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Starbucks is an American international coffeehouse chain and coffee firm located in Seattle, Washington. It is the most famous coffeehouse firm in the world. Although the firm has branches in almost every part in the US and other nations around the world, there are various challenges it faces which would affect its competitiveness and profitability:
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- Price – The price of a commodity influences its demand (Barron, 2006). The higher the price, the lower the demand and vice versa. Coffee has substitutes such as McDonald’s McCafe. If Starbucks raises its price, people will start taking McDonald’s McCafe which means the firm will sell less hence a reduction in profits.
- Technological innovation – Any firm that does not use the most advanced technology in its production process makes little or no profits in the long-run. It produces less and its production costs go up. With high costs and little to sell, profits will reduce greatly.
- Price of related goods. Starbucks’ coffee is relatively expensive. With the current harsh economic conditions, people find it hard to spend too much on coffee while there are other similar products such as McDonald’s McCafe and tea whose prices are cheaper. High coffee prices push customers away meaning Starbucks’ sales reduce and hence its profits.
- Price elasticity of demand - This measures the responsiveness of a change in quantity demanded due to change in price (Gupta, 2010). Considering that the price of coffee at Starbucks is high, a little increase in its price would result to a large drop in the number of consumers of its product, and vice versa. The previous case would lead to considerable reduction in the company’s profits.
From the above points, it is clear that Starbucks would be less competitive and make losses in the long run.
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