ECONOMICS AND FINANCE FOR BUSINESS COMPARISON BETWEEN TWO CAFES STARBUCKS AND CLASS ROOM 48 LOCATED IN MANLY, NSW, AUSTRALIA
This report gives a brief about the market structure of two coffee shops both of them are situated in Manly. The key findings of this report is at first Starbucks was losing due to this many Starbucks branches were closed in Australia. Starbucks closed 70% of their retail in first seven years and they lose nearly about $105 million. In the recent years Starbucks has picked up their growth process and they are growing slowly for an example they have 23 outlets in 2008 in 2019 they have 39 outlets in Australia this proves that they are growing slowly. In this report the value HHI is also calculated that determines whether the market is concentrated or not. The report also analyses the growth strategies taken by the Starbucks and The Classroom 48. The strategies of the Starbucks are more influential than the Classroom 48 that is why the market share of the Starbucks is more than the Classroom 48. The market of coffee shops is growing by 2.2% over the year. Hence it can be said that the classroom 48 has the scope to capture the market as it serves a good quality of food and gives a good service to their customers.
The goal of the report presented is a literature review and comparison between two cafes in Australia. The companies that are being investigated are Starbucks and Class room 48. Starbucks is a famous brand, which is preferred by most of the people. However, the company had no success in the Australian market since its joining in the year 2000. On the other hand, Class room 48, is an Australia based company situated in Manly. Being a firm of the country itself, this cafe is in much more comfortable condition compared to Starbucks.
The research is done through both primary and secondary analysis. The companies’ official sites were being visited to collect information about the reviews of the general public. The sites also contained the list of products that the companies offer to their customers along with the price of the products. The cafes were also personally visited in order to carry out the research. After taking permissions from the managers of both cafes, staffs have been asked some questions regarding their views towards the business. The customers were also being asked about their opinion of the two cafes and how their preferred cafe is better than the other. Through the secondary method of investigation, it has been found that Starbucks has failed to proclaim in the Australian market, while Class room 48 has been continuously flourishing.
The research is consisting of a literature review that gives the detailed description of the strategies that should be used by the companies to expand with profit. There is the mention of different strategies that would help the companies grow from within. The pricing and non pricing methods are also described in order to attract more customers. The research would be concluded with a short synopsis of the entire report
2.1 Market stucture
There are mainly four types market structure exists in the economy. These are perfectly competitive, monopoly, monopolistic competition and oligopoly. The four market structure is based on some assumptions. In this context of two coffee shops Starbucks and Classroom 48 is having monopolistic competition market structure. The market structure is monopolistic market structure because the main assumptions of this market structure are the firms can maximize their profit. The two cafes Starbucks and Classroom 48 sell slightly differentiated products and the consumer or the buyer can choose their product over another product. There are also no barriers of other cafes to take entry into the market. The cafe business is improving very much over the year. There are over 20000 thousands coffee shops in Australia. Starbucks opened their first outlets in 2000. By the end of 2008 they opened nearly 90 shops in Australia. Starbucks closed nearly 70% of their outlets in Australia in the year 2008. They mainly closed those shops where they wer5e incurring loss. Starbucks has only 23 outlets left in Australia. In the opening seven years Starbucks incurred a loss about $105 million dollars which leads to close those 61 locations in Australia. In 2018 there were 39 outlets that is they are growing slowly. The growth of coffee business is about 2.2% in Australia in 2018.the market share of the two coffee shops Starbucks and Classroom 48 is about 51% and 49%. The Herfindahl and Hirschman index is obtained by summing up the square of the market share. The HHI determines the concentration of the market the range of HHI is from 0 to 10000. The high the value of HHI, the concentration of the market is that much high. If the value is less than 1500 then the market is competitive if the value is between 1500-2500 then the market is comparatively concentrated if the value is greater than 2500 then the market is highly concentrated. In this context of the HHI for the Starbucks and The Classroom 48 is 51^2+49^2=2601+2401=5002. Hence, the market of both the coffee shops is highly concentrate
2.2 Cyrrent competittion of the industry
The product based Competition is mainly for the basic coffee shops and here the two companies Starbucks and The Classroom 48 is both are the basic companies. The larger companies earn profit maximum by the sales of chains. The competition for the specific retail arises for the quality, flavor and for other specifications of coffee. Starbucks offer a variety range of coffee flavor like hazelnut, amaretto, raspberry and many other flavors. Starbucks does not use flavored coffee beans instead of the flavored beans they use concentrated syrup for each and every flavor (Burke, Genn-Bash and Haines, 2018). According to Starbucks use of concentrated syrup- increases the taste of their Arabica bean. The Classroom 48 also offers a variety range of coffee flavors. The industry rivalry is due to the special coffee which is different for each retail organisation. The sale of the special coffee is mainly vary for the taste and the flavors the shop offers. The taste of coffee varies from customer to customer.
