Starbucks Analysis

Basic Information, Firm and Industry

            Starbucks – a coffeehouse chain company based in the United States and registered in the National Association of Securities Dealers Automated Quotations [NASDAQ] with a stock ticker symbol of SBUX and NAICS Codes of 71111, 72211, 72231, 72232, 722211 and 722213. Considered as the largest coffeehouse company, Starbucks have more than 15,000 stores operating not only in the United States but also to 42 countries around the globe. The said company also has a P/E ratio of 21.64 and a market capital worth 14.04 billion USD (“Starbucks Corp. (SBUX).” 1). Moreover, the kind of market wherein Starbucks is presently standing can be classified as a monopolistic competition in nature since its product is differentiated from its competitors. Aside from Starbucks “original” coffee drinks, Starbucks has been extending its product line into the non-coffee iced-beverage market to expand its market (“Starbucks Corporation.” 16).

Furthermore, there is a low entry barrier in the industry of coffee making as shown by the number of competitors that the Starbucks presently have. Two of their major competitors are Dunkin’ Donuts and Krispy Kreme, not to mention small local coffeehouses and coffee brands operating in the market; competitors for new product lines like Orange Julius, Jamba Juice etc and fast food chains such as McDonald’s and Burger King  and other small coffee (Anstett 5). The said two major competitors of Starbucks has been aggressively using price cutting strategy in attracting more customers to visit their stores but not all of Starbuck’s competitors could perform this strategy. Clearly, there is an intra-industry rivalry existing in the industry of coffee making since coffee companies tries to develop new products that are not included in the coffee industry in order to expand their market size. In terms of market share, independent coffeehouses only accounts to around 61 percent of the total market since 2001 and expects to have a more aggressive growth for the next couple of years see appendix 1, meaning, nearly 40 percent will be the market share of Starbucks in the coffee industry (“Independent Coffee Houses, Endangered Species in the Starbucks Age.” 1).

Market Conditions

            One of the reasons behind the high levels of demand for the products of Starbucks can be attributed to the market growth factor as suggests by the positive relationship between the market share and market size of Starbucks in the coffee industry. In other words, the main reason why consumers would want to purchase Starbuck’s products would be due to the fact that the said company has the largest share in the number of coffee stores in the market, contributing in perceiving potential customers that the coffeehouses of Starbucks serves superior quality coffee; and at the end of the day, the said scenario improves the sales quantity of Starbucks. The said market growth is accompanied by the current trend for coffee lovers, that is, buying of coffee in coffeehouses rather than the “on the go” coffees available in the market.

In other words, due to large market size of Starbucks in the coffee industry, people would prefer visiting its store than with other coffeehouses since customers supposes that Starbucks offer high quality coffee beverages in the market than with others. Conversely, one possible factor that affects the level of supply in the coffee making industry specifically Starbucks, would be the supply of coffee beans in the market. Starbucks is just one of the subsidiaries of Starbucks Corporation that pays for and roasts high quality whole bean coffees, after which, selling them together with fresh rich-brewed coffees, cold blended beverages, variety of complementary food products as well as Italian style espresso etc. Therefore, the supply of coffee beverages in Starbucks is being affected by the market supply of coffee beans. One scenario to illustrate the connection between the two concepts would be: when prices of coffee beans in the market increased due to some economic-market forces, the costs of producing a cup of coffee in the market [Starbucks] also increases since the former serves as an input in the production process.

Market Structure

            In the industry of coffee making, as what have stated in the first part of this paper, there are many sellers existing in the market making this industry as well as buyers that makes this industry fall under the category of monopolistic competition. Even though coffeehouses offer coffee beverages, but due to developments into their product lines, products of coffeehouses tend to be more differentiated than what it should be. Coffeehouses, especially Starbucks, start exploring other types of beverages and products that will compliment their coffee and non-coffee beverages in order to expand the category of their market, therefore making their sales and profitability improve. There are also fewer barriers to entry in the coffee industry as shown by the present number of coffeehouses in the market and same goes when exiting the industry but this scenario seems not to occur for the next couple of years since coffee making industry is still profitable.

