North Greenville University Graduate School of Business



North Greenville University Graduate School of Business Assignment for Course:ECON5310Submitted to:Dr. GregorySubmitted by: Whitney S. BoozerB000003928965 Century Cir, Apt 1000-M Greenville, SC 29607864-455-7000 (work)864-404-5574 (home)Date of Submission: November 22, 2017Title of Assignment: Term Paper ProjectCERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any sources from which I used data, ideas or words, either quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course.Student's Signature: Whitney S. BoozerDishonesty and Plagiarism:The awarding of the university degree attests that an individual has demonstrated mastery of a significant body of knowledge and skills of substantive value to society. Any type of dishonesty in securing those credentials therefore invites serious sanctions, up to and including suspension and expulsion. Examples of dishonesty include actual or attempted cheating, plagiarism, or knowingly furnishing false information to any university employee. Plagiarism is defined as submitting anything for credit in one course that has already been submitted for credit in another course, or copying any part of someone else’s intellectual work, published or unpublished, including that of other students, and portraying it as one’s own. Proper quoting, using strict APA guidelines (as specified by your instructor), is required at all times. Your instructor may use plagiarism-detection software to identify instances of full or partial plagiarism.AbstractIn this research paper you will find an economic analysis based on concepts Starbucks Company used to control their brand loyalty. This paper goes into detail about how Starbucks uses it pricing power to remain the number one coffee industry. The original CEO of Starbucks, Howard Schultz’s methods used to create the business model of the coffee stores will also be explained in great depth. The new CEO of Starbucks will be introduced and his goals for the company will be compared to Howard Schultz’s vision. Starbucks’ two main competitors and how those companies tried to start a coffee war will be discussed. The use of modern technology to help grow the company will also be mentioned. Lastly, you’ll find recommendations to help enhance Starbucks stores even more to attract more business.Starbucks’ Use of Pricing Power to Influence Consumer Behavior Whitney S. BoozerNorth Greenville UniversityStarbucks Corporation is famous for being able to influence consumer behavior to control brand loyalty by its use of economic concepts. The company uses pricing power, price elasticity of demand, market demand, incentives, and technological innovations to keep their customers coming back for more. Although there were a couple businesses that tried to compete with Starbucks by selling coffee, they still couldn’t beat Starbucks. All of these economic concepts are what helped the Starbucks franchise be as successful as it still is today. The History of StarbucksStarbucks is a very popular, well-known coffee shop that has been around since March 31, 1971. It’s the world’s largest coffeehouse company with more than 20,891 stores across 62 countries. The first store was opened in Seattle, WA. The company was almost named Cargo House based from the novel, Moby Dick, but thanks to the continuous brainstorming of Starbucks’ cofounder, Gordon Bowker and fellow coffee impresario, Terry Heckler the name Starbucks was chosen. Gordon Bowker had remembered from working at an advertising agency alongside of Terry Heckler that names beginning with “St” were known to be strong and powerful brands (Luu, 2017). Starbucks offers a variety of over 30 blends and single-origin premium coffees, handcrafted beverages, merchandise, and fresh food Starbucks is known for their use of high-quality whole bean coffees. The company is the perfect place for business meetings, social gatherings, and for networking (Ehrenfeld, 2008). Howard Schultz’s VisionHoward Schultz, the impresario and original CEO of Starbucks, had a vision to recreate a European café into an American coffee shop that doesn’t feel like home or work, but a well-blended combination of both. His goal was to design an environment where the customers could come in to relax while staying as long as they want while sipping on a tasteful, high-quality cup of coffee that cost a little more than basic coffee stores. Schultz became a master of the phrase service design by determining what a business needed to do in order to set and meet the expectations of the customers it wants to attract. He came up with the idea of providing the option for consumers to personalize their coffee drinks by using hundreds of combinations such as a half-café latte with two shots of espresso. Howard Schultz struggled with the decision of leaving Starbucks a couple times due to the stress of needing to push harder for company growth. He juggled with the possibility of growth and scale interfering with his vision and identity of creating the perfect customer experience. Schultz loss many of his successors due to disagreements on the stores design. Howard knew that focusing on finances would ruin the atmosphere of the neighborhood coffee store that was supposed to leave its customers with