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Introduction

          Starbucks. The mere mention of it’s name has you thinking about your favourite cup of coffee. Hot or Cold, bitter or sweet, it doesn’t matter. Starbucks’ mission is to inspire and nurture the human spirit-one person, one cup and one neighbourhood at a time. Thus far they have been succeeding with over 5500 outlets across 50 countries.

Why Starbucks?

The main reason as to why we had chosen Starbucks was because we wanted to learn more about the beverage that we loved so much. Furthermore, we also chose this beverage because we felt that it was a drink many young adults such as ourselves enjoyed and therefore would be interesting to learn more about the demand factors affecting the instant beverage industry. The last reason as to why we chose this industry was because we wanted to study the factors of demand of something which was nearby and had a direct impact on us.

The type of market competition Starbucks is in is an imperfect competition. Starbucks is in a monopolistic competition structure. There is a relatively large number of sellers. Among the sellers of close substitutes include Coffee Bean and Tea Leaf, Chatime and Pacific Coffee Company There is a great amount of differentiation in product between these firms. The differentiation includes product attributes, service, location and packaging. There is easy entry and exit into monopolistically competitive industries. Firms within monopolistically competitive industries have some control over price of products. This is due to product differentiation.

Issues

We wanted to learn more about the factors of demand that affect the instant beverage industry in Malaysia. There are many companies within this industry. In order to conduct our research we had to assume everything other than the factors of demand that we intended to study were kept constant (ceteris paribus). We assumed that during this period of time, the disposable income made available to the participants of our survey was kept constant. Furthermore, we also assumed that these individuals remained loyal to their chosen beverage. Next, we also assumed that the price of the beverages we intended to study remained constant. This was the most important assumption as the Law of Demand states that Price has a direct inverse relationship with Quantity and therefore needed to be assumed constant throughout this study.

Problem Statement

The Factors of Demand that we intended to study are  income, price of substitute goods, taste and preference of consumers and lastly the effects of customer expectation on the demand of Starbucks.We wanted to study whether:

a.    Individuals with higher income are more likely to purchase Starbucks?

b.    Does the price of substitute goods affect the demand for Starbucks?

c.    Does the taste of the beverage matter?

d.    Are future expectations of price changes enough to sway demand?

Objectives

1.    To better comprehend the determinants of demand that affect the instant beverage industry

2.    To gain a better understanding of price elasticity in the instant beverage industry

3.    To learn to analyze and gain info from basic surveys

Limitations

1.    Limited Sample Space-not diverse group of individuals (age,income,gender,taste/preference)

2.    Respondents that may not have filled in the survey honestly

3.    Close-ended questions do not allow participants to explain or express themselves

4.    Different people may have different levels which distort likert-scale based questions

Methodology

The first step that we had taken was to analyze the factors of demand that we intended to study and based on that design a comprehensive and informative survey.

Here are the factors that affect demand:

·      Income

·      Price of substitute goods

·      Taste of Beverage

·      Customer Expectation

By researching on the internet, using reference books and also the knowledge that we had learnt from our economic classes, we came up with 4 factors. Next was to know the factors of demand elasticity:

·      Level of Income

·      Availability of substitute good

We got together and discussed what suitable questions should be put in our survey so that we can find out consumers behaviour towards changes. We came up with 14 questions and distributed it randomly to 30 people.

After all of that, we got our results and we evaluated  and analysed our data and the findings that we received.

Findings and analysis

Starbucks coffee is known to all as a glamorous type of coffee, some even find it out of the world but what are the factors that affect the demand of Starbucks coffee? The answers can be shown with a simple survey that we had carried out to analyse the effect of income, price of substitute goods, taste and preference of consumers and the effects of customer expectation on the demand of Starbucks.

Income Factor

According to the survey that we had conducted, all of the participants of our survey that consumed Starbucks were unemployed full-time students. Therefore, we assume their pocket money is their source of money and they have no other forms of income. Income is seen to have a direct effect on the number of Starbucks purchased. At first we asked participants which drink they preferred, the results were 53.33% for Starbucks and 46.67% for Chatime. Then we continued to ask if they would buy Starbucks over Chatime if their income increased. At this question the results were Starbucks 60%  and Chatime 40% . This shows that there is a direct linkage between Income and demand for Starbucks. This could mean that they feel Starbucks is their best choice if money was not an active barrier. Furthermore from this we are also able to derive that Taylor’s University Students feel that Starbucks is the superior good whereas Chatime is an inferior good. Students prefer are more willing to purchase Starbucks as their purchasing power has increased with an increased income and the opportunity cost is lower, as they do not have to forgo anything of great significance in order to purchase Starbucks Coffee

 Elasticity

To determine the elasticity of demand for Starbucks Coffee we measured the percentage change of Quantity demanded over the percentage change in Price. This was derived from the question if there was a 10% increase in price of Starbuck’s Coffee, would you still buy it. Despite a 10% increase in price, the percentage change of quantity demanded for Starbucks Coffee had dropped by 6.25%. The percentage change of price is higher than percentage change of quantity. This means that a 10% change in price is still acceptable and that most consumers are still willing to pay this price for Starbucks Coffee. This indicates inelasticty.However, when there is a 30% change in price of Starbucks Coffee, the percentage change of quantity demanded for Starbucks had dropped by 43.75%. The percentage change of price is lower than percentage change of quantity. This means that consumers react negatively towards the price change and would shift to substitute goods. This indicates elasticity.This means that despite consumers thinking Starbucks is a superior good, they will still move away from Starbucks if the price becomes too expensive for them. This shows that Starbucks is clearly a luxury good and students can live without it.

