The Proposal Essay
Business Proposal for Starbucks Inc: Whole Wheat Bread Sandwiches
In this business proposal, we will introduce a new range of wheat bread sandwiches for Starbucks Coffee that will allow the company to increase its revenue figures and also combat the increasing competition from its rivals such as Dunkin Donuts and Mcdonalds. Starbucks Coffee was founded in the year 1971 and is headquartered in Seattle. The company at present is the world’s largest coffee house chain with 21160 stores in 63 countries of the world where it serves instant coffee, whole-bean coffee and related appetizers.
The reason we believe that the product will be a success for the company because the US population is now facing many health issues and the consumers are now looking for healthier yet cost effective options. Consumers around the world are willing to pay higher for healthier food options. Particularly in the US, which is ranked as most obese country, even the younger population now understands the importance of a healthy lifestyle. Thus, while the rival companies are offering full cheese white breads and burgers, Starbucks can introduce the healthier option in the form of whole wheat bread sandwich. Many of the customers of the company are busy professionals who take their coffee on the go the offices, thus, adding a healthier appetizer for the customers will not only turn the sandwiches as healthier complimentary good for the customers but will also assist the company in achieving the objectives of larger revenue figures and profits.
Market Structure: Monopolistic
Starbucks Inc. operates in monopolistic competitive market where a number of sellers such as Costa Coffee, Dunkin Donuts, Mcdonalds and many others sells similar sort of products with differentiated attributes such as packing, branding, offers, etc. Important to note, in the short-run many monopolistic firms can earn super-normal profit, but because of low barriers to entry they end up earning only normal profits in the long-run. Some of the general feature of monopolistic market structure includes:
i)All firms produce similar yet differentiated product(not necessarily perfect substitutes)
ii)Low barriers to entry and exit.
iii)All firms are profit maximizers.
iv)Each firm have its own pricing policy and none of them are the price takers.
The demand for Starbucks products is elastic, i.e. a 1% change in the price of the product will have a higher proportion effect on the quantity demanded of the product. Thus, consumers increase the quantity demanded at lower rates, vice-versa, however, the demand in the industry is majorly driven by brand name along with the price.
Price elasticity and its impact
With elasticity of the product identified to be elastic, a launch of low-priced product by a big market player such as Starbucks can increase the quantity demanded by the consumers. In addition, with consumer spending reportedly back on the bullish trend in the United States, the company can benefit with the launch of low-priced new line of wheat bread sandwiches in the form of increased sales and most importantly increased market share.
Being operating in a highly competitive industry where the rival firms are already selling the product to the consumers, Starbucks should follow competition-based pricing strategy according to which the company will price the product similar to what the rival firms are charging. With Starbucks having high customer loyalty, even similarly priced products will be able to reap into competitor’s clientage.
While the pricing strategy will be an important factor in the success of the product, but non-pricing strategies will ensure the organization achieves its objectives. Some of them are discussed below:
Extended working hours:
Starbucks stores are known for offering their products only during the day time while only few of the stores are open in the evening offering appetizers, etc. On the other side, rivals like Mcdonalds and Dunkin have 24*7 store timings for the customers.
Thus, in order to ensure success of the new product, the company may opt for extending hours for its stores.
Starbucks is largely known for its coffee servings and although, Starbucks serves sandwiches after 4PM in some of its stores, but if the plan is to introduce the product with full capacity and awareness, advertisements in TV Commercials, Store Outlets, Newspapers, etc. can do the needful for the company.
The company can bundle the sandwiches with some of its best-selling products like Latte or instant coffee. This will create a complimentary relationship between the good and the product in the long-run thus ensuring success and increased revenue figures from the new product also.
iv) Offers and Gift Cards
In order to attract more customers, Starbucks can launch the product with attractive offers and value addition to the gift cards. For Instance, in the initial stages, the company can offer the sandwiches at discounted prices or can add value to the customer’s gift cards once the product is purchased.
Non price strategy for creating barriers to entry
For a firm operating in a monopolistic industry, it is very difficult to create a barrier for other firms to enter into the market. However, Starbucks that hails high on customer loyalty, raising production output to a level which cannot be matched easily by a firm which is willing to enter the market can be the only way to create barrier for the new entrants, but for a restricted period of time.
Change in the cost mix of the company:
Adding a new product to the product line of the company involves significant costing and is likely to impact the fixed and variable costing mix. Starbucks cost of sales includes a portion of rental expenses for the stores which is fixed irrespective of the sales of the company, which we assume to be $30000 for a store. Thus, adding a new product will not affect the fixed costs of the company although variable expenses relating to raw materials(bread and other ingredients), advertisement expenses and many other will see a hike, which we assume to witness a hike by 10% and around $2.80/ unit.
Change in marginal cost and marginal revenue
Every firm in the monopolistic market maximizes its profit by producing the output at the level when marginal costing equals marginal revenue while the price is charged for the quantity from the demand curve. Hence, with our decision to increase the quantity supplied of the sandwiches to create barrier for the new entrants, the marginal cost will increase while the marginal revenue will fall, and the optimum production level will be fixed at the point of intersection of these two parameters.
Long, N. (n.d.). What Happens to Marginal Revenue When Output Increases? Retrieved February 24, 2015, from Chron': http://smallbusiness.chron.com/happens-marginal-revenue-output-increases-34481.html
Monopolistic Competition. (n.d.). Retrieved February 24, 2015, from Investopedia: http://www.investopedia.com/terms/m/monopolisticmarket.asp
Starbucks Inc. (2014). Annual Report 2014.
Stengel, D. (n.d.). Principles of Managerial Economics. Retrieved February 24, 2015, from http://catalog.flatworldknowledge.com/bookhub/reader/5572?e=stengel_1.0-ch07_s07
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