a warm-feeling (Stewart & O’Connell, 2017).Howard Schultz’s philosophy was borrowed by many companies, including its competitor, Dunkin’ Donuts. Dunkin’ Donuts used Schultz’s concept when the company picked hot pink and orange to use for its company’s logo colors. Starbucks chose the color green because it’s a soothing color. Dunkin’ Donuts loves the use of bright colors and all of its stores use bright lighting as a representation of “grab-and-go,” which comes from its catch phrase: Americans runs on Dunkin. On the other hand, Starbucks uses cozy seats and dim-lighting as a way create a sense of relaxation with a library-like atmosphere (Stewart & O’Connell, 2017).Kevin Johnson’s GoalKevin Johnson inherited the Starbucks Company from Howard Schultz in April of this year. Johnson used to be the CEO of Juniper Networks and served as a board member for Starbucks for nine years. Johnson shares Schultz’s focus on using digital tactics to increase revenue in the company. He is also currently working on making sure the coffee trees that the company is receiving its coffee beans from are healthier trees which will mean cheaper coffee beans. Since Johnson took over the company, Starbucks serves 90 million customers each week and employs 250,000 people worldwide (Ryan, 2017). CompetitorsStarbucks has two main competitors which are Dunkin’ Donuts and McDonald’s. Both companies have been competing to expand their menu with various coffee drinks. Each of the businesses are eager to increase their businesses by opening up locations in various areas to reach more customers. The Starbucks Corporation grew extraordinarily fast and became the coffee industry’s number one leading business. Back in 2009 the NY Times published an article about Starbucks announcing to close 900 stores. This article made people begin to speculate that the company was either going out of business or being taken over by new management. The company ended up closing a total of 507 stores, but the reason was due to the country being in a recession. Starbucks’ second quarter net income had dropped 77% since people were spending less money. It was around this era when both of Starbucks’ biggest competitors tried to step in and remove Starbucks from the throne. High-quality coffee had been considered expensive for many years until Dunkin’ Donuts and McDonald’s began selling coffee as a way of trying to compete with Starbucks (White, 2017). Dunkin’ DonutsDunkin’ Donuts opened in the 1950s and became the first doughnut store to open. The only focus of the company at the time was selling doughnuts. Back then owners of the company wasn’t even thinking about adding coffee to their stores to go along with their doughnuts. As years passed Dunkin’ Donuts began to lose business due to other doughnut companies entering into the market to compete. It wasn’t until around 1990s when the company began to consider designing a coffee model to their business. In the year of 2006, Dunkin’ Donuts officially declared war against the Starbucks Corporation. Dunkin’ Donuts had begun to produce drinks with a rich product line and higher quality (Sherman, 2017). The company started using traditional advertisements while Starbucks was only relying on word of mouth advertising. Dunkin’ Donuts became referred to as the cost-effective premium coffee seller because compared to Starbucks they were providing the same quality coffee drinks except with more reasonable prices. Eventually even with Dunkin’ Donuts being the name of the company, it started receiving majority of its revenue from selling coffee in 2004. Dunkin’ Donuts was able to steal those original Starbucks customers who loved the coffee Starbucks offered, but hated their prices (White, 2017).McDonald’sStarbuck’s latest competitor is McDonald’s. McDonald’s entered into the coffee market in 2009. It all started when McDonald’s launched the McCafé. The launch of this new coffee drink was definitely a game changer for the coffee industry. By 2015 McDonald’s was bringing in more revenue (approximately over $26 billion) than Starbucks and Dunkin’ Donuts. When McDonalds introduced its iced and flavored coffee drinks it immediately started attracting customers (Sherman, 2017). McDonald’s knew they had to think of a way to make their coffee products appear more attractive than Starbucks and Dunkin’ Donuts, which is why they decided to provide cheaper prices than both companies. The company set it prices for both hot and iced coffee at one buck. The McCafé lattes were being sold two dollars lesser than Starbucks. This major price decrease gave McDonald’s a price advantage, because now consumers could purchase coffee drinks that tasted just as good for way less than Starbucks (White, 2017). Market DemandStarbucks exceeds exceptionally well in market demand. Consumers don’t hesitate to pay a few more bucks for coffee because they know they are receiving a cup of great quality coffee. Even with Dunkin’ Donuts and McDonalds being in the coffee market and trying to compete by offering cheaper prices, they’re still no match for Starbucks. Customers are continuously wanting more which is why the company is expanding even more by opening more stores around the world. Starbucks has decided to create more drive-thru and express stores