Conduct

            Among the given topics under the “Conduct” box, the most important one for Starbucks would be the product development since the only reason why the customers always go back to their stores, aside from the fact that they have the large number of shares and number of stores in the market, would be the quality of their coffee and non-coffee beverages. By developing its product, Starbucks could establish a well defined product line distinct only for their chain of coffeehouses. In other words, it will serve as Starbuck’s trade mark or will differentiate Starbuck’s from other coffeehouses operating in the market. The next important factor would be the advertising. Starbucks spends less in media advertising since they rely much on viral advertising also known as the “word of mouth” or the passing of information in a person-to-person manner verbally.

Performance

            With its mission to establish itself as the premier supplier of the finest coffee in the world, and at the same time maintaining its uncompromising principles while the company grows, for sure everybody will agree that Starbucks already serves as the epitome of coffee makers in the market thereby fulfilling the said mission statement (“The Way We Do Business.” 1). Moreover, it was also identified in the first part of this paper that Starbucks has been profitable and expanding for the past years displaying the market influence that it has in the said industry, see appendix 2. Within the workplace, employees have great working environment since they respect one another and securing the satisfaction of its customers to preserve the reputation of the company for offering high quality products. All of these principles have been able to execute by the management of Starbucks, therefore, receiving more customers and in the coming years. This only tell us that Starbucks has been making efforts in order to provide its customers with nothing but the best service as well as coffee and non-coffee beverages in the market.

Government Policies

            Starbucks employs nearly 150,000 workers in order to suffice the needed man power in each of its stores. Almost all of the production process of Starbucks products requires the use of manpower; therefore, it is clear how important the role of workers to Starbucks as far as production process is concerned. It was found out that Starbucks’ workers only receives minimum wages and various states where Starbucks is currently operating are already making initiatives to improve the welfare of the Starbucks workers through increasing their minimum wage rate (“Worlds First Starbucks Strike, Auckland.” 1). This will greatly affects the operational costs and profitability of the company since the increase in the minimum wage rate means that it is additional costs on the part of the management. This issue is a serious threat since this could affects the prices of Starbuck’s products if the management cannot accommodate the said increase in the minimum wage rate of their workers.

Sysco

Basic Information of the Firm and Industry

            Sysco Corporation- currently considered as the largest foodservice distributor in North America distributing long range of products like canned goods, fresh meats, frozen foods etc as well as non-food items such as disposable napkins, plates, tableware even restaurant and kitchen equipments are also being offered by the said company. Sysco is an acronym which stands for Systems and Services Company; with over 400,000 customers in the market and Sysco comprises by restaurants, hospitals, schools and colleges as well as hotel and motel. At present, Sysco is operating around 170 stores throughout the United States and Canada and competes with other foodservice distributor like U.S. Food Service and Performance Food Group which serves as the major competitors of the company and other regional companies in the market; see appendix 4. It was identified that Sysco has a market share of around 12 percent which accounts to nearly 22 billion out of 200 billion worth of the food service distribution industry as of 2001 (Mantena, Petote & Rau 1).

Moreover, Sysco has a stock ticker symbol of SYY based on the New York Stock Exchange [NYSE] with NAICS codes of 422490, 425120, 424420 and 423440. Sysco Corporation has P/E ratio of 17.55 with a 3 percent dividend and yield at the start of this month showing the kind of performance the company has in the market (“Sysco Corp. (SYY).” 1). Leading the foodservice industry, Sysco Corporation enjoyed market revenue of around 30 billion in 2005 with a market capital of more than 18 billion USD not to mention the impressive growth of their sales volume which increased to around 9 billion giving the company a profit of 264 million USD during the second quarter of 2007 (“Sysco Sales Rise, As Does Its Profit.” 1). Furthermore, the stock price in Sysco Corporation, as for those who are interested of investing into this company, is currently equal to 29.83 USD and this is only for the common stock although this is relatively low as compared to last year during the first quarter with nearly 35 USD per share, see appendix 3, (“Sysco’s Second Quarter Income Rises.” 1).

