Economic Assessment

Factors that drive demand and supply for the company’s goods

DEMAND:

• Starbucks is a premium coffee brand, hence client income levels have a significant impact on demand. Increased spending on upmarket goods, such as specialty coffee, might arise from having greater discretionary income, which increases demand.

• Consumer Preferences and Tastes: As tastes and preferences shift towards specialty coffee, distinctive flavours, and individualized drink options, demand for Starbucks' offerings may increase.

• Starbucks' strong brand image and excellent marketing methods can boost its attractiveness, resulting in increased demand. The company's capacity to create a "third place" outside of the home and work for clients helps with this.

• Health Trends: Increased awareness and preference for healthier products may influence demand. Starbucks has evolved by providing a variety of healthier options, including dairy-free and sugar-free selections.

SUPPLY:

• Cost of Raw Materials: The price of coffee beans and other raw materials can affect Starbucks' supply chain. Fluctuations in these costs can impact the company's ability to supply products at stable prices.

• Global Supply Chain Management: Starbucks sources coffee beans from various parts of the world. Political instability, climate change, and trade policies in these regions can impact supply.

• Labor Costs: The cost and availability of labor, especially in retail locations, can influence Starbucks' ability to supply its services. Labor strikes or shortages can disrupt operations.

• Technology and Innovation: Investments in technology for coffee brewing, mobile ordering, and supply chain management can improve the efficiency and reliability of supply.

• Regulatory Environment: Regulations related to health, safety, labor, and trade can impact Starbucks' supply chain operations. Compliance with these regulations can affect the cost and ease of supply.

• Store Expansion and Distribution Channels: The strategic opening of new stores and expansion into new markets can increase the supply of Starbucks' goods and services. Similarly, the use of diverse distribution channels, including online sales and partnerships with other retailers, can enhance supply capabilities.

The type of economy that the company operates in

Starbucks operates in an oligopoly, taking place as one of the dominant companies in the market of coffee and related drinks. It only has a few major competitors (such as Dunkin' Donuts and McDonalds), it is hard to enter the market, and has non-price competition. Starbucks operates within a capitalist market system – the production is owned and regulated by private individuals. Starbucks aims to maximize profits and satisfy consumers.​​

How was the company affected by the 2008 Financial Crisis?

From 2008 to 2013, the revenue growth of Starbucks experienced a drop of -5.9% during the 2008-2009 recession.

During the recession, the decline in household disposable income due to increased unemployment and decreased wages caused downward pressure on the revenue and profitability margins in the industry, including Starbucks.The 2008 Financial Crisis led to significant strategic and operational changes. Starbucks’ response to the crisis helped it to recover and continue its growth in the next several years.

1. Drop in income level caused a drop in consumer spending: The financial crisis caused a decrease in income for many consumers, so the non-essential Starbucks products (such as premium-priced coffee, etc) became less in demand. Due to lower demand, Starbucks’ sales and profitability declined.
   

2. Reducing costs by closing stores and layoffs: In response to sales and profitability decline, Starbucks had to close underperforming stores and cut jobs in order to reduce costs. Starbucks moved their attention to more profitable locations.
   

3. Change in strategy: The financial crisis made Starbucks reconsider their strategy and shift its focus on customer experience, cost savings, and innovation, to improve profitability and increase demand. Starbucks had to postpone their expansion plans and focus on the already existing stores.
   

4. Price adaptation: In response to the drop in income of a major part of their consumers, Starbucks decided to introduce more affordable products and discounts to retain customer loyalty and attract customers.
   

5. Expansion abroad: During the recession, Starbucks decided not to stop expanding its international businesses. This helped to overcome some of the negative impacts of the American market. The company focused on growth in markets where the economic downturn has hit less.
   

How the company has been affected by the current inflationary environment

The company posted a strong financial performance for the first quarter of fiscal 2024 and the entirety of fiscal 2023, successfully navigating challenges related to the economy.  Starbucks demonstrated perseverance and strategic prowess during the inflationary period from 2023 to 2024. 

Starbucks saw considerable growth in fiscal 2023, as evidenced by a 27% increase in GAAP earnings per share and a 15% improvement in non-GAAP operating margins to 16.1%. This achievement was partly due to the company's "Reinvention" approach, which tightened margins, enhanced operational efficiency, and increased sales. Notably, comparable store sales in North America increased by 8%, led by greater average check and transaction growth. However, this increase was largely offset by greater labor costs and a better working environment.

Overall, Starbucks has effectively addressed inflationary pressures by carefully investing in employee benefits, career development, and store manager support, as well as improving consumer experiences both in-store and online. These tactics have not only sustained, but increased Starbucks' growth, emphasizing efficiency, strategic pricing, and a focus on employee and customer pleasure as vital to its success.