specifically in the outer edges of urban and suburban areas (Forbes, 2017). Technological InnovationStarbuck’s use of technology has assisted in revenue in the business. The company offers high-speed Wi-Fi in all of their stores. In 2011 Starbucks launched a free app that allows its customers to pay by scanning their device. Customers can download the app on their Android, iPhone, and Blackberry devices. The app provides customers with the option to upload or reload money onto gift cards inside of the app and use it to pay for their food, drinks, and other specialty merchandise (Adkins, 2017). The app even has a mobile order and pay feature that allows you to make a purchase without even standing in long coffee lines. Another cool feature on the app is that it allows you to monitor your rewards. Customers gain stars every time they make a purchase, and when they reach a certain amount they are rewarded any food or drink at any size and price for free. Starbucks has also teamed up with Spotify to provide a rich, digital music experience in both in-store and out of store. Amongst other partnerships with Starbucks are the New York Times, USA Today, and the transportation Lyft app (Roderick, 2015).During the fall of 2016, Starbucks introduced a web-based series that uses video, podcasts, and text to tell stories about ten ordinary people creating a positive change called Upstanders. The web-series featured stories of inspiring Americans that often get ignored by traditional news organizations. Starbucks’ use of this unparalleled platform helps to enlighten how the company’s thinking about content has evolved in today’s mobile and social world. Upstanders was designed to embrace Starbuck’s brand promise by luring consumer engagement by not focusing on selling their coffee or other products. The company’s motive for using media to create that personalized effect by broadcasting their consumer’s experiences. Media is the perfect tool to use to be creative by way of entertainment or to do advertisement for a business. The Starbucks Corporation knew that when they created the web-series that the public wouldn’t care about who actually was behind producing the content, but how transparent, informative, genuine, and entertaining the media content is (Lauria, 2016).Almost ten years ago, Starbucks first began aiming to be a cultural tastemaker by designing all of its stores to be a retail channel for books, music, and movies on a mass scale. Starbucks use to promote novels and movies in its stores by advertising them on their coffee cup sleeves and coasters. Once it used the Lionsgate movie, Akeelah and the Bee to advertise on their cups as a way to encourage their customers to want to learn how to spell challenging words, since the movie was based on a girl winning a spelling bee. Starbucks even later went on to create Starbucks Entertainment, an in-house media division (Lauria, 2016).Later, Starbucks started to focus on incorporating music into their brand by adding it to their stores. The idea of adding music ended up being a huge part of the atmosphere in all of the stores. Eventually, the company began offering a selection of CDs that were located at the front of the stores by the cash registers for customers to purchase. As time went on the coffee company added digital music to its environments. Starbucks bought Hear Music, a digital music company, and launched its own record label which was able to sign its own artists. However, by 2015 Starbucks realized selling CDs wasn’t such a good idea after all and removed the CDs from their stores (Lauria, 2016).Today Starbucks has become the key leader in utilizing the social aspect of social media by using various media platforms. The company uses Instagram to advertise its content that its customers have submitted in. There is also a social platform called My Starbucks Idea that provides its customers with a way to submit new ideas for food, drinks, and merchandise. The Starbucks Rewards program provides access to download free music, the latest deals, and other perks via Android and Apple apps. It’s known that the coffee company receives over 25% of its transactions through its app. The reasoning for Starbucks creating the app is so that the company will have a way to gather data while learning about its customers’ interests and behaviors (Lauria, 2016). Price Elasticity of DemandNormally if you increase the price of a product, sales will slowly decrease. This idea is definitely false for the Starbucks Corporation. Starbucks’ use of price elasticity of demand has been a great economic concept used by the corporation. The business continues to do well in sales even after price increases because they’ve done a wonderful job in establishing their customer base. According to a representative of Starbucks the company has a strategic plan to increase their prices by about 1% to take care of labor, rent, and other business costs. The prices of their beverages go up from 5 to 20 cents to help balance out business costs in order to run the company effectively to meet the consumer demand. Research shows that coffee prices have decreased on average of 42% every year. Starbucks withholds pricing power because it is the dominate coffee industry in the world. The social strategy of Howard