Starbucks Malaysia

Starbucks Malaysia is a joint venture between Starbucks Coffee Company and Berjaya Group Berhad. In 1998, Starbucks has entered Malaysian market with the first store at KL Plaza in Kuala Lumpur (Market Watch, 2013) and it is operated by Berjaya Starbucks Coffee Company Sdn. Bhd.. In January 2012, Starbucks were expended in whole Malaysia with more than 140 stores in the country (Starbucks Coffee Company, 2013). Starbucks is well known in the coffee industry. Starbucks roasts and sells high quality of Arabica coffees and coffee drinks in their outlets (Market Watch, 2013). Besides that, Starbucks also provide food such as sandwich, cakes, and bread in their outlets.

In Malaysia, Starbucks’s coffee is a luxury good so it would have elastic of demand. When Starbucks’s coffee is a luxury good, consumer is very sensitive to the price change. The consumer demand will drop drastically when the price of the Starbucks coffee rises because consumer would consume lesser than before or switch to a less costly alternatives (Sloman, Wride, and Garratt, 2012). When the consumer consume lesser, the total consumer expenditure will decrease. Thus, the total revenue receive by Starbucks will also be decreased. Graph 1 below shows that a small change in price will have a huge change in the quantity (Sparknotes.com, 2013).

                                                                                 Graph 1

Besides that, there are several determinants that cause the shifts of the demand curve. First of all, it is the price of related goods. When the price of the substitute such as tea is increase, the demand for Starbucks coffee will also increase. Moreover, when the price of the complement such as milk is increase, the demand for Starbucks coffee will decrease. The next determinant is the income. When the income is increase, the demand of the luxury goods will increase and the demand for normal good will decrease. For example, the demand for the Starbucks coffee increases whereas the demand for McDonald’s coffee will decrease when there is an increase in the income. Besides that, the expected future price is also one of the determinants of demand. When the price of Starbucks coffee is expected to be rise in the future, the current demand for the Starbucks coffee will increase.

           On the other hand, Starbucks are willing to supply more coffee because the price of the coffee is relatively high and they are able to cover their marginal cost of production (Sloman, Wride, and Garratt, 2012). There are several determinants that cause the shifts of the supply curve. First of all, it is the prices of factors of production. The suppliers are not willing to supply more when the price of a factor of production such as the farming cost for the coffee bean increased. Thus, the supply curve will shifts to the left. The next determinant for supply is technology. The brewing system that used in Starbucks could allow them to produce the coffee within minutes. When the cost of production of Starbucks coffee is low, they are willing to supply more. Therefore, the supply curve will shift to the right. Moreover, the state of nature is also one of the determinants for supply. For example, the storm in Colombia has cut down the production of coffee bean to 10% in year 2010 (Walsh, 2011). When the supply is decrease, the supply curve will shift to the left.

There are three factors that influence the price elasticity of demand. The first factor is the closeness of substitutes. When there is more substitutes are available in the market, the demands for the Starbucks coffee will more elastic (Sloman, Wride, and Garratt, 2012). For example, when the price of a cup of Starbucks coffee rose from RM13 to RM14, consumer would start to a buy a cup of tea instead of coffee. This indicates that Starbucks coffee is very elastic. On the other hand, if the consumers are not willing to giving up the Starbucks coffee even the price is very high; this indicates that Starbucks coffee is inelastic because there is lesser substitute in the market.

            The next factor that influences the price elasticity of demand is the amount of income spent on the good. The elasticity of demand of the Starbucks coffee is depend on the income that consumer are willing to pay. When the income of consumers is increase, consumer is more willing to pay for a cup of Starbucks coffee. For example, luxury good like Starbucks coffee will become a normal good to some people because their income allow them to spend more. However, when the income of consumer is not increase, consumer is not willing to pay for a cup of Starbucks coffee. Hence, the Starbucks coffee is very elastic.

The last factor that influences the price elasticity of demand is the time. The longer the time, the more time you can find substitutes. Thus, the demand for the Starbucks coffee is more elastic. For example, caffeine addicted might be switch to tea when the time given for them is long enough.

Starbucks Malaysia is in a monopolistic competitive market structure. Monopolistic competition can be defined as many firms are competing in the market but they have some power to decide on the price (Sloman, Wride, and Garratt, 2012). Starbucks are price maker so the demand curve faced by the firm is downward sloping. Coffee is a homogeneous product but Starbucks has successfully differentiated their product from their competitors with the brand, quality and taste. Therefore, Starbucks are able to control its price.

In the short run, Starbucks may earn supernormal profits because they are facing less competitors and their product are differentiated from their competitors such as Coffee Bean and Tea Leaf and San Francisco Coffee. When the marginal cost is equal to the marginal revenue, Starbucks could maximize their profit (Sloman, Wride, and Garratt, 2012). When Starbucks produce high quality of coffee, consumers are willing to pay at a higher price because the consumption for coffee drinkers is increasing from Brazil to Asia (Walsh, H, 2011). Therefore, Starbucks are able to earn supernormal profits in short run.

