Analysis of Starbucks microeconomic and macroeconomic environment in the UK market

Analysis of Starbucks microeconomic and macroeconomic environment in the UK market

Starbucks is the leading American owned coffee corporation, as well as the coffee house chain. The corporation was initiated in the year 1971 in (Seattle) Washington. Starbucks is widely described as second wave coffee. The company is regarded as the leading worldwide coffee company chain. The corporation operates in 75 countries with approximately 30,000 locations. Its outlets serve both and hot coffee drinks, whole bean coffee, and some tea products to customers. Starbucks provides a wide variety of products such as beverages, brewing equipment, coffee beans, and sandwiches as well as snacks. Over the years, the company has been incurring various production costs in the process of creating its output. Variations in production costs have affected the firm profitability and overall market. The company’s key competitors are Caribou, Dunkin Donuts, and McDonald’s. The economic environment of any organization refers to a set of economic factors such as changes in interest rate, inflation rate, exchange rate, employment, and productivity.

It is essential to analyze the effects of microeconomic and macroeconomic environment on business. Economic theory will be applied in examining the nature of the UK economy.  Macroeconomic data will be used to characterize the economy by considering fluctuations in economic growth, exchange rate, and interest rates effects on cost structure, product demand, and profitability. Secondly, the Starbucks market structure will be analyzed by considering the microeconomic environment in which the firm operates. Finally, the paper will explain UK regulatory features and policies that affect Starbucks macroeconomic environment.

The United Kingdom coffee market is steadily expanding. Traditionally, the country was said to be a tea consuming kingdom. However, a coffee consuming culture has taken over the nation. As a result, the United Kingdom coffee market is indispensable and significantly contributes to the economy. In the morning, the majority of the population visits either coffee shops or coffee vending machines to enhance their daily energy — currently, there 95 million coffee cups taken in the UK regularly. In 2019 there was a 1400 specialty coffee location, which is projects to increase to about 2500 by the end of this year.

The market has an old-style traders chain whereby coffee bean has to pass through various stages before being available for consumption. The process being in coffee-producing countries like Columbia, Brazil, and Ethiopia, which proceeds with smallholders as well as local traders. It then proceeds to agents who eventually sell it to UK importers.  United Kingdom coffee market is categorized into out home consumption like coffee shops and in-home use such as supermarkets, but they are rapidly expanding. More than of the country’s market is controlled by coffee giant chains where Starbucks is one of them. In the European continent, the nation’s coffee market is ranked as the 5^th largest consumer market.

Market structure is the physical features of the market whereby a firm engages in. Entry barriers determine various types of market structure and each market structure, number of firms, and product differentiation. Starbucks operates in an oligopoly market structure whereby a considerable market share (total sales) is controlled and dominated by a few numbers of firms (Singal, 2019). There are only a few firms that control a significant market share. An oligopoly market structure is said to have a concentration ratio of five firms of at least 50%. This implies that the UK coffee market is dominated by five firms having an overall share of more than 50%. The retail coffee market is dominated by Starbucks, Café Nero, and Costa Coffee.

The interdependence of coffee firms characterizes Starbucks’ entire market. Since a few firms dominate the market, every firm is aware of its competitor’s actions. Interdependence among the firms implies that they can make vital decisions in response to other decisions. Moreover, Starbucks is the largest company in the UK coffee market. The corporation’s management in the oligopoly market has to be in line with its competitor’s decision updates. After that, the firm makes it economic decisions in response to their competitors. Secondly, the market is characterized by entry barriers, which makes it difficult for new entrants. Starbucks markets can be said to be oligopoly since it has restrictions that allow the firm to gain a considerable market share. However, these barriers are not similar to those exhibited in a monopoly market structure since they are considerably less. These entry barriers encompass both economies of scale and brand loyalty. Lastly, firs in the markets have differentiated their coffee products, which result in non-price competition.

