Research Analysis for Business

Starbucks Coffee Company started in 1971, as a roaster and retailer of whole beans and ground coffee, tea, and spices in a store located in Seattle Pike Place Market. Currently, Starbucks has almost 30,000 stores in 78 countries. It is a well-recognized brand with a mission "to inspire and nurture the human spirit - one person, one cup and one neighborhood at a time" (Starbucks Company Profile, 2019).

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Market Structure, Market Share, Competitors, and Barriers to Entry

Market structure is a sum of market characteristics within which the company operates. Monopolistic competition is one of these structures. It is characterized by a large number of companies producing differentiated products. Nonprice competition is widespread in this type of market structure. There are low barriers to enter or exit in monopolistic competition. Starbucks operates in a market structure of monopolistic competition. While Starbucks stores are widespread, there are many other coffee retailers, often offering their services right next door. Dunkin' Donuts, Keurig, and McDonald's are Starbucks' current largest competitors. However, Starbucks is still in a significant lead with over half of the market share.

(Starbucks is maintaining its competitive edge, 2016)

As with many other markets, there are barriers to enter the coffee market in the United States. Some of these barriers are higher than others. Initial investment to start a local coffee shop is one of the lower barriers. Brand recognition on a larger scale, however, is a much higher barrier that e new company will likely not be able to achieve quickly. Brand loyalty is another high barrier in the coffee industry. Customers often have a high preference for Starbucks coffee to coffee from any other coffee shop. The large scale of operation also gives Starbucks a competitive edge when purchasing supplies and ingredients. It can access better quality coffee and a more significant number of suppliers all over the world (Pratap, 2019).

Trends in Current Macroeconomic Indicators

Current Stage of the Business Cycle

Starbucks Coffee Company started in 1971, and it incorporated in 1985, it went public in 1992 (Starbucks company profile, 2017). The number of its stores has been growing steadily within all this time. In the past three years, the company has increased the number of stores from around 25,000 to almost 30,000. While more than half of the stores are located in the United States, the other half is spread out around the world. As of September 30, 2018, China has more than one-third number of stores in the United States (Form-10K, 2018). Net income of Starbucks for this fiscal year is $4,518,300,000, which is $1,633,600,000 higher than the year of 2017, this is an almost 57% increase in just a year, and 64% from three years ago (Annual income statement, 2018).

(Form-10K, 2013)

(Form-10K, 2014)

(Form-10K, 2015)

(Form-10K, 2016)

(Form-10K, 2017)

(Form-10K, 2018)

(Annual income statement, 2018)

Real Gross Domestic Product (GDP)

GDP has been going up for the last three years. Starbucks contributed to this growth. The number of cups of coffee sold could be a good indicator of how the economy is doing. When the GDP is rising, people spend more money on goods and services. Starbucks product is a part if this category. If people are doing well financially, they will have that cup of morning coffee out, if times are tough, they will brew it at home.

(U.S. Bureau of Economic Analysis, 2019)

Inflation as Measured by the Consumer Price Index (CPI)

The consumer price index is used to measure inflation. CPI rates have been going up over the last three years. So were Starbucks prices. It has raised its prices by 15-20 cents a year over the previous few years (Settembre, 2018).

(U.S. Bureau of Economic Analysis, 2019)

Unemployment Rate

Unemployment rate shows how widespread unemployment is, and it has been going down steadily over the last three years. Starbucks is a large company and hires many employees. Its number of employees went from around 140,000 three years ago to over 180,000 as of 2018 (Pratap, 2018). The lower unemployment rate also means that more people have jobs and can afford such luxury as a coffee at a coffee shop. Lower unemployment rate contributed to Starbucks growing profits.

(U.S. Bureau of Economic Analysis, 2019)

(Pratap, 2018)

Federal Funds Rate and Current Rate for Borrowing Funds (Prime Rate)

Federal funds rate has been going up during the last three years. The prime rate is the rate that banks charge to their most creditworthy customers. It is linked to the federal fund rate. For the general population, it means that borrowing money has been getting more expensive. Credit card rates, mortgage rates, and car loan rates are all increasing. For businesses, it means that it costs more to borrow capital, which means, profitability is going down. Despite growing federal fund and prime rates, Starbucks has increased its profitability over the last three years.

(U.S. Bureau of Economic Analysis, 2019)

(U.S. Bureau of Economic Analysis, 2019)

Trends in Demand

Demand for Starbuck coffee has been going up over the last three years. It is evident by the number of stores that Starbucks has been opening up domestically and internationally. Another evidence of it is Starbucks growing annual sales. In 2016, Starbucks sales were $21.31 billion; in 2018, it was $24.72 billion, that is a 16% increase (MarketWatch, 2019). In the last two quarters, sales went from $6.3 billion to $6.63 billion, that is a 5% increase.

