.theguardian.com/business/2011/oct/13/starbucks-coffee-climate-change-threat [Accessed 23 October 2013]

Irfani (2010) A Step Closer to Defeating AIDS. Irfani’s IB Economics Blog[blog].
Available from: http://inairfani.wordpress.com/2010/02/21/a-step-closer-to-defeating-aids/ [Accessed 23 October 2013]

Monopolistic Competition.
Available from: http://ctaar.rutgers.edu/gag/NOTES/micnotes10.html [Accessed 23 October 2013]

O’ Connell, M. (2008) Not Just Coffee: Starbucks’ Rise to Success Whittaker Associates [blog]. Available from: http://whittakerassociates.com/not-just-coffee-starbucks%E2%80%99-rise-to-success/ [Accessed 23 October 2013]

O’ Farrell, R. / Demand Media (2013) Starbucks Pricing Strategy.
Available from: http://smallbusiness.chron.com/starbucks-pricing-strategy-10544.html [Accessed 23 October 2013]

Riley, G. (2012) Market Structure Summary. Tutor2U. Available from: http://www.tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html

[Accessed 23 October 2013]

Royal Malaysian Customs Department (2013) GST Impact.
Available from: http://gst.customs.gov.my/en/cp/Pages/imp.aspx [Accessed 23 October 2013]

Royal Malaysian Customs Department (2013) Resources & Guides. Available from: http://gst.customs.gov.my/en/rg/Pages/rg_gen.aspx [Accessed 23 October 2013]

Spark Notes (2013) Equilibrium. Available from: http://www.sparknotes.com/economics/micro/supplydemand/equilibrium/section1.rhtml [Accessed 23 October 2013]

Starbucks Corporation (2013) Responsibility Grown Coffee.
Available from: http://www.starbucks.com.my/responsibility/ethical-sourcing/coffee-sourcing [Accessed 23 October 2013]

Starbucks Corporation (2013) Starbucks Company Profile.Available from: http://globalassets.starbucks.com/assets/9a6616b98dc64271ac8c910fbee47884.pdf [Accessed 23 October 2013]

Starbucks Corporation (2013) Starbucks Malaysia.
Available from: http://www.starbucks.com.my/about-us/starbucks-malaysia [Accessed 23 October 2013]

Walsh, H./ Bloomberg (2011) Starbucks Drinkers Won’t Get Break as Columbia Supply Drops. Available from: http://www.bloomberg.com/news/2011-05-26/coffee-drinkers-won-t-get-price-break-as-colombia-supply-slumps.html [Accessed 23 October 2013]

Wong, V. / Bloomberg Businessweek (2013) Starbucks Is Raising Its Prices Today. But By How Much? Availablr from: http://www.businessweek.com/articles/2013-06-25/starbucks-is-raising-its-prices-today-dot-but-by-how-much [Accessed 23 October 2013]

(2012) Demand & Supply. Whyecons[blog]. Available from: http://whyecons.wordpress.com/ [Accessed 23 October 2013]

(2012) Movement in the Supply Curve. Biz/ed[blog]. Available from: http://www.bized.co.uk/virtual/vla/theories/supply_curve_movements.htm [Accessed 23 October 2013]

Externality

The main reasons for government to intervene the market is to correct for market failure, to achieve a more equitable income and wealth distribution and to improve the performance of the economy.

Malaysia government is promoting the Goods and Services Tax (GST) will to replace the service tax and sales tax (SST) and will implement it between 18 and 24 months. The reasons of the government want to replace it the GST can overcome the weakness of the current tax system which is the cascading tax, double tax and pyramiding tax, tax erosion and leakages through transfer pricing and other ways (Royal Malaysian Customs Department, 2013). GST is a more transparent and business friendly tax system to increase tax compliance and easier to record and audit. Besides, implementation of GST may enhance the effectiveness and transparency of tax administration and management. The implementation of GST will not affect the people who income below RM 3,000 per month and is expected no price of essential foodstuff will increase (Royal Malaysian Customs Department, 2013).

The price of goods and services which currently includes the SST will be reduced due to the proposed GST rate is 4% which is lower than the current tax rate (Royal Malaysian Customs Department, 2013). Starbucks is categories as restaurants and hotels can enjoy the reduction in price with 1.20% (Table 2). This will encourage the goods and services sector to produce more to boost the economy due to the lower cost.

Graph 7: The Positive Externality (2010)

Government Intervention

The main reasons for government to intervene the market is to correct for market failure, to achieve a more equitable income and wealth distribution and to improve the performance of the economy.

