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3.1 Start Up: Coffee

Starbucks's Rise and Market Impact

  • Early Beginnings:

    • Starbucks began in Seattle in 1971.

    • By 1986, it had grown into a small chain of four stores in the Seattle area.

  • Howard Schultz's Influence:

    • In 1987, former Starbucks manager Howard Schultz bought the company from its founders for 3.8 million, inspired by the culture of Italian coffee bars.

    • Schultz launched an aggressive expansion campaign and took the company public.

  • Global Expansion and Financial Success:

    • By 2019, Starbucks had become an international chain with over 30,000 stores in seventy-eight countries.

    • It grew into a Fortune 500 company with over 22 billion in annual sales revenue.

  • Impact on Consumer Tastes:

    • Starbucks revolutionized the coffee-drinking habits of people worldwide.

    • It spurred American consumers' taste for gourmet coffee.

The Evolving Coffee Market

  • Increased Competition:

    • Starbucks's success and profits attracted other companies, leading to market entry by retailers such as Seattle’s Best Coffee and Gloria Jean’s Coffees.

    • Today, the coffee market includes coffee bars, coffee carts, drive-throughs, and coffee kiosks in various locations.

    • Even McDonald’s now sells specialty coffee drinks in its McCafes.

  • Volatility in Coffee Bean Prices:

    • The price of raw coffee beans, the foundation of Starbucks’s empire, can be quite volatile.

    • Over the last decade, prices have ranged from as low as 1.22 per pound to as high as 3.02 per pound.

    • Starbucks roasts and distributes these beans through grocery stores and its cafes, where customers may pay 5 or more for a cappuccino or latte.

Introduction to Markets

  • Definition of Markets:

    • Markets are defined as the institutions that bring together buyers and sellers.

    • They are the spaces, physical or virtual, where these exchanges occur.

  • Types of Markets:

    • Physical spaces: Examples include a kiosk in a student union for a morning latte.

    • Virtual spaces: Online platforms allow finding specialized products, like Indonesian civet coffee, globally.

    • Centralized markets: Buyer purchases, such as shares of Starbucks stock, are routed through a central exchange like the NASDAQ.

    • Decentralized markets: Products like muffins are available from multiple distributed sources—groceries, bakeries, cafes, and convenience stores.

  • Function of Markets:

    • Markets determine not only the prices of goods and services but also how much of those things society will produce and consume.

    • They provide tools to understand how prices and quantities are likely to change in response to broader economic events.

The Demand and Supply Model: A Core Economic Tool

  • Learning Objectives Addressed:

    • What determines the price of raw coffee beans? The price is determined by the interaction of demand from coffee roasters and consumers with the supply from coffee growers in the market for raw coffee beans.

    • How is the price of a cappuccino set? The price is set by the interplay of consumer demand for specialty coffee drinks and the supply provided by cafes like Starbucks, reflecting their costs and desired profit margins.

    • How do producers of coffee beans decide how much to produce? Producers decide based on factors like production costs, expected market prices, and their profit incentives, which are captured by the supply side of the market model.

    • What happens if growers don’t produce enough, or if they harvest too much? If production is insufficient (undernourishment), prices will likely rise due to scarcity, while overproduction will likely lead to falling prices due to a surplus, as markets adjust to find a new equilibrium.

  • Overview of the Model:

    • The demand and supply model is a powerful framework used by economists, from Nobel Prize winners to students.

    • It serves as a fundamental tool for understanding market dynamics.

  • Components of the Model:

    • Buyers' Side (Demand Side): This part focuses on the factors that influence buyers' decisions regarding what to purchase and in what quantities.

    • Sellers' Side (Supply Side): This part examines the factors that determine what sellers want to produce and how much they are willing to offer for sale.

    • Integration: By putting demand and supply together, the model explains how markets determine the prices and quantities of products and services traded in the economy.

  • Versatility: The model is highly adaptable and can be applied to a wide range of situations, from searching for wedding venues to sourcing hops for craft brewing, or even students buying coffee during study sessions.