2. Production Costs All the costs, internal and external, to produce a good Very important to businesses and the economy Can determine if a business succeeds or fails Directly affects prices Examples of different costs at Starbucks Dairy Labor Occupancy
3. Starbucks: A brief history 1971- The first store opens at Seattle’s Pike Place Market 1987- First stores open outside of the Seattle area in Chicago and Vancouver B.C. 1988- Begins to offer health benefits to both full and part-time employees 1991- Becomes the first privately owned company to offer stock benefits to part-time employees 1992- Opens on the stock market at $17 per share. Ends at $21.50 per share
4. Present Day Starbucks Over 16,000 locations in 50 different countries Has earned multiple awards for the ethical treatment of its workers as well as the ethical treatment from coffee bean suppliers
6. Increases in Production Costs Drink prices have increased nationwide Covers increasing milk costs due to high demand for US milk Covers rising costs of other commodities such as sugar and coffee prices. Increased production costs are passed on to consumers
7. Production Costs for the Better Have become cheaper over time Forces companies to be competitive Companies strive to make a better product at lower prices to maximize profit
8. Production Costs for the Worse Government regulations may increase the cost of certain products Excuses for companies to raise their prices
9. Production Costs: Go Away! Production costs affect every business entity that produces a good or service Allocation of resources, management of labor, and efficient business practices determine whether production costs will severely hinder the business from making a profit.
10. Low Production Costs in an Efficient Business Bottled Water Companies New technology, minimal use of laborers, economies of scale, and location, location, location. Externalities- Air Pollution, Tapping of Precious Resources
11. High Production Costs in an Efficient Business Oil Industry Low reserves, difficulty in retrieval, and liability of laborers Externalities- Health Problems, Environment
12. The Starbucks Company Starbucks has rather high production costs but also enormous profits
13. How They Do It Lean Approach Takes away unnecessary movement and changes time-wasting activities Price Raises 2006-Raised price an average of a nickel per beverage due to higher labor and energy costs 2007-A substantial increase in diary prices led to an average increase of 9 cents per drink 2010-A increase in the price of raw coffee has lead to a recent increase of “labor-intensive” drinks like frappucinos and lattes
14. Low Elasticity of Starbucks Consumers As Starbucks increases prices costumers stay loyal At the end of the last quarter the profits were triple the expected figure, 339.0 million with more stores to open in the next fiscal year including an expansion in China Price raises are typically not added to coffee and espresso drinks High Elasticity of Demand Whereas, consumers who pay $4 for a Frappuccino are more willing to absorb the price raises Low Elasticity of Demand
15. Externalities of Starbucks Employee Benefits Paid vacation and sick leave, subsidized health benefits, 401(k) plans, and stock options for both full and part time employees Environmentally Conscious Fair Trade Coffee and Environmental Leadership
16. The Goal of Starbucks Expand the output of coffee Starbucks owns company farms to produce high quality beans at low costs By using company farms, Starbucks does not have to pay for the middleman costs of beans
17. High Starbucks Bean Prices 2001- Starbucks purchased 90% of it’s beans at variable pricing 2002- Starbucks switches to buying 74% of it’s beans at fixed costs 31% of those suppliers turned into long term contracts Increased purchases from small suppliers from 9% to 59% of their total purchases
18. Corporate Responsibility: Starbucks Donates portions of it’s profits to charities Helped with reconstruction efforts in New Orleans after Hurricane Katrina Being Environmentally friendly “Grounds For Your Garden” Restructured napkin and trash bag sizes Recycled over 2.5 billion cups
19. No Shortage of Negatives 2005 – Starbucks is forced to pay $165,000 to eight employees Employees claimed they were retaliated against for being pro-union 2006 – Starbucks once again pays $2,000 to three employees and two fired employees were offered reinstatement
20. New Competition: McDonalds McDonalds has attempted to enter the coffee house market Offers gourmet coffee at lower prices Will cut into Starbucks coffee sales, as well as food sales
21. Starbucks Partnerships Apple Customers were allowed to browse iTunes to find out songs on the store’s radio and were offered free songs as a “Pick of the Week” PepsiCo Frappuccino bottled beverages Dreyer’s Ice Cream Starbucks flavored ice cream Acquired Seattle’s Best Coffee in 2003 Used as a franchise