Categories	Reduction in price (%)
Clothing and footwear	2.71
Communication	1.86
Furnishing, Household Equipment and Maintenance	1.57
Restaurants and Hotels	1.20
Transportation	0.94
Alcoholic beverages and tobacco	0.73
Housing, water, electricity, gas and fuels	0.12
Miscellaneous goods and services	0.08

Table 2: Consumer Price Index (CPI) shows the result of goods and services will result in price reduction (Royal Malaysian Customs Department, 2013)

Besides, the GST has lessened the burden of the tax payer so that they can have more disposable money (Table 3).

Income Group	Average monthly expenditure(RM)	SST		GST
Income Group	Average monthly expenditure(RM)	Tax burden (%)	Tax paid (RM)	Tax burden (%)	Tax Paid (RM)
Poor	570	2.38	13.57	2.17	12.37
Lower	1,856	2.75	51.04	2.43	45.10
Middle	3,767	2.94	110.75	2.57	96.81
High	7,211	3.13	225.70	2.74	197.58
Average	2,041	2.88	58.78	2.53	51.64

Table 3: Comparison of tax burden under GST and SST (Royal Malaysian Customs Department, 2013)

Supply

Supply curve shows the relationship between the price of a good and the quantity of the good supplied over a given period of time.

Change in quantity supplied is a movement along the supply curve to a new point due to a change in price.

Change in supply is a shift of the supply curve when a determinant other than price changes.

Starbucks is warning of a threat to world coffee supply because of changing climate. According to Jim Hanna, Starbucks sustainability director, said its farmers were already seeing the effects of climate change, with severe hurricanes and more resistant bugs reducing crop yield (The Guardian, 2011). If the condition continues as they are then is a potentially significant risk to the supply chain, especially the Arabia coffee bean. If Starbuck is lack of coffee bean (raw materials), then it has to decrease its supply. Hence the supply curve will shift inward from S1 to S3 at Graph 6.

Graph 6: The Shift of Supply Curve (2012)

Demand

Change in quantity demand is a movement along the demand curve to a new point when there is a change in price. Law of Demand is the quantity of a good per period of time will fall as price rises and will rise as price falls, other things being equal (centeris peribus).

Referring to Graph 4, the original price of lattes is at P1 and the original quantity demanded of lattes is at Q1. A New York Starbucks increased the price of lattes by ten cents at 25th of June, 2013 (Bloomberg Businessweek, 2013). The price of lattes has increased to P2 and the quantity demanded of lattes has decreased to Q2.

Graph 4: The Movement along the Demand Curve (2012)

Change is demand is a shift of demand curve when a determinant of demand other than price changes.

According to Luis Genaro Munoz, chief executive of Columbia(the second largest producer of mild Arabica coffee), coffee drinkers from Brazil to Asia are increasing consumption and willing to pay more for high-quality coffee (Bloomberg, 2011). As Starbucks is providing the good quality coffee, demand has increases for high-quality coffee. Since there is an increase for demand, the demand curve should shift outward from D0 to D1 at Graph 5.

Graph 5: The Shift of Demand Curve (2013)

Market Structure

Characteristic	Perfect Cometition	Oligopoly	Monopoly	Contestable Market/ Monopolistic
Number of Firms	Many	Few Dominant Firms	One with Pure Monopoly. Effective Duopoly in Many Cases.	Many
Type of Product	Homogenous	Differentiated	Limited	Differentiated
Barriers to Entry	None	High	High	Low Entry and Exit Cost
Supernormal Short Run Profit	Yes	Yes	Yes	Any Profit Possible
Supernormal Long Run Profit	No	Yes	Yes	Supernormal Invites Hit and Run Entry
Pricing Power	Price Taker	Price Maker but Interdependent Behaviour	Price Maker-Constrained by Demand Curve and Possible Regulation	Price Maker-but Actual and Potential Competition Limits Pricing Power
Non Price Competition	No	Yes (Important)	Yes	Yes (Important)
Economy Efficiency	High	Low Allocative but Scale Economics and Innovation	Low Allocative but Economies of Scale and Reinvested Profits. Risk of X-Inefficiency due to Lack of Competition	High Depending on Strength of Contestabilty
Innovative Behaviour	Weak	Very Strong	Potentially Strong	Strong

Table 1: The Characteristic of Market Structure (Riley, 2012)

Beside Starbucks, there is always many competitive firms in coffee industry, such as Old Town White Coffee, Ambrosia Coffee, Caribou , Dunn Bros Coffee, The Coffee Bean & Tea Leaf, Paparich, Chinese Restaurant (Cha Can Sat) witlh the most traditional Chinese coffee and Mamak stall with the most local taste. Fast food restaurant even promote the breakfast coffee, such as Mc Donald’s and Subway. The number of firms in coffee industry is many and they are having intensive competition among the firms. This can be compare between Row 2 of Table 1.