Sysco Corporation uses competition-based pricing strategy since members of the foodservice distribution industry easily affect one another in terms of supply and demand in the market making them price as the only factor to use in order to gain competitiveness over the others. The industry where Sysco Corporation is currently at can be classified as an oligopoly wherein there is a small degree of competition in the market since there are only 3 major foodservice distributors in the market: Sysco, U.S. Food Service and Performance Food Group. Another reason why it was classified under the market category of oligopoly will be the fact that there is a high barrier to entry due to the large market share of the three major foodservice distributors making it very risky for new entrants to try penetrating in the said industry aside from the fact that there is a small gap between the homogeneity of the products of the identified three major players. Aside from the conventional media advertising to boosts sales, Sysco has new approach to market their product lines into their target market and that is through the establishment of more stores into regional areas to improve the company’s market influence into the said market. By establishing stores into the said places, Sysco can be able to relay the message into their customers that they can also serve the needs of those people in the rural areas and in order for the company to exhibit to its target customers how great its market influence and the credibility that the company holds. This is just like expanding the market of Sysco and at the same time showing into the market how capable the company in terms of presenting its product lines.

On the other hand, in order for the production process of Sysco Corporation to continue, the following inputs are need: labor, land and capital. Sysco has been able to minimize the costs of their production due to the fact that they pay their workers by the existing minimum wage rate policy of the states where its stores operates. The costs of land that will be used by the company especially for plantation purposes will depend on the distance of the land from the center of commerce of the state where it operates. The distant the land to the center of commerce of a given state, the cheaper the cost of land and for this regard, Sysco Corporation prefers to buy lands distant from the center of commerce in order to save much capital as the company could.

Even though Sysco has the largest market share in the market, it does not necessarily mean that their operation is perfect. Just like any ordinary company in the market it also experiences challenges like competition which already been identified during the latter part of the paper. Another possible problem that Sysco currently faces would be the instability of the U.S. economy specifically the low income of the consumers which negatively affects their demand level causing the sales of Sysco to decline for the next coming quarter. moreover, the declination of sales is also tantamount to the lowering of total revenues of the company which discourages investors since it would only signifies that Sysco can only offer low returns on investment given the current level of sales and revenues that are generated from the operation. On the other hand, one possible to counter the said scenario will be to expand the market size of the company by establishing new stores in rural areas that Sysco has not explored yet. Through conducting feasibility studies, Sysco management could identify rural areas that will potentially uplift its sales and revenue levels. Another would be to start taking steps for a stronger international operation since the company has enough connections and market influence to utilize as well as the international market is much stable. Moreover, this opportunity can serve as the road of the company towards attracting more foreign investors that will enhance their financial capabilities.

Sysco Corporation’s mission is to help their customer’s succeed indeed serve as the guidance of the company from the planning stage down to the implementation of various strategies and market approaches. The company continuously secures the success of their customers as well as helping the latter in achieving their goals through the provision of outstanding service the company could offer not to mention that Sysco’s management recognizes the role of customers in achieving corporate goals of the company.

Basic Market Conditions

            Among the given factors, the one that greatly affects the  demand conditions of the consumers will be the price elasticity of the company’s products since consumers are more price sensitive due to the fact that they currently receives low income as the consequence of various economic elements. This only suggests that it would be beneficial and at the same time advantageous on the part of Sysco to make the prices of its products as lower as possible in order to attract more customers to come into their stores. Even the competitors of Sysco will also have to make its prices competitive and at the same time earning profits from the operation. Since Sysco and its major competitors are operating in an oligopolistic type of market, price competition is the only option for them since consumers will patronize the one with the cheapest products and given that there is only a few buyers to choose from.

This scenario is explained by the fact that products that are being offered by the foodservice distribution industry is categorized as elastic goods since any slight increase in the price level will significantly drop the demand of the consumers. In other words, there is an inverse relationship between the price level of a certain good and the quantity demanded. On the other hand, the factor that greatly affects the level of supply of products of Sysco will be the raw materials since it has a big part in the production process of the company. By finding ways on how to minimize the costs of raw materials in producing the products of Sysco it will raise surplus of capital for the company or give an avenue for the management to further cut the prices of its products in the market in order to gain market competitiveness. However, since raw materials performs a large role in the production process of Sysco, any slight increase in the costs of raw materials in the market can negatively affect the profitability of the company since it cannot pass down to the consumers the said increase in the costs of raw materials since it will trim down the number of customers that will come into its stores based from the above identified relationship of price and quantity demanded of Sysco’s products.

