Coffee Supply and Demand
Besides the high demand and cost for gasoline these days, coffee is considered the second most traded commodity on worldwide markets next to oil. "Coffee is grown in more than 50 countries in a band around the equator and provides a living for more than 20 million farmers. Altogether, up to 100 million people worldwide are involved in the growing, processing, trading and retailing of the product" (Spilling the Beans
, ). In 2001, coffee farmers and plantations produced over 15 billion pounds of coffee while the world market only bought 13 billion pounds. The overproduction in the coffee industry is not a usual thing and is one of the major reasons why prices vary throughout the industry.
One of the major corporations today that is trying to control a large portion of the supply of coffee is Starbuck. Starbucks Corporation is the leading retailer, roaster and brand of specialty coffee in the world. Starbucks purchases, roasts, and sells whole bean and rich-brewed coffees, espresso beverages, cold blended beverages, an assortment of food items, coffee-related
accessories and equipment, a selection of quality teas and a line of compact discs. Starbucks has over 8,700 retail locations in North America, Latin America, Europe, the Middle East, the Pacific Rim and is continuing to grow. When coffee is considered Starbucks has developed a worldwide name for itself and has become a huge success.
An article in the Seattle Post, describes the alliance that Starbucks is making to ensure that a sustainable supply of high quality of coffee is produce in Latin America. "Starbucks President and CEO Orin Smith said the alliance is partly his company's effort to pass on the "high price" of a cup of coffee to farmers." (Lee, 2004). He states that the high price enables them to pay the highest price to the farmers. Though the high prices to suppliers can demonstrate that money get to farmers with being diverted. Starbucks overall goal with this alliance is to buy 60 percent of its coffee under the standards agreed upon by 2007. "The agreement reflects the growing power of the premium coffee market and efforts to exploit it for the benefit of small farmers" (Lee, 2004).
When it comes to the supply, demand and price of coffee there are certain factors that can fluctuate these characters to rise or fall. Weather is one example that affects the consumption of coffee.
Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide. It offers brewed coffees, Italian-style espresso beverages, cold blended beverages, various complementary food items, coffee-related accessories and equipment, a selection of premium teas, and a line of compact discs, through its retail stores.
Until about 1990, coffee was traded in a managed market, where both consuming and producing countries agreed on pre-determined coffee supply levels through export quotas for the producing country. This managed market was regulated by the International Coffee Agreement (ICA). But in 1990, disagreements broke out among the countries and the ICA was broke down. This, along with market liberalization, created an increase in the global coffee production. The increase in coffee supply brought on a rise in inventories in consumer countries along with a poor demand. One of the consequences of this shift was a change in power to the roasting and retailing industries and created a decrease in the prices that were paid to producers. This whole scenario is known as the coffee crisis.
The quantity of a commodity demanded depends on the price of the commodity, the prices of all other commodities, the incomes of the consumers as well as the consumer’s taste. The quantity of a commodity supplied depends on the price obtainable for the commodity as well the price obtainable for substitute goods, the techniques of production, the cost of labor and other factors of production. It is supply and demand that causes a market to reach equilibrium. If buyers wish to purchase more of a commodity than that of which is available at a given price, then the price will to tend to rise. If they wish to purchase less of a commodity than that of which is available, then the price will tend to drop. Consequently, the price will reach equilibrium at which the quantity demanded is just equal to the quantity supplied.
Coffee is a growing part of people’s daily lives. Just before the 9-5 weekdays, and even during the 9-5, it is common for the working class to drink a cup of coffee. To support this accustomed part of our culture, it involves a complex supply chain that allows those coffee beans to turn into a cup that can be consumed. This paper is structured on how Starbucks, the top coffee supplier in the world, can supply its stores, from raw materials to manufacturing, right to the start of someone’s day.
...for automobile drivers, the prices of inputs continue to make the price of coffee unstable for coffee drinkers. Seasonal inputs like the coffee bean are volatile because of unavoidable aspects like the weather, which also affects the price of coffee directly, since less tends to be consumed in the summer than in the winter. A bad growing season can decrease the supply of coffee beans, thus increasing the price. Furthermore, other compliment prices affect coffee sales, like sugar and dairy products. When the price of these compliments increases, so does the price of a regular cup of coffee sold at Starbucks.
One of the most important factor that can influence the taste of coffee is the type of coffee beans. There are two most common varieties of the coffee plant that make up nearly all of the world’s coffee production: Arabica and Robusta. 75% of the world’s coffee production is Arabica and 25% being Robusta. Arabica coffee beans, grown significantly in Brazil, Colombia and Latin America, are the type best known to Western consumers. Robusta beans are largely popular in Asia and they are used in instant coffee and supermarket brands. Vietnam is the 2nd largest coffee producer but 90% of is production is Robusta, rather than Arabica beans typically used in European-style espresso and Starbucks coffee.