The coffee shop needs to differentiate among the others due to they are providing the similar products, such as latte, expresso, capucino and tea. Starbucks has a simple idea on setting their price which is customer willing to pay if they satisfy and enjoying the good quality (Demand Media, 2013). The quality control of Starbucks is strict to ensure that the source of coffee, customer service and the coffee products are always maintain a high standard (Demand Media, 2013). Besides, Starbucks has an intentionally to form their coffee lingo, such as “tall” for large, “grande” for medium and “venti” for small (O’ Connell, 2008). When the customer use the Starbucks’ coffee lingo to place order, the customer may feel an escape from the urban life and experience a charge of European sophistication. Besides, Starbucks is the only coffee firm which provides the drive-thru services to customers. Hence, Starbucks has differentiated itself among the competitors. This can be compare between Row 3 of Table 1.

There is no significant barrier of entry for coffee industry due to low entry and exit cost. Everyone who is interested in coffee industry may just start selling any kinds of coffee at anytime and anywhere. They can even start selling coffee at their own house. As the entry cost is low, even though the one want to exit the industry, there has no significant sunk cost. The entry and exit cost for the coffee industry is low as compare to others industry, such as agriculture, manufacturing, petroleum and gas and real estate. This can be compare between the Row 4 of Table 1.

Firms may make any possible profit for short run due to they are not at mature state due to the changes of variable input. As firms in the industry are making a supernormal profit (Graph 1), it will attract new firms to come in the industry because there is still have place for others to venture as well. However, if the firms of the industry are making a subnormal profit (Graph 2), it means, the firms is suffering a loss, some of the firms may leave the industry and venture other industry which is more attractive and profitable. This can be compare between the Row 5 of Table 1.

Graph 1: The Supernormal Profit of Monopolistic Firm. Graph 2: The Subnormal Profit of Monopolistic Firm.

As the market has regulate itself by the entering and leaving of the firm, the firm in the market will only earn normal profit (Graph 3) in the long run. This is tabulate at Row 6 of Table 1.

Graph 3: The Normal Profit of Monopolistic Firm

Starbucks has strong non-price strategy to do branding. The white and green Starbucks coffee cups are specially designed as a walking advertisement for itself. It has more penetration than advertisement on boards or TVs because the others can SEE the people are enjoying the Starbucks coffee. It is a solid evidence and prove that it is a worth customer buy coffee. It has evidenced by more than two trillion customers each year (O’ Connell, 2008). Besides, Starbucks also approaches customer by celebrating festival together. Starbucks will decorate their stores to lift up the festive spirit. The workers will also greet the customers with the element of the festival (Starbucks Corporation, 2013). Starbucks will offer customers beverages that attract the local example during the major festive seasons such as National Day (Merdeka) (Freebies Land Malaysia, 2013). Hence, Starbucks has strong non-price competition strategy. This can be compare with others at Row 8 of Table 1.

Figure 2: Starbucks is celebrating National Day with Malaysian by offer free upsize while buying a Grande Frappucino. (Freebies Land Malaysia, 2013)

As Starbucks as a firm in the coffee industry has many firms to compete, products are differentiates, low entry and exit cost, very important at non-price competition. Hence, it is a monopolistic market structure. This can be proved by Column 5 of Table 1.

Introduction

Figure 1: The logo of Starbucks, it is inspired by the sea featuring a twin tailed siren from Greek mythology (Starbucks Corporation, 2013).

Starbucks is an American global coffee company and coffeehouse chain. It has started a single store in Pike Place Market, Seattle, Washington as a roaster and retailer of whole bean and ground coffee, tea and spices. Starbucks mission is to inspire and nurture the human spirit-one person, one cup and one neighbourhood at a time (Starbucks Corporation, 2013). Today, the company has 18ooo retail stores in 60 countries and has connected with millions of customers (Starbucks Corporation, 2013). Starbucks Coffee Company has a joint-venture with Berjaya Starbucks Coffee Company to bring Starbucks in Malaysia (Starbucks Corporation, 2013). The first Malaysia Starbucks store is opened at 17^th December 1998 in Kuala Lumpur. In January 2012, Starbucks has successfully expanded around Malaysia with 140 stores (Starbucks Corporation, 2013). Starbucks provides a range of products for customers to enjoy in the stores, at home and on the go. The products included coffee, handcrafted beverages, merchandise, fresh food and consumer products (coffee and tea, ready-to-drink and ice-cream). Hence, Starbucks is in coffee industry.