Market Structures

            Sysco Corporation uses vertical integration in order to manage its different subsidiaries and each of these subsidiaries produces a different product as compared to others and combines these products to provide satisfaction to its customers. Moreover, Sysco Corporation has only one owner for the entire group of companies making it united through hierarchy. Furthermore, with regards to capitalizing, Sysco Corporation’s costs structure is basically composed by fixed and variable costs. Buildings, machineries and equipments are considered as fixed costs of the operation since the company has to purchase the said factors of production even if the company has not yet started its operation as well as the said above factors become part of the production factors for a long period of time. As for the variable costs of operation of Sysco, basically these are the raw materials in producing products of Sysco that are changing for a short period of time. Like for example fruits that are being used to produce desserts, vegetables to prepare dishes etc.

            Since foodservice distribution industry is classified as an oligopoly, companies that are included in this type of market has the capacity to set up barriers and to market entry for other business entities on and off the table. Since almost majority of the market shares belongs to Sysco Corporation, then, it has the influence to whether it will initiate the formation of cartel and perform cut throat competition in order to prevent the entry of new business entities and at the same time cutting the competition between the existing companies as well as increasing their profits. Cut throat competition is performed through setting the prices of a certain company with a great market influence to its lowest possible level in order to attract more customers to come into their stores leaving the new entrants with a few available customers, that in the long run can force the latter to shut down since it cannot sustain the price competition since it only starting in the market and recovering from the fixed assets that it invested in the market.

Conduct

            Predatory pricing only applies for special cases on the part of Sysco Corporation since it only uses the said pricing strategies whenever there is a threat for market entry of new business entities in the industry of foodservice distribution. In a normal operation of Sysco in the market it uses market based competition pricing scheme since, as what have already identified in the latter part of this paper, Sysco is susceptible to whatever the price level will its competitors will set and vice versa since they all have the information and predictions of what will be the strategy of one will take given a market situation.

With this, major members of the foodservice distribution industry have limited freedom in setting their preferred price levels given the influence of one another in the market. There is a big possibility that the company that opposed and ignored the pricing level of its competitors will fail in the market especially if pricing strategy place a major role to gain market competitiveness.  Next to pricing strategy, another important factor in this industry would be the collusion of the companies in the market. Cartel is a type of market collusion as far as oligopoly type of market is concerned. as what have identified in the latter part of this paper, cartel provides avenue to prevent the entry of new business entities in the industry as well as lessening the level of competition existing in the market giving the companies an opportunity to increase their profit and at the same time minimizing the threat of being less competitive in the industry. With this benefit that can be derived from collusion, there is no doubt why this is one of the important factors to consider by the companies operating under the market category of oligopoly.

Performance

            Based from the identified mission of Sysco Corporation and from the impressive growth that the company currently enjoys in the market, there is enough reason to say that Sysco have been fulfilling the said corporate mission that serves as the guide of the company in almost all the aspects of operation from planning down to the execution of planned actions and strategies in the market. The fact that Sysco’s sales increased significantly during the second quarter of 2007 to 9 billion USD that formed net earnings of 264 million USD means that customers are satisfied to the quality of the products and/or services that they receive from the company as well as earning the brand recognition from the target customers of the company. with the large market share of Sysco in the industry of foodservice distribution, it gave the company market influence to have bargaining power to its supplier and discounts that eventually contributes to costs efficiency of the company since it minimizes the costs of production. Moreover, another reason why Sysco experienced an improvement on its profitability would be due to the effective customer support team of the company. This only suggests the kind of quality that Sysco’s employees could offer to its customers that gives the latter extra satisfaction from patronizing the products of Sysco.

Government Policies

            One possible distortion that the government officials can impose to Sysco will be the policy regarding the prohibition of predatory pricing of companies that have a large market share and influence in the market that can cause unfair market competition like the former. In addition, even the cut throat competition is being prohibited by the government that is why companies are performing it discretely to the public. The said prohibition of the government for Sysco to exercise pricing strategies that are of advantageous in nature to the company protects the interests of the consumers from the said abuse of market power of the former. This is one of the many roles of the state in the society aside from the provision of security. Another government policy of the government that affects the operation of Sysco Corporation will be the setting of minimum wage rate of workers of the company just like the case of Starbucks. Workers play a major role in the operation of Sysco since any increase in the wage rate of the workers as imposed by the state will raise the operation costs of the company.

            Competitors of Sysco Corporation

Works Cited

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“Worlds First Starbucks Strike, Auckland.” 22 November 2005. Unite Union. 6 February 2008 <http://www.scoop.co.nz/stories/BU0511/S00370.htm>.