Cost of Production in Starbucks

Written by: Dr. Lucy PhD
Updated: Sep 24, 2019
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Category: Business
Date added
2019/09/24
Pages:  4
Words:  1103
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Cost of Production in Starbucks essay

When we analyze the cost of production, which is the cost related to making goods and services that directly create revenue for a firm, it is also represented by the cost acquired by a business when manufacturing a good or service. Production costs include a variety of expenses, such as labor, raw materials, consumable manufacturing supplies, and overhead. There are various costs that a firm handles that help guarantees both production and distribution of a good, product, or service. They include fixed costs and variable costs. Fixed costs are considered overhead costs that do not change based on manufacturing. Examples of Starbucks would be rent, depreciation, and setup cost. Variable costs or direct costs are items that change based on production. Examples are raw materials such as coffee or ingredients used in syrups, labor, and shipping cost. “Coffee is about $8 a pound (and Starbucks may get it for cheaper), which gets you about 26 small cups of coffee. So for just the coffee, that’s about 30 cents a cup,” (1).

In essence, one would think just coffee is cheap, but after adding in your flavors, creamers, stirrers, and even that little green stopper, it picks up a tab to an end cost of $4.20 and even more for larger and specialty coffees. As well as the cost of coffee, the company has other costs such as dairy, teas, and food products that are an expense to Starbucks. Not all people who visit Starbucks are coffee consumers, and they have a variety of specialty tea that they grow environmentally friendly. Other costs, but not limited to our administrative and operating expenses. As mentioned above, the company utilizes its massive consumer base to influence costs in its favor. The cost of coffee may be a major expense for Starbucks, but the company’s ability to use that in its favor to keep the cost of production intact and running is due to Starbucks’ ongoing success. Knowing that the cost of the coffee bean is what drives the costs of products in stores, Starbucks is always looking for efficient ways to help supply farmers with the necessary tools to keep costs in a price range where those who would look at coffee as a not a need for everyday life. Overall Market (2).

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Figure 1: Largest Coffee Chains (3)

The graph above from Statista.com displays the top coffee chains in the United States. As we can see, Starbucks can be considered the leader in this market of coffee chains. Starbucks currently leads the market, with more chains in the United States and globally. In the 80s, Dunkin’ Donuts, a coffee chain that dominated the market due to its prior popularity within the financial industry workforce and the price plus marketing, Dunkin’ seemed to be a coffee you’d serve at home like Folgers. Shultz wanted to take Starbucks to the consumers and give them the same coffee experience as he fell in love with on a trip to Italy. Though Starbucks has faced many failures over the years, the company continues to grow and expand, just as Shultz wished. Though entering the market was no easy task, Starbucks aimed at global expansion. For example, a major barrier to expanding into the market in China; Starbucks had to understand the culture of the Chinese people, who favors tea over coffee. To work through this barrier, the company conducted broad research before entering the market in 1999 (5). “Moreover, Starbucks deliberately began to bridge the gap between the tea drinking culture and the coffee drinking culture by introducing beverages in the Chinese stores that included local tea-based ingredients,” (6). The market structure for the coffee market is rather easy due to low cost and fairly easy exit. The only way to set yourself apart is by offering exceptional products, branding, advertising, and consumer loyalty. Starbucks’ influence on the market comes from its operations, from the way the farmers are respected and the bean’s cultivation to the care of harvesting and shipping, sustaining the land in which the coffee is grown.

The “experience” the consumer has is vital to Starbucks’ influence. Starbucks prides itself on serving you that perfect cup of coffee brewed for you. Putting customers’ names on their cups, customizing orders, and providing quality service are key to its growth. Knowing one can walk into their local Starbucks to grab a cup of coffee or tea while discussing business notes or catching up with friends influenced other companies to change their setup. Starbucks’ influence from Italy inspired them to focus on business and personal relationships and reasonings with its consumers. Recommendations are a key factor in the company’s ability to run its operations. The availability of coffee beans controls Starbucks’ business; without them, the company would lose profit and ultimately no longer exist in its current position. Whether operating within the United States, its primary market, or globally in China or South America, the company has to stay on top and ahead of its coffee sourcing.

The recommendation for Starbucks would be to continue investing in the fair-trade market and the sustainability of coffee beans. Continue supporting the farmers and every factor in between until the finished product. As Starbucks continues to grow, so will its demand for coffee beans and the demand for exotic blends of coffee. Starbucks must continue to be a front-runner by being smart in its investments and knowing when to focus on sustainability versus demand. In addition to coffee, growth can continue if they focus on the consumer experience model and not just the products they serve. As those of us who strive for the “Gold Status” earned due to frequent visits, Starbucks must maintain its gold star by offering the gold experience and continue to differentiate from its competitors.

References

  1. Spector N. Bummed by Starbucks’ price hike? Here’s how much it costs to make your coffee [Internet]. NBC News. NBC News; 2018. Available from: https://www.nbcnews.com/better/business/bummed-starbucks-price-hike-here-s-how-much-it-costs-ncna881821
  2. Splitter J. Coffee Farmers Are In Crisis. Starbucks Wants To Help. [Internet]. Forbes. 2019. Available from: https://www.forbes.com/sites/jennysplitter/2019/07/31/coffee-farmers-are-in-crisis-starbucks-wants-to-help/
  3. Statista.com. The number of units: coffee house and cafe chains in the US 2021 [Internet]. Statista. 2022 [cited 2022 Oct 21]. Available from: https://www.statista.com/statistics/920174/number-of-units-of-selected-leading-coffee-house-and-cafe-chains-in-the-us/#:~:text=Starbucks%20had%2015%2C450%20units%20in
  4. Dunkin’ Donuts. Dunkin’ Donuts History [Internet]. 2018. Available from: https://news.dunkindonuts.com/internal_redirect/cms.ipressroom.com.s3.amazonaws.com/285/files/201610/Dunkin%27%20Donuts%20History_11%203%2016.pdf
  5. Wang HH. Five Things Starbucks Did to Get China Right [Internet]. Forbes. 2022. Available from: https://www.forbes.com/sites/helenwang/2012/08/10/five-things-starbucks-did-to-get-china-right/
  6. DeVault G. Market Research Case Study About Starbucks Entry to China [Internet]. LiveAbout. 2018. Available from: https://www.liveabout.com/market-research-case-study-starbucks-entry-into-china-2296877

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Cost of Production In Starbucks. (2019, Sep 24). Retrieved from https://papersowl.com/examples/cost-of-production-in-starbucks/