Most of the firm maximizes their profit in which they have monopoly power. That is only that firm can provide that special service or product. From these, it can be stated that the coffee can earn more profit from the special coffee they have in their special menu. The main proposal for the coffee shops is that they can increase the variety of special coffee. The price of the product should be more competitive. Sometimes the demand for the special thing is inelastic that is the customer is less responsive for a change in the price (Seminario, and Mendoza, 2018). The ideal business strategy that can increase the profitability that the coffee shop should cater its special to its high income and well educated consumer base.
3.1 The growth straegies taken by the companies so far
Howard Shultz owned all the assets of Starbucks on 18th August 1987. As soon as he buys the Starbucks he took aggressive growth strategies. Starbucks opened 125 stores in the first five years. In order to maintain the quality and the service to the customers Starbucks did not go for franchising instead of that it controlled all their stores. In this way they expanded their business in many countries. The second strategy taken by the Starbucks was the satisfaction of the employees in Starbucks. According to Sangster and Priestly (2019), Howard Shultz said that the employees are the soul and heart of Starbucks because whatever the Starbuck earning those are coming through them. Starbucks took a strategy of giving health incentive to the employees who are working more than 20 hours a week (Starbucks.in, 2019). The Starbucks also launched a new scheme that is employee stock ownership plan which is known as Bean stocks. At first they offered 12% of the base overtime it was increased to 14% of the base pay. The involvement of the employees in the business was a master plan by the Starbucks management. Now the employees get a clear incentive which also not increased the cost of Starbucks (Perfectdailygrind.com2019). The level of the service of the employees also increased. Starbucks also started a new open forum for the employees where they allow all suggestions and question of the employees of the Starbucks. Starbucks secured their suppliers despite of being one of the top coffee shop they never insisted their supplier to decrease the price of the coffee beans. Starbucks aligned with Conservation International to improve the C.A.F.E (Coffee and Farmers equity prices). The main objective of C.A.F.E is increase the standard of living of the farmers and to observe the quality of the coffee beans (Cnbc.com, 2018)
The classroom 48 is not a big company like Starbucks but they are competing with these types of big established company (Classroom48.com, 2019). They mainly focus on the quality of the food the price of their products. The prices of their products are comparatively lower than Starbucks. That keeps their coffee shop always filled. They also offer a great service to their customers. There are also special offers, which are provided to their special customers. They also try to keep their menu unique which attracts many customers towards them. They offer special prices and special items on the special days like mother's day, Christmas and many more. They also give a great discount on these special occasions.
3.2 Proposal for growing business
The Classroom 48 has great scope to capture the market share because of their great service unique menu, and tremendous discounts. The Classroom 48 need to open new branches in other cities too to expand their business. They should not give franchise to maintain their reputation for quality and services (Ramos et al. 2018). The Starbucks needs to be more technologically sophisticated they need to educate their employees. They need to target the high income well educated people for the specialized coffee if they lower the price of their specialized coffee and if it becomes available to every people then it will lower the profit margin because for rich people the demand for the specialized coffee is inelastic. The rich people are less responsive with the change in price of the coffee.
Pricing is a very important matter in business. According to Felton (2018), the pricing of the products is one of the top reasons of customer attraction. There are two types of competitions that the companies use in order to secure scores in the business. The two competitions are Pricing and Non-pricing competitions. A company’s competitive strategy solely depends on the kind of strategy it chooses. Thus, the companies that choose pricing competition compare the price of the products they are delivering, with the price of its competitors’ products. It is very crucial for the organisations to have proper information about the competitors. The organisations are required to check the pricing of the competitors’ pricing of the products, on a regular basis. The organisations can also provide prices that are higher than the competitors. In this procedure, the companies have something special to offer. The special offers or some innovation in the service gives the explanation of the higher price range. However, there could be problems that the companies would face if the special offers are not efficient or satisfy the customers (influenced by Salunke, Weerawardena and McColl-Kennedy, 2019). Then again, the companies can apply lower costs than the key competitors. The organisations applying this type of pricing technique have to be aware of the marketing techniques that the competitors are using. For keeping the profit of the organisation intact, the company should be attentive of the market price as well.
Another strategy that the organisations choose to follow is non pricing technique. This type of technique is usually used by oligopolies and monopolistic companies, who have higher competition. In this method, the companies focus on the quality of the products instead of the price. The companies attract customers by the quality of the product, which becomes the reason for the success of the companies.
The pricing strategy of the two companies is quite different from each other. The products of the Starbucks and Class room 48 are widely different on the basis of price. On the viewpoint of Simon and Fassnacht (2018), it can be observed that Starbucks has higher pricing range of products compared to Class room 48. It is clear that the world famous company has been putting the name of the brand as its key front ignoring the product quality. The table below shows the different prices of same products in both of the companies (Salunke et al. 2019).,
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