This paper examines the key economic forces shaping Starbucks' near-term and long-term business outlook. Drawing on commodity price trends, employment data, and consumer spending theory, the analysis evaluates both favorable and unfavorable input cost dynamics — including Arabica coffee bean prices, dairy costs, and energy expenses — alongside demand-side factors such as falling unemployment, rising disposable income, and renewed consumer confidence. The paper concludes that, on balance, the positive economic influences outweigh the negative ones, positioning Starbucks to achieve gains in both sales volume and profit margins as the post-2009 recovery continues.
Starbucks is the largest chain of coffee shops in the United States. In line with many other businesses, the organization suffered financially as a result of the 2009 recession. However, when looking to the future, the economic conditions appear to provide an optimistic outlook. Positive influences are emerging for Starbucks both as a purchaser of inputs and as a seller of products. The costs of key inputs appear to be constrained and, in some cases, falling, while opportunities exist for the firm to increase internal efficiencies as well as grow sales. Lower costs and higher sales, accompanied by improvements in efficiency, will not only lead to a higher nominal profit but will also lead to performance improvements and a better profit margin — provided that potential can be realized.
Many of Starbucks' input costs reflect underlying commodity prices. One of the most important inputs is coffee beans. Starbucks buys only high-quality Arabica beans. While the cost of Arabica beans was very high in 2011, the 2012–13 season produced a surplus due to a bountiful harvest, leading to a significant decline in the price of coffee (Josephs, 2013). Starbucks arranges contracts for the purchase of Arabica beans in advance to ensure sufficient supplies of the required input, but the company is still able to benefit from lower prices (Starbucks, 2012).
The contracts used by Starbucks are undertaken on a "price to be fixed" basis, whereby the firm fixes the price at a future date with reference to spot prices (Starbucks, 2012). The firm pays a premium on the beans, but a lower spot price results in lower overall costs. Additional cost benefits exist in the form of potential productivity improvements. It has been estimated that over the next five years the coffee industry will achieve an average productivity improvement of 1.2% per annum, which will have a beneficial impact on overall costs.
There are also some negative economic influences to consider. Dairy prices within the United States have been showing an upward trend that shows no sign of abating (Economagic, 2013). The price of oil is also expected to increase (Forecasts.org, 2013). Because the United States is not a coffee-producing nation, it imports coffee as well as other inputs. Transportation costs rise when energy prices rise, and broadly increasing energy costs also negatively affect operational overheads.
Starbucks has the potential to benefit from improving economic conditions. The firm appeals to the mass market, selling a non-essential product. Sales of non-essential products suffer most during economic downturns. Conversely, during a recovery, firms that sell relatively low-cost items still perceived as small "luxuries" may benefit disproportionately from even modest increases in disposable income (Kotler and Keller, 2011).
A key indicator of the U.S. economy is the unemployment rate, which had dropped to 7.5% in 2013. A Wall Street Journal survey of economists at that time indicated an expectation that approximately 180,000 jobs would be created each month over the following twelve months (Casselman and Izzo, 2013). As employment rises, wages are also likely to increase, raising disposable income where wage growth exceeds the rate of inflation. There was broad agreement among economists that a recovery was underway — slow, but sustained — and that another recession was unlikely in the near term (Casselman and Izzo, 2013).
"Higher demand lifts core and complementary product sales"
Starbucks faces uncertainty, as there is no crystal ball to predict the future. However, many positive influences are emerging: short-term lower coffee costs and the long-term potential for increased demand may offset rises in other cost areas. On balance, there is a greater potential for gains than for losses. Starbucks is therefore likely to benefit from the changing economic environment, seeing both sales volumes and profit levels increase.
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