The existing firms in the market have already taken advantage of economies of scale scope as well as product differentiation, which poses difficulties to any willing or new entrant. Additionally, Starbucks has already created a high-quality Frappuccino brand, which is widely recognized by many consumers. Hence, it becomes difficult for coffee consumers to accept new or emerging brands; thus, new entrants are restricted from entering the market. Consumers have behavior in such a way that makes them prefer purchasing existing product brands as opposed to new ones. Through the economies of scale by Starbucks and other leading firms, they can produce with considerably lower expenses (Tejvan Pettinger, 2017). Economics of scale arises from the bulk purchase of raw materials (coffee beans) and bulk transportation and sale of output benefits. The reduction of expenses means that the firm can sell its output to consumers at fair prices. For instance, in a case where there is a new entrant Starbucks and other leading companies may create an uncertain environment by lowering its produce at levels that are not possible for the entrant. As a result, to the price decline, due to economies of scale, the entrant sells its produce at significantly higher prices. Likely, entrant does not enjoy economies of scale hence difficulties in gaining market share. New firms may be willing to access the market, but they are unable due to the existing barriers.

In an oligopoly, market structure firm’s competitive behavior depends on its objectives, government regulation, and entry barriers. In the Starbucks market there are there possible outcomes. These outcomes include price wars or competitive oligopoly, collusion, and stable prices — firms collusion results in the generation of higher price levels.

By considering the nominal term gross domestic product (GDP), the UK economy is ranked as the 5^th largest in the world as well as 2^nd ranking in the European Union. Generally, the UK comprises England, Wales, Northern Ireland, and Scotland. The entire economy is regarded as a free-market economy, implying buyers and sellers hold most of the decision making power. In the market, both buyers and seller’s decisions are minimally influenced by the government. Services are the leading sector in the economy and account for 78% of total GDP. It is mainly influenced by construction, agriculture, production of both gas and oil, and aerospace. Recent split form the European Union has influenced policymakers to address the economic structural deficiencies like productivity and growth. In the year 2017, Starbucks experienced a decline in profit, and the firm blamed the deterioration of consumer confidence due to a Brexit vote. The coffee chain reported a pre taxation profit declined by 61% to £13.4 million.

Starbucks ‘ profitability, the demand for its products, and its cost structure are greatly influenced by fluctuation in macroeconomic factors. These macro factors include economic growth, exchange rates, and interest rates within the United Kingdom (Engel, 2016). Macroeconomic factors can either help a firm or impact it negatively.  It is worthy to note that Starbucks has various types of production expenses in its cost structure. These costs are categorized into fixed and variable costs. On the one hand, the firms existing fixed costs are not influenced by macroeconomic fluctuations. On the other hand, variable costs tend to be affected by changes in macroeconomic factors.

The bank of England sets the United Kingdom’s interest rates. Currently, the interest rates are held by the bank at 0.75%. The rate is not stable any fluctuation influences consumer habits, existing Starbucks lending, property, and acquisition of the firm financing. Interest rate fluctuations affect both the firm’s and consumers’ confidence.  A rise in the UK interest rate affects lowering consumer income. As a result, coffee consumers with existing debts pay more interest on loans. It will negatively impact consumer spending habits due to the increase in debt money they have to pay, which in turn reduces their disposable income available for purchasing goods and services.

Additionally, a rise in interest rate improves saving incentive as opposed to spending (consuming). Interest rate increment motivates people to save their money in deposit accounts to gain from the increase. Starbucks ‘ services are luxurious; thus, consumers will limit their coffee purchases, thus negatively impacting the firm. Therefore, a rise in interest rate tends to lower Starbucks coffee demand and subsequent profitability. On the other hand, consumer spending habits are improved as a result of lowering interest rates. Consumers will be able to acquire more money lending institutions. They spend finances in the economy on purchasing goods and services. Low-interest rates imply that there will be less expensive in paying loans.

Furthermore, it avails more disposable income to consumers in the entire economy. Unlike the effects of the interest rate increase, the low-interest rate will boost the purchasing of Starbucks products. A decline in interest rates translates to increment in demand for coffee products leading to more sales and subsequent profitability.

Interest rate rise makes it difficult for Starbuck to acquire loans from financial lending institutions because they become more expensive. Commercial lending institutions charge more for investment loans. Repayment for most firm’s loans take a long duration of years, therefore raise of interest rate will increase the Starbucks cost structure due to the increase of debt money. Additionally, the firm will be reluctant to acquire any short term loan to be used in its expansion as well as payment of unexpected costs. Interest rate rise hinders investment since firms tend to be involved in risky activities. Most of the business profits will reduce since it will be used in lain payments.

On the other hand, interest rate decline will lead to growth and expansion of Starbucks. With a decrease in interest rate too low levels, it is easy for the firm to acquire more finances from the lending institutions due to the decline in loan expenses. Reduction in interest rates implies that loan costs would be much less in the long run. This would facilitate paying back outstanding loans. Hence the firm can stabilize its debts. Furthermore, interest rate decline increases the firm’s profitability due to new ventures and an increase in coffee demand.