In the long run, Starbucks will have zero economic profit because there will be new firms enter in the market and some of their customer may switch to other brands of coffee. For example, McDonald has introduced a relatively cheaper coffee drinks compared to Starbucks which has been proved popular (Miller, 2009). Therefore, it causes the demand for Starbucks decreases. When the firm is in equilibrium, the demand curve which is also the average revenue curve is tangential to the average cost curve. Graph 2 below shows the equilibrium short run and the long run under monopolistic competitive (Bized.co.uk, 2001).

                                                                                       Graph 2

            In Malaysia, there is a price ceiling for the coffee industry. Price ceiling is a regulation that set by the government which states that when the price charge higher than the price set by the government it is considered illegal. Under Competition Act 2010, coffee shops are allowed to charge different prices on their products but the price charge must be reasonable (Borneo Post Online, 2013).

            Furthermore, government in Malaysia has imposed indirect tax to certain prescribed goods and services such as food, drinks and tobacco (NBC Group, 2013). The rate of the service tax is 6% which will be pay by the consumer for every purchased. Hence, the price of Starbucks coffee will increase by 6% for every purchased. When the consumers pay all of the tax, the firm is in the perfectly elastic supply.

            In the long run production, Starbucks may experiences economies of scale as well as diseconomies of scale. When Starbucks is in the economies of scale, the long run average cost is decrease because the coffee that they produce is increasing. However, when Starbucks is in the diseconomies of scale, the long run average cost is started to increase because the coffee that they produce is increase. For example, the brewing machines that used in Starbucks allow them to produce many cups of coffee within minutes. Therefore, their long run average cost is decrease because they are able to earn profit at this point and so Starbucks is in economies of scale. Before the diseconomies of scale occur, constant return to scale will be occurred. In constant return to scale, the long run average cost is kept constant when Starbucks are able to increase their production. However, the brewing machines in Starbucks need to be repair or do maintenance due to long period of usage. So the long run average cost is started to increase and yet Starbucks still increasing their production. At this point, Starbucks is in diseconomies of scale. Graph 3 below shows the long run average cost curve for economies, constant, and diseconomies of scale (Riley, 2012).

                                                                   Graph 3

In conclusion, Starbucks Malaysia is a monopolistic competitive and they are price maker in the market. They usually set a higher price compared to their competitor because their product is differentiated. They can gain loyal customer form their product differentiation. Loyal consumers are willing to pay at a higher price because the quality of coffee that Starbucks produce meets their preferences.

                                                                                                                                             (1518 words)


By Chai Ching Wan (0311880)

   

Reference

Bized.co.uk. (2001) Monopolistic Competition - Short Run to Long Run. [online] Available at: http://www.bized.co.uk/reference/diagrams/Monopolistic-Competition---Short-Run-to-Long-Run [Accessed: 23 Oct 2013].

Borneo Post Online (2013) ‘Have a cuppa with us before upping prices’. [online] Available at: http://www.theborneopost.com/2013/10/20/have-a-cuppa-with-us-before-upping-prices/ [Accessed: 23 Oct 2013].

Market Watch (2013) Starbucks Announces the Opening of 100 New Stores in Malaysia over the Next Four Years. [online] Available at: http://www.marketwatch.com/story/starbucks-announces-the-opening-of-100-new-stores-in-malaysia-over-the-next-four-years-2013-06-26 [Accessed: 20 Oct 2013].

Miller, C (2009) Will the Hard-Core Starbucks Customer Pay More? The Chain Plans to Find Out. [online] Available at: http://www.nytimes.com/2009/08/21/business/21sbux.html?_r=0 [Accessed: 22 Oct 2013].

NBC Group (2013) Service Tax in Malaysia. [online] Available at: http://www.nbc.com.my/service-tax-in-malaysia.html  [Accessed: 23 Oct 2013].

Riley, G (2012) Unit 3 Micro: Revision on Scale Economies and MES. [online] Available at: http://www.tutor2u.net/blog/index.php/economics/comments/unit-3-micro-revision-on-scale-economies-and-mes [Accessed: 24 Oct 2013].

Sloman, J., Wride, A. and Garratt, D. (2012) Economics. Eighth Edition. Pearson.

Sparknotes.com (2013) SparkNotes: Elasticity: Elasticity. [online] Available at: http://www.sparknotes.com/economics/micro/elasticity/section1.rhtml [Accessed: 21 Oct 2013].

Starbucks Coffee Company (2013) Starbucks Malaysia. [online] Available at: http://www.starbucks.com.my/about-us/starbucks-malaysia [Accessed: 20 Oct 2013].

Walsh, H (2011) Starbucks Drinkers Won’t Get Break as Colombia Supply Drops. [online] Available at: http://www.bloomberg.com/news/2011-05-26/coffee-drinkers-won-t-get-price-break-as-colombia-supply-slumps.html [Accessed: 24 Oct 2013].