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Research Analysis For Business

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Macroeconomic Analysis and Strategies to be Adopted by Starbucks

Introduction

Starbucks is a publicly traded company that retails specialty coffee. Currently, the company operates in more than 50 countries across the world. Starbucks roasts high quality whole beans coffee and produces tea beverages and handcrafted coffees. This is with an aim of maintaining the company’s standards and establishing a unique brand that drives sales. Currently, the company occupies 20% of market share in United States (Meyer, 2015). However, the market share has been declining recently following increased competition from the close competitors.

Starbucks operates in household commodity market where it sells tea beverages and coffee products. Its market structure is that of perfect competition where buyers and sellers of the commodities are so numerous and there is no barrier to entry. Starbucks’ primary competitors include specialty coffee shops and quick service restaurants. There are numerous competitors that Starbucks faces in most of its markets in which it operates. However, Starbucks understands that customers continue to choose their products based on product quality, service and convenience (Meyer, 2015). This provides competitive advantage for Starbucks. However, Starbucks continues to receive strong competition especially in ready-to-drink coffee beverages and the quick service restaurants in United States. In the coffee market in which Starbucks operates, there are no barriers to entry. This means that any business small or large can decide to produce specialty coffee

Current trend in macroeconomic indicators

Business cycle and inflation

It is approximate seven years since the 2008-2009 economic crisis. Since then, the country’s economy has been expanding and growing. In 2016, the United States economy grew at a rate of 1.9%. Although this is relatively below the ideal growth rate of 2 and 3%, the economy can be said to be in the expansion stage of the business cycle (Amadeo, 2017). This is because at the expansion stage, the economy is growing healthy and slowly expanding. The current inflation rate in United States is 2.4%. This means that the consumers’ prices increased by 2.4% which was relatively higher as compared to the 2016 inflation rate of 2.1% (Amadeo, 2017). This means that the dollar has weakened slightly and items have become more costly. This therefore means that as the price of goods and services increases, the Americans’ purchasing power of dollar is falling. This is also likely to reduce the purchasing power of consumers as the costs of various items increases.

Real gross domestic product and unemployment rate

In 2017, the rate of unemployment fell to 4.4% since the numbers of those who are unemployed in United States reduced by 146 thousand to 7.1 million. A declining unemployment rate means that more people have money and resources to purchase given goods and services (Amadeo, 2017). When it comes to real gross domestic product (GDP), the country has been registering a growth in GDP. In 2015, the United States GDP was $18036.65 billion. This was approximate 29.09% of the economy across the world. This indicates that the economy of the United States is growing rapidly and it is within the expansion stage of the business cycle.

Federal funds rate and current rate of borrowing

Federal funds rates in the Unites states is the rate of interest which credit unions and banks lend reserve balances to other institutions. The current Federal funds rate is relatively low and stands at 0.75%. This is an indication that it is not expensive to borrow money and makes it a suitable source of short-term loans. Currently, the prime rate stands at 3.50 (Amadeo, 2017).

Trend of demand in the United States that Starbucks Company should observe

The consumer price index was up by 0.1% between February and March 2017. The consumers' price increased by 0.2% following increased inflation and food-at-home prices reduced in 2016 as compared to 2015. This was the first annual decline in prices of products within the supermarkets. The overall decline of prices during this period was as a result of increased dollar strength, deflated oil prices and reduced transportation costs. In 2017, the price for supermarket products is likely to increase due to inflation

Starbucks in order to be able to generate enough profit will need to increase its prices for specialty coffee and other products by 1%. This means that if the coffee products cost 8 dollars, they will need to increase the price by 0.08 and this will costs $8.08. This is important in order to be able to meet the costs of production which has been increased by inflation.

How variable and fixed costs affect Starbucks decision

Starbucks decision to increase its product prices is mainly driven by the variable and fixed costs. As inflation continues to increase, the costs of the raw materials in United States are increasing. At the same time, the weakening dollar due to inflation is calling for increased salaries for the workers, thus increasing the labor cost. With such factors into consideration, Starbucks has to increase its products prices in order to be able to meet these additional costs and achieve a healthy profit (Richards, 2014).

Starbucks recommended business strategies

Starbucks is a company in United States that continues to face major challenges related to increased competition especially from restaurants that sell specialty coffee products. At the same time, the company continues to face major challenges related to increased competition from wholesalers and retailers selling coffee products such as Walmart (Richards, 2014). For this reason, there is need to adopt both pricing and non-pricing strategies in order to compete effectively within the growing U.S market and within an industry that has no barriers to entry.

When it comes to pricing strategy, Starbucks needs to use penetrating pricing strategy. This is an important strategy which will involve lowering the prices of its products in order to be able to penetrate various markets and in order to occupy a higher market share. Although inflation is increasing, Starbucks will need to adjust their prices slightly lower than the price of their close competitors. For example, if the prices of the competitors increase by 1 dollar due to inflation, Starbucks will need to increase their price by 0.4 dollars for example. This will make their price relatively lower than that of their competitors (Richards, 2014). For this reason, Starbucks will need to constantly review the prices of its close competitor’s products in order to understand how to adjust their prices. For non-pricing strategy, Starbucks will need to adopt quality. This will involve producing products that are of high quality than those of the competitors. They will also need to adopt the product differentiation strategy and aim at improving the branding. This is in order to be able to occupy a high market position.

In future, Starbucks will need to increase their production since the economy of America is rapidly growing and providing more opportunities (Kimmons, 2016). At the same time, the unemployment rate has greatly decreased and this means that more people will be in a position to purchase Starbucks' products. Furthermore, Starbucks can increase its production and should borrow small loans since the lending rates at the Federal Reserve have reduced.

References

Amadeo, K. (2017). Why the Economy Is Better Than You Think. The Balance. Retrieved from https://www.thebalance.com/u-s-gdp-growth-3306008

Kimmons, R. (2016). Advantages & Disadvantages of Non-price Competition. Smallbusiness.chron.com. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-nonprice-competition-10048.html

Meyer, P. (2015). Starbucks Coffee Company’s Organizational Structure - Panmore Institute. Panmore Institute. Retrieved from http://panmore.com/starbucks-coffee-company-organizational-structure

Richards, L. (2014). Different Types of Pricing Strategy. Smallbusiness.chron.com. Retrieved from http://smallbusiness.chron.com/different-types-pricing-strategy-4688.html