Exchange rates are of great significance in the United Kingdom trading economy. They represent firms (Starbucks) costs whereby commission is in currency exchanges. Exchange rate fluctuation is risky to firms whose assets are held in other currencies. Also, it affects export prices, which is essential in aggregate demand, the balance of payments (BOP), and import prices. Bank of England considers exchange rates when deciding the economy interest rates. Currency depreciation occurs when the value of pound decreases in relation to another country’s currency. Whereas appreciation occurs when pounds value increase in comparison to another national currency.  Generally, exchange rates devaluation or depreciation of exchange encourages export trade by making it cheaper while increasing importation costs. On the contrary, currency appreciation (revaluation) increases exportation costs while making imports cheaper. Primarily, currency appreciation and depreciation significantly impact firms that are involved in either importation or exportation.

United Kingdom Starbucks, uses coffee imports from producing countries to create its products. As a result, Starbucks ‘ cost structure, product demand, and profitability are significantly influenced by exchange rates of macroeconomic fluctuations. In the UK, Starbucks uses raw materials such as coffee beans, tea, and cocoa, which are mainly imported from producing countries. Currency, depreciation negatively impacts Starbuck by increasing its raw materials importation expenses from producing countries. As a result, the firm’s cost structure will be increased since they will have to spend more to purchase inputs that were initially less expensive. The change in cost structure will force the firm to raise the prices of its products to meet additional production costs. Coffee product price increments will make consumers cut down their purchases, resulting in a decline in demand. A combination of these factors will lead to the deterioration of Starbucks sales and subsequent profitability decline.

Moreover, the exchange rates can appreciate. Currency appreciation makes importation trade cheaper, which will be beneficial to Starbucks. The firm will be able to acquire its raw material at low prices, which tends to reduce its production costs. Furthermore, currency appreciation lowers inflation pressure in any given economy. The company cost structure will be impacted positively since raw material prices would decline significantly. The company might reduce its output prices in response to a decrease in production costs, which will increase consumer demand. Therefore, Starbucks prices increase due to the decline in production costs and sales increase.

Additionally, currency appreciation can make the bank of England to lower its interest rates. The inflationary pressure is reduced by currency appreciation to lower interest rates. Also, higher interest rates trigger too rapid currency appreciation, which forces the bank of England to reduce currency value by lowering interest rates.

Government policy significantly affects Starbucks microeconomic environment in cases where it affects inputs as well as individual economic decision inputs. Government taxation decisions can either encourage or discourage a firm’s operations. Taxation is essential in financing all government functions. When the United Kingdom imposes a tax on Starbucks, the firm finds microeconomic mechanisms to offset the impact. The firm can counteract the effect by reducing its expenses or production of additional output. Government policies can influence markets through government expenditure. Economic systems, such as incentives, can significantly affect Starbucks. For instance, if the UK government decides to give a subsidy to Starbucks the business, it is likely it will produce a higher cost curve. Additionally, fiscal policies have a direct impact on the prices of goods and services.

In conclusion, Starbucks ‘ business decisions are influenced by both microeconomic and macroeconomic environments. The business environment impacts all economic decisions that are carried out in any business setting. Starbuck’s microeconomic environment is related to the analysis of specific sectors within the organization. Just like other businesses, the microeconomic environment is, if essential for a firm’s decisions, since it is concerned about factors that affect business operations. These factors include consumer behavior, competition, and forces of demand and supply. On the other hand, the macroeconomic environment surrounds the entire economy as opposed to specific sectors. Analysis of Starbuck’s macro-environment focuses on an examination of how the firm is affected by the economic, regulatory features.

References

Singal, R. (2019). Starbucks: market structure, competitive impact, pricing. Retrieved November 30, 2019, from Brainmass.com website: https://brainmass.com/business/marketing-strategy/starbucks-market-structure-competitve-impact-pricing-275488

Tejvan Pettinger. (2017). Oligopoly | Economics  Help. Retrieved from Economicshelp.org website: https://www.economicshelp.org/microessays/markets/oligopoly/

Engel, C. (2016). Exchange Rates, Interest Rates, and the Risk Premium. Economic Review, 106(2), 436–474. https://doi.org/10.1257/aer.20121365

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