Exercise 6-2) Competing as Starbucks

Competing as Starbucks

* Review articles about the operation of Starbucks Corporation coffee stores from the following sources:

·         Starbucks Gossip(http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html)

·         CBC News(http://www.cbc.ca/money/story/2008/07/01/starbucks-closures.html)

·         The Seattle Times(http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html)

* Think about the following questions and jot down some answers in your study notes:

1.    Why would Starbucks be considered part of a perfect competition market?

It is because there are many small buyers and sellers of whom are price takers spread widely. All various franchise companies and private small sellers exist in this market not to affect the demand and supply tremendously. Besides, quality of coffee is almost similar not to divide their tastes perfectly. Moreover, even now many coffee sellers appear and disappear depending on the situations like benefits.

2.    What are some main reasons for Starbucks to:

a.   realign their business practices.

b.  close a number of stores.

           

The size of Starbucks business was huge but the profit structure was not good because too many store focused in some area and they are cannibalized each store. It results to decrease the gross profit range of company. Therefore, headquarter of Starbucks need to do realign the profit structure for closing the non-profit stores.

3.    What impact do costs and profit making have on these decisions?

a.    Consider in terms of short-run and long-run costs. 

             In short run, severance costs and lease-termination cost occur and if some stores  

             which do business for a short time close, they lose money such as interior cost and

             annual franchise fee.  In long run, wage of store staff, monthly rental fee can be saved

             due to shut down not profit stores.

4.    Do you think coffee is too expensive at Starbucks?

a.    How have they managed to charge such prices?

b.    What would happen if they lowered their prices? Support your explanation with a graph.

Starbucks are managing the coffee cost as the level that they can achieve maximum

profits. In the case that total cost is lower than the revenue, they can reach the maximum profits.

  

     If the lower the price, then the revenue will decrease and the benefits also reduce.