Demand for single served coffee has been going up not only in the United States but also around the world. For example, Starbucks opens a new store in China every 15 hours (Gigliotti, 2018). Last year, it opened its first store in Milan, where it will have to work hard to convert Italians from quick espresso at the bar, to an American style coffee. Currently, most of the customers there are international tourists that are familiar with the brand already.

Even at almost 30,000 stores worldwide, Starbucks still has excellent growth potential. Due to recent economic growth in Asian countries, the demand for Starbucks coffee is increasing. In countries like Thailand and Vietnam, holding a Starbucks cup is often viewed as a status symbol. However, American style stores will not function optimally in every culture. As Starbucks expands, it will have to take into consideration the culture and traditions of a new country.

(MarketWatch, 2019)

(MarketWatch, 2019)

Price Elasticity of Demand

There are several substitutes available for Starbucks products. Starbucks is already offering a wide variety of coffee substitutes like teas, juices, and smoothies. Every Starbucks store uses similar technology. As new technologies and products become available, they pose competition for Starbucks. For example, when smoothies started gaining popularity, Starbucks had to adapt and install smoothie technology in its stores. Another reason for Starbucks popularity is that it positioned itself as a place where adults can "hang out." As craft breweries and gourmet wine shops become more popular, they present competition for Starbucks.

Currently, food products make up 20% of Starbucks sales (Pratap, 2019). For some customers, food choices are essential when deciding where to go. With Panera Bread Company and McDonald's just around the corner, customers often choose them. For Starbucks to become more competitive in the future, it will have to expand its food menu and increase its food sales.

Home brewed coffee is another substitute that Starbucks customers can turn to. To address this potential substitute the company recently started selling its whole and ground, flavored and unflavored coffee beans in most grocery stores and supermarkets.

Starbucks offers a premium product and experience of drinking it at a premium price. Its product is price-inelastic, Starbucks increases its prices, but customers are still paying for it.

Impact on Variable and Fixed Cost on Output Decision

Starbucks, like any other business, has variable and fixed costs. Examples of fixed costs are rent, administrative expenses, and equipment. When opening a new store, the cost of rent always has to be taken into consideration. To control fixed costs, Starbucks closes underperforming locations every year. Some variable costs are under control for Starbucks as well. Coffee beans are only a small portion of Starbucks overall costs, but the company buys it in a large quantity, therefore, at a significant discount. Same goes for other raw ingredients.

Challenges of Expansion to a Foreign Location

Organizations expand a business to a foreign location as a result of many reasons. An organization may decide to expand to a new foreign location to access wider markets. The expansion offers a business the opportunity to reach more consumers and thus increasing its sales. Organizations also venture into foreign markets to gain a competitive advantage over their competitors. For instance, an organization may choose to expand its markets to a location whereby their competitors do not operate. This provides an opportunity for an organization to build strong brand awareness with consumers in the foreign market before its competitors. International expansion also provides an organization to acquire access to new technologies and the industry ecosystem. This in turn significantly increases the operations of an organization.

On the other hand, international expansion provides an organization with the opportunity to access new talent pools. Organizations enjoy the unique advantages of international labor in terms of increased productivity, diverse educational backgrounds, advanced skills, and unique organizational cultures. Lastly, businesses may consider expansion into foreign markets to access the additional investment opportunities which are offered in the foreign markets. The international expansion provides the organization an opportunity to forge important connections and develop new resources by operating in global markets.

This report section will discuss the foreign expansion of Starbucks Corporation into Italy. Starbucks is an American coffee company which has over the past few decades expanded into the international markets. The section will discuss the current global economic condition and their effects on macroeconomic indicators in Italy and provide a forecast for population growth, GDP growth in the country, GDP per capita growth, sales growth, and export growth. The secton will also discuss the supply chain challenges and provide a recommendation to Starbucks for whether for or against an expansion in Italy.Global Economic Condition and Local Macroeconomic Indicators in Italy

Italy, or the Italian Republic, became a nation-state in 1861. As of 1946, it became a democratic republic. Its large urban centers are Milan, Rome, and Naples. Italy's population is 62 million people, 80% of whom are Roman Catholic. It has the third largest economy in the European Union. Italy is distinctively split into industrial north and agrarian south. The northern part is dominated by private companies, while the southern part is highly subsidized. The Italian economy is driven by the manufacture of high-quality consumer goods produced by small and medium-sized enterprises, many of them family-owned. Large underground economy (agriculture, construction, service sectors) accounts for 17% of Italy's GDP. The country has exceptionally high public debt, reaching 131% of its GDP in 2017. Overall unemployment is 10.5%, but youth unemployment is exceptionally high at 37%. Italy's GDP has been slowly growing by 1-1.5% a year for the last four years, but it d...