Schultz making the company more than just a place to go for a cup of coffee, but to conduct business was an excellent idea to help boost sales. Schultz wanted to create an atmosphere that was a mixture of both work and home by selling addictive coffee products. Today, Starbucks is seen as the place to meet on short notices and people often refer to it as a “zone of attraction.” All of the Starbucks stores provide wireless charging stations for smartphones and laptops because they want their customers to stick around to work on school work and business work with the hopes of their consumers continuously purchasing snacks and drinks as time passes. All of these characteristics play a role in giving the company pricing power (Meyers, 2015).IncentivesOne of the great things that Starbucks also offer besides their delicious coffee is their rewards program. Starbucks’s reward programs allow their customers to actually save money from spending so much money there. The programs were definitely designed to create brand loyalty because it’s basically a way of showing appreciation to the customers for remaining a customer. Starbucks’ customers who have made purchases at one of its stores over a long period of time will receive the opportunity of being a Gold Card Member. Gold card members receive coupons on regular purchases in addition to every 12th drink free. The free drink can be of any beverage and size which is a definite bonus. The mission of Starbucks Company is to bring high-quality coffee to numerous locations in the world while using their rewards programs to maintain customer loyalty and revenue (Krikorian, 2014)Macroeconomic FactorsThe macroeconomic factors facing Starbucks is that it relies on its revenue to come from household disposable income. People don’t mind spending around 4 bucks for a cup of coffee as long as they can financially afford to. When the recession hit the United States back in 2009, Starbucks net income and profitability margins took a tremendous hit. The company began to see its clientele drop drastically because many people became unemployed which means they wasn’t able to afford and expensive cup of coffee from Starbucks. The per capita coffee consumption was another macroeconomic factor that played a part in the demand for coffee. As the economy began to slowly heal from the recession families were able to build their house hold disposable income back up, and were soon back in Starbucks purchasing that expensive cup of coffee again (Pestle Analysis, 2015). Impact on Political FactorsOne of the main political factors impacting Starbucks is their sourcing of raw materials. Starbucks has to make sure it follows the laws and regulations of the countries that they buy their raw materials from to make their coffee. It is Starbucks responsibility to observe the political stability of the countries they’re buying their raw materials from. Another political factor is regulatory pressures within the United Stations home market. Employment laws and tax polices also play a major role in the hiring of Starbucks’ workers and the taxes they add onto their products to sale (Pestle Analysis, 2015). Impact of Socio-Cultural FactorsThere are several socio-cultural factors that Starbucks must take into consideration when determining methods to help grow their company. One socio-cultural factor is determining who they target consumers will be and whether or not that group will change. The generation known to as the Baby Boomers is slowly fading out, which means Starbucks will be slowly seeing a decrease in their older consumers. This means that management must make any necessary changes to reel in the Generation X and the millennial consumers. Starbucks must research the lifestyles of the population and incorporate strategies that will attract their younger generations. The company has to pay attention to their customer preferences and design a menu that attracts their new customers’ taste buds. The consumers’ level of education is another important feature that plays a huge role in the environments of the local stores (Pestle Analysis, 2015). Impacts of Legal FactorsStarbucks has to be careful not to violate any laws or regulations in the places where they buy their raw materials. The business must be observant whenever they bring a new coffee product onto the market and take into consideration that product’s caffeine consumption level to ensure that it doesn’t break any policies or regulations created by health officials. Starbucks must stay up to date on trade and licensing regulations pertaining to the industry. All of these legal factors influence the impact it could have on Starbucks if the company doesn’t take them into contemplation (Pestle Analysis, 2015). Market StructureStarbucks definitely fits into the monopolistic competition market structure. It is easy to enter into the coffee market because all one need is an espresso maker and coffee beans. The challenging part of operating a business in the monopolistic competition market is that business leaders have to make sure to come up with an idea that makes their company unique from its competitors. The monopolistic part that makes Starbucks out shine its competitors is the customer service that customers receive from the baristas, the quality