American Public University
The Starbucks Cost Analysis
The Starbucks coffee shops are on every corner in many cities all around the world, and they all look like similar with a coffee color background, promotion stuff, and coffee kinds. Starbucks trains its workers as a barista and spends the effort to create a coffee environment in its stores and subsequently a coffee culture. Considering that many people are almost like addicted to the Starbucks coffee all around the world, Starbucks could create the largest coffee shops supply chain in the world. While succeeding this, Starbucks could manage to develop a cost-efficient supply chain structure. In this essay, I will analyze its cost structure and give some insights.
Fixed and Variable Costs in Starbucks Coffee Shops
Starbucks franchise its coffee shops all around the world. Thus, the coffee shops run by the different entrepreneurs. The shop structures and how the coffees and other products are presented to customers are very similar according to the franchising agreement. Similar structures create similar cost structures. It is possible to claim that the cost of rent and labor cost differs depending on where a store is located in different countries.
Total costs consist of fixed costs and variable costs in the short-run. In general, less than one-year is accepted as short-run as and longer than a year is considered as long-run. In the long-run, there are no fixed costs because everything can be changed in the long-run. Starbucks has several fixed costs. Equipment and tools for preparing drinks and food, rent, shelves, heating systems, tables, chairs, and armchairs, other furniture, paintings, and other embellishments are included in the fixed cost. Variable costs include coffee ingredients, ice, water, labor costs, food ingredients, electricity cost, heating cost, milk, sugar, promotions, and giveaway sample products (Lonan, 2014).
Is the company technically or economically efficient?
Starbucks is a large coffee shops supply chain spread all around the world, and each branch has to use the same products provided by the Starbucks. Therefore, the Starbucks supply chain gains a large scale of economies. That enables the company to enjoy the opportunities reducing the cost of production by decreasing the cost of inputs including coffee beans, milk, and some other coffee and food ingredients. Even we hear some news that Starbucks can make deals with the governments of coffee beans producing countries to reduce the price of coffee beans. Being a large supply chain gives a monopsony power to Starbucks.
On the other side, an important cost for Starbucks is rent. Starbucks would like to position its stores on the main streets and squares in all the cities to be close to its customers; however, this strategy might cause the stores to pay high rent rates. Therefore, the company’s main strategy of locating its stores on the main streets and squares causes cost inefficiency (Green, 2015).
Finally, labor cost is important for Starbucks. Starbucks trains its baristas. However, Starbucks has a challenging career path and being a manager in a store takes long years. Until a worker become a manager, he or she cannot get a satisfactory wage. That causes a high turnover rate in Starbucks and training new trainees always happens in the Starbucks stores even though Starbucks are relatively more successful in reducing turnover rate in the food and beverage retailers market. Considering that new starters can make relatively more mistakes, and implement training for newcomers continuously causes cost inefficiency (Rockmael, 2015).
Does the Company Experience Economies or Diseconomies of Scale?
Starbucks is one of the largest supply chains in the world, and the company makes large purchases. For instance, all the Starbucks stores use the same coffee beans all around the world. Thus, it is easy to see that Starbucks enjoy the advantages of large economies of scale. Even it is possible to claim that this situation gives a great monopoly and monopsony power to Starbucks. Starbucks can implement a killing competition strategy in many different cities and countries thanks to the advantage of large economies of scale (Hoban, 2016).
Does the company experience economies of scope?
Starbucks provides various products to its customers including coffee drinks, cold drinks, juices, sandwiches, cakes, coffee filters and cups, coffee beans, salads, ice cream, donuts, and some other similar products. The only difference between the stores is the name of the store in Starbucks. Even we observe that some people collect coffee cups from the different Starbucks stores in the world to add to their collectibles. This situation creates the advantage of large economies of scope to Starbucks. However, Starbucks are not successful in every product it sells in the stores. For instance, Starbucks has tried to sell bagels, and its bagels were not as good as the rival bagel companies' bagels. Therefore, even though Starbucks try to develop economies of scope to gain relatively more power, it does not always work (Hoban, 2016).
Does the company use technology effectively to control costs?
Starbuck uses some digital technologies to monitor its operations in its supply chain all around the world, and reduce the costs. The store workers also prepare some digital reports and use some digital platforms to convey some information to the central management. Therefore, we can say that the central management gathers enough information and data to improve the supply chain and reduce the costs all over the world (Hoban, 2016).
What strategies would work for your company to minimize costs so that the company maximizes revenue and profits?
I would recommend two main amendments. Firstly, the company can arrange its renting strategy to decrease its cost of rent. It might be possible to reduce the cost of rent by choosing some alternative store locations, especially in the large metropolitans. Secondly, Starbucks should reregulate its human resources management to increase the efficiency. The company has an advantage of having a relatively lower level of turnover, and this advantage can assist the company to increase the efficiency. Also considering public relation is important in face-to-face marketing, improving human resources rate might increase the satisfaction level of customers in general.
References
Green, D. (2015). New York rent is so high that Starbucks has started closing some locations. [online] Business Insider. Available at: http://www.businessinsider.com/starbucks-is-feeling-rent-increases-2015-3 [Accessed 22 Jan. 2017].
Hoban, M. (2016). What Can We Learn From Starbucks’ Supply Chain Management?. [online] blurGroup. Available at: https://www.blurgroup.com/blogs/supplier-diversity/starbucks-supply-chain-management/ [Accessed 22 Jan. 2017].
Lonan, D. (2014). Business and Coffee. [online] Daniellonen.com. Available at: https://daniellonen.com/2014/12/05/business-and-coffee/ [Accessed 22 Jan. 2017].
Rockmael, K. (2015). Is Starbucks Really a Great Place to Work? - Monitor 360 Blog. [online] Monitor 360 Blog. Available at: http://monitor-360.com/blog/is-starbucks-really-a-great-place-to-work/ [Accessed 22 Jan. 2017].
