Project by

STARBUCKS Saurabh Mehta

INDUSTRY REPORT
MANAGERIAL ECONOMICS CIA 3
Guided By – Prof. Ganesh
  Starbucks Corporation founded in 1971 in Seattle, is a premium
Coffee retailer around the world.
 It has more than 238,000 employees across nearly 20,000 stores in
more than 70 countries.
COMPANY  The total revenue of Starbucks as of 2017 is nearly 290 crore USD.
PROFILE  PRODUCT: Coffee (premium Roasted beans), and other food &
beverages.
  They Belong to a monopolistic market and believes in aggressive
MARKET expansion strategies to push out most of its competition.
STRUCTURE  Yet in recent years, they have seen constant slow decline in their
AND STUDY market compared to previous years prior 2007. This has led to
OF doubt their approach of premium designer coffee which is kept
STARBUCKS relatively very high compared to their competitors.
 The "founding father" of the theory of Monopolistic Market
is Edward Hastings Chamberlin, who wrote a pioneering book on
the subject, Theory of Monopolistic Competition (1933).
Monopolistically competitive markets have the following
MARKET characteristics:

STRUCTURE  There are many producers and many consumers in the market,
and no business has total control over the market price.
THEORY  Consumers perceive that there are non-price differences among
the competitors' products.
 There are few barriers to entry and exit.
 Producers have a degree of control over price.
 Elasticity Profit
Number of Market Product Excess
of Efficiency maximization Pricing power
firms power differentiation profits
demand condition

Perfect Yes/No Price

Infinite None Perfectly elastic None Yes P=MR=MC
Competition (Short/Long) taker

Market
Comparison Monopolistic
Many Low
Highly elastic
High
Yes/No
No MR=MC
Price
competition (long run) (Short/Long) setter

Absolute
Relatively Price
Monopoly One High (across Yes No MR=MC
inelastic setter
industries)
 Sales

26%

STARBUCKS
SALES
74%

USA OTHER
Starbuck
Demand &
Supply Curve
MARGINAL
UTILITY
 Starbucks is a company with various limited flavor coffees and other
ANALYSIS items, (for example Unicorn Frappuccino). But these items are
experiencing Diminishing marginal utility, as the fans utility factor is
decreasing with their increasing consumption which in turn making fans

question the high prices of the Starbucks products.

 Equilibrium of a firm under monopolistic competition is often couched in terms of short period
and long period.

Short Run:
 In the short run, monopolistic competition comes closer to monopoly hence earning super
normal profit.
 The price-output combination is such at which perceived marginal revenue curve intersects the
marginal cost curve so that MR = MC

EQUILIBRIUM  The price-output combination where MR = MC is such that corresponds to the point at which
perceived demand curve dd’ intersects the proportional demand curve D0D0‘.
(SHORT RUN)
 Equilibrium of a firm under monopolistic competition is often couched in terms of short period
and long period.

Long Run:
 monopolistic competition comes closer to perfect competition because the freedom of entry
and exit allows firms to enjoy only normal profit.
 Long run equilibrium is achieved at point E where LMC equals MR.
 The equilibrium output thus determined is OQM. At this output, AR equals AC.
 The firm gets normal profit by selling OQM output at the price OPM.
EQUILIBRIUM
(LONG RUN)
 SALES CHART
9%

8%

7%

6%

SALES 5%

GROWTH 4%

3%

2%

1%

0%
2012 2013 2014 2015 2016
Change in ticket size Change in Transaction Sales Growth
 TOTAL REVENUE
25000
22390
21320

20000 19160

16450
14900
15000 13300

TOTAL 10700
11700

REVENUE 10000

5000

0
2010 2011 2012 2013 2014 2015 2016 2017
SALES REVENUE
  Starbucks should retain their customer base by convincing why their
products are at a premium, and also they should keep in mind their
mindset and provide coupons and offers to retain them

 They should also target people who aren’t unaware of their products, as
they have mindset of not trying it because of high prices, even though
SUGGESTIONS they can afford one. This can be done by providing cut down of prices for
a limited period of time in various locations.

 They should also keep coming with different flavors and fusion of product
which keeps the people hooked on to Starbucks, in order to combat the
decrease in marginal utility.
THANK YOU