of the coffee, and the design of the stores. Starbucks’ competitors tried to compete by changing the taste of their coffees and offering lower prices. If it wasn’t for Howard Schultz carefully designing the structure of the business Starbucks might have suffered a great deal when Dunkin’ Donuts and McDonald’s broke the entry barriers to get into the coffee industry (Schwartz, 2013). Pricing ModelThe Starbucks Corporation receives its revenue from three main sources which are company-operated restaurants, food service, and licensed stores. The company-operated restaurants brings money into the business because simply for the fact that Starbucks manages every aspect of its stores. Starbucks operates four major brand names which are Starbucks, Teavana, Seattle’s Best Coffee, and Evolution Fresh. It was reported in 2014 that the company being in charge of all of its restaurants brought in 79% of the company’s revenue alone. The food service revenue consists of consumer packaged goods such as the coffee, tea, snacks, and other specialty beverages that Starbucks sale to their consumers on a daily basis in its retail stores. The food service brought in 11% of the company’s revenue in 2014. The licensed stores revenues come from its royalties and license fees for all of Starbuck’s franchise coffee locations. According to the 2014 research study, Starbuck’s received approximately 10% in revenue for its licensed stores (Jones, 2014). Cost StructureThe main cost driver for Starbucks is the price spent on each pound of the coffee beans. The two most popular coffee beans that Starbucks use are Arabica and Robusta. The Arabica coffee bean has a milder flavor compared to Robusta which is why it is the most consumed coffee bean species. Starbucks purchases Arabica beans more than Robusta coffee beans due to its weaker flavor mixing more easily to create various blends of coffee in all product platforms (Krikorian, 2014).The cost structure of Starbucks is pretty straightforward designed like the typical high-end fast-casual restaurants like Panera Bread and Chipotle. The company’s massive market capitalization is what allows it to influence economies of scale. Other businesses in the coffee industry boast strong operating cash flows and high capital expenditures related to things such as kitchen maintenance and vertical integration efforts. Starbucks also doesn’t have a specific dollar amount that they spend on producing one cup of regular coffee, but researchers speculate approximately anywhere from twenty cent to seventy-five cents. Starbucks appears weak when looking at its costs and operating margins in comparison to Dunkin’ Donuts. However, Dunkin’ Donuts income statement doesn’t include the full cost of coffee beans like Starbucks’ income statement does. Recent studies have revealed that Starbucks has been repurchasing its own shares while paying dividends to increase returns to investors. In fact, Dunkin’ Donuts revenue comes mainly from royalties that its franchises pay to the company. Dunkin’ Donuts also tell their owners where to purchase inputs, and even lays claim to a percentage of their profits. This tactic alone benefits the company, but the business still relies on the coffee bean commodity prices just as much as Starbucks’ performance (Krikorian, 2014). RecommendationsThere are a few recommendations I would make to Starbucks. I think Starbucks should consider selling wine, because many customers enjoy a glass of wine while reading. Wine also is known to relax the mind which would make it fit in perfectly with the Starbucks atmosphere. I don’t recommend selling any other alcoholic beverages besides wine, because all others could cause behaviors that would completely ruin the entire vibe of the atmosphere. Another recommendation I would make is to add a top level that consists of a miniature library-store so that customers who forget to bring a book could go upstairs to purchase one then return downstairs to enjoy a cup of freshly brewed coffee. It would also be nice if Starbucks added more paintings to their walls to give it more of a “home” vibe.ConclusionIn conclusion, Starbucks Corporation has done a tremendous job of using economic concepts to ensure consumer brand loyalty. The company knows how to use pricing power to make their customers still want to spend an extra few bucks to not only receive an extraordinary cup of coffee, but to witness the cozy atmosphere of its stores. Starbucks has utilized social media quite well by designing its Starbucks Rewards program to show appreciation to its loyal customers by rewarding them with free drinks or snacks of any size of their choice. Starbucks has an excellent understand of market demand and knows just the right moves to make at the right times. No matter how many more companies try to add coffee to their businesses, Starbucks has set the bar pretty high to beat.ReferencesLuu, Christopher. (2017, July 5). Starbucks Could Have Had A Very Different (& Very Bad) Name. Retrieved from . (2016, September 19). Let’s Look At Starbucks’ Growth Strategy. Retrieved from , Julia. (2017, October 26). Who Are Starbucks’ Main Competitors? (SBUX). Retrieved from , Walter. (2017). Starbucks Competitors: The Big Three. 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