The importance of economic indicators to the strategic planning process in any organization is the ability to benchmark economic conditions that contribute to improve profitability, business growth and market size. Leadership sets up the mission “to establish Starbucks as the most recognized and respected brand in the world.” In doing so, they have created a set of industry-leading, comprehensive coffee-buying guidelines addressing coffee quality, financial transparency, social and environmental responsibility. Starbucks strategy is also expanding market in globally to provide high quality coffee in convenient and visibility locations. They are continuing to innovate and extend the business with imaginative new ready-to-drink beverages and expanded packaged coffee offerings (Starbucks Corporation, 2007).
Coffee is a worldwide cash crop of which demand has exponentially increased over the years. “Coffee is (after oil) the world’s second most important traded commodity” (Cleaver 61). Competing coffee brewing companies wage war on offering the freshest, best tasting coffee the market has to offer. With such stiff competition there must be enough coffee beans deemed to be good enough in quality to supply the increasing demand. Starbucks can be considered one of today’s top competitors if not thee top coffee manufacturer presently in business. This successful company has had a huge impact on the coffee industry as well as the world. They have gone through great length to provide consumers with an excellent product as well as create a legacy that shows how to best go about running a massive corporation while keeping the environment clean and healthy.
Starbucks is currently the industry leader in specialty coffee. They purchased more high quality coffee beans than anyone else in the world and keep in good standings with the producers to ensure they get the best beans. Getting the best beans is only the first part, Starbucks also has a “closed loop system” that protects the beans from oxygen immediately after roasting to the time of packaging. They did this through their invention of a one-way valve which let the natural gasses escape but keeping oxygen out. This gave them the unique ability to ensure freshness and extended the shelf life to 26 weeks. Starbucks isn’t only about the coffee, it’s also about a place where people can escape to enjoy music, reflect, read, or just chat. It is a total coffee experience. The retail outlet has been responsible for much of Starbucks growth and has contributed substantially to their brand equity.
... Also important is the price of complements, or goods that are used together. When the price of gasoline rises, the demand for cars falls.
Coffee market in Taiwan is also important. Since 1998, Starbucks enter the Taiwan coffee market, more people have adapted the habit of drinking coffee (De Pelsmacker, Driessen and Rayp, 2005). Taiwanese consumers have more opportunities to face different types of coffee options. Consumers usually have positive attitudes for ethically made products. Most of consumer would be willing to pay a higher price for fair trade coffee, but they care more about the brand, label, and taste of the coffee
Bruss (2001) argues that the company hopes as well to make new investments in new coffee types. Starbucks has recently developed a new type of coffee called green-coffee. These strategies are created with the objective of support Starbucks’ commitment to buy coffee that has grown and processed by suppliers. They meet certain conditions of social, economic and quality standards. In addition to that, the company is paying additional premiums to those vendors who meet the specific requirements that the company wants.
Starbucks is a worldwide company, known for is delicious brews of coffee and seasonal varieties of tasty drinks for any occasion. Starbucks opened with two main goals, sharing great coffee with friends and to help make the world a little better. It originated in the historic Pike Place Market of Seattle, Washington in 1971 by Jerry Baldwin, Zev Siegl and Gordon Bowker. The creation of Starbucks’ name came from the seafaring tradition of early coffee traders and the romance evoked from Moby Dick. At the time, this individual shop specialized in the towering quality of coffee over competitors and other brewing services enabling its growth to becoming the largest coffee chain in Washington with numerous locations. In the early 1980s, the current CEO Schultz saw an opportunity for growth in the niche market. After a trip to Italy he brought back the idea of a café style environment of leisure and social meetings to the United States we now see in Starbucks locations today. Schultz ultimately left Starbucks to open his own coffee shop, Il Giornale which turned out to be a tremendous success. Fast forward a year later, Schultz got wind that Starbucks was going to sell all their components of Starbucks including their stores and factories, he immediately acquired the funds to buy Starbucks and linked both operations. Within five years he was able to open more than 125 stores starting in New England, Boston, Chicago, and gradually entered California. He wanted Starbucks to be a franchise system based on the mission of telling the truth and emphasize the quality,
The coffee bean supplier market is made up of mostly a few large suppliers, which would suggest suppliers have significant bargaining power. This power is limited by the sheer size of Starbucks which continues to grow, which mitigates supplier power as achieving such a large contract as with Starbucks is very lucrative. Furthermore, Starbucks has engaged in backward vertical integration, purchasing coffee farms in China and Costa Rica, to ensure their supply of high quality beans at a reasonable price, regardless of the increasing demand of high quality beans and the limited suppliers.