        

Price of Substitute Goods

In general an increase in the price of a substitute good of Starbucks coffee will cause an increase in the demand for Starbucks coffee. According to the survey that we had conducted, we could see an 18.75% increase in quantity demanded for Starbucks when there was a 20% increase in price of Chatime, which is the substitute good for Starbucks coffee. An increase of price of Chatime caused an increase of quantity demand for Starbucks. This proves the general assumption that was made earlier. A cross-elasticity calculation showed that there is positive cross elasticity.  This shows that consumers generally prefer Starbucks, however are forced to settle for the inferior good (Chatime) due to price factors. This also shows that the demands for these goods are very elastic as there is high availability of these especially since these two shops are only opposite one another in Taylor’s University Lakeside Campus. This shows that the price of substitute goods would increase the quantity demanded for Starbucks.

Taste of Beverages

The average rating derived from a likert-scale based questions showed that the average rating for Starbucks is an 8 whereas for Chatime only 6. Furthermore, when asked which drink customers preferred 53.33% chose Starbucks and 46.67% chose Chatime. Assuming ceteris paribus other than taste of Starbucks and Chatime, 66.67% of consumers chose Starbucks and only 33.33 % of consumers chose Chatime. The 13.34% change shows that consumers prefer the taste of Starbucks, The reason as to why this 13.34% of consumers could have changed is due to the now equal pricing of Chatime and Starbucks (assuming ceteris paribus other than taste). Before that many of our participants could have preferred Starbucks at Taylor’s University Lakeside Campus because of the free Wi-Fi or the more comfortable environment in comparison to Chatime at Taylor’s University Lakeside Campus  which does not provide Wi-Fi or comfortable seating areas. However when everything other than taste is kept constant, majority of students still prefer Starbucks. This proves that Starbucks is the better tasting beverage.

Customer Expectation

Considering the release of the new Malaysian Budget, which had a reduction of the sugar subsidies had led to much speculation and expectations of an increase of price for Starbucks coffee. This is because sugar is an intermediate good for Starbucks Coffee. Therefore, we assumed there was a spillover effect and we wondered how would consumers react if there were rumors that Starbucks was about to increase their prices, would they increase the amount of purchase. As much as 23.33% of people said they would increase the number of purchases they made this week, however 76.67% of people said they would still buy the same amount. This could be because they expect the price change to be minimum and therefore they would not immeadiately react to the minimum price changes. Therefore, customer expectations can affect the demand for Starbucks Coffee.

Conclusion

In conclusion Starbucks is in a monopolistically competitive industry and elasticity is high as there are a variety of substitutes and they are both affordable and available to consumers. Based on our research, the income factor affects student’s purchases, they would purchase more Starbucks if their Income increased. This direct link between income and choice of drink proves that Starbucks is the superior good whereas Chatime is considered the inferior good. Starbucks Coffee is considered preferred by consumers as it has a superior taste. Currently the quantity demanded for Starbucks is lower than it would if it was priced similarly to Chatime. This means that if Starbucks were to lower their prices, they would be able to extend to a much larger consumer base as price is a barrier. I believe this be able to offset incerease of customers would price reduction and still allow Starbucks to earn normal profits in the long run. Consumers are more willing to purchase cheaper items as the opportunity ``` cost is then lower. Our research has shown, that when other than taste ceteris paribus, consumers prefer Starbucks over Chatime. This shows that consumers prefer the rich taste of Starbucks compared to Chatime. Consumer expectation due to reduction of sugar subsidies does not have a large impact on the demand for Starbucks. This could be as consumers think the change will be minor. However, the goods and services tax might be able to reduce the demand for Starbucks in the future. Suggestions for Starbucks include price reductions through discounts or rebates. Furthermore, Starbucks needs to improve efficiency to reduce costs to prevent a rise in prices when the goods and service tax is introduced in the future. Despite the large efforts that were put into this research, there were limitations that have hampered this research. These include small sample groups, insincerity of participants,  and shortage of time to allow for detailed research. Therefore, I hope that in the future more detailed research can be carried out.

Survey Form

Economic Assignment

1.    Age

Below 18        18-21        21-24        Above 24

2.    Gender

Male                 Female

3.    Occupation

Student                        Employed Student                     

4.    The highest qualification:____________________________________

5.    Weekly Income:

RM0-100                     RM100-200         RM200-300         RM300-400

6.    Which drink do you prefer?

Starbucks       Chatime               

7.    If Chatime increased their price by 20% which would you prefer?

Yes                   No

8.    Would you still buy Starbucks if they increased their price by 10%?

Yes                               No

9.    Would you still buy Starbucks if they increased their price by 30%?

Yes                               No

10. Would you buy more Starbucks if your income increased?

Yes                               No

11. Hearing rumors that there will be an increase in the price of Starbucks next week, would you buy more this week?

Yes                               No

12. How frequent do you drink in a week?

1-2                                3-4                         4-6

13. Which factor makes you to choose your specified drink?

Taste                            Price                     Promotion/Discount

14. Assuming other than taste, everything else is constant, which drink do you prefer?

Starbucks                   Chatime

15. Please rate the taste of these companies drink from 1 – 10.

Starbucks:     (1 – 10)

Chatime:         (1 – 10)