Starbucks Accounting This Is a Managerial Accounting

Starbucks Accounting

This is a managerial accounting paper

Starbucks accounting questions

From the case in 2004, explain the logic for a price increase from Starbuck's perspective.

In 2004, Starbucks was facing rising costs for its input goods such as milk and coffee beans. In 2004, Starbucks announced that the "price for a tall coffee is going up by 10 cents. A 12 ounce coffee used to cost $1.55 without tax but it will now cost $1.65" (Wirth 2004). Consumers were understandably annoyed by the price increases, and groused about how already expensive coffee was getting more expensive. However, Starbuck's decision seemed to be wise in the short-term. Customers who are price-sensitive to a 10 cent increase in the price of beverages are unlikely to be regular patrons at Starbucks. According to one Starbucks coffee buyer: "Because it's only 10 cents it won't make that much of a difference to me, even though I do drink it every day. I'm willing to pay whatever it takes to get my Starbuck's fix in the morning" (Wirth 2004).

Starbucks needs to balance operating costs with the price of its beverages. Starbucks also needs to take into consideration consumer willingness to pay a certain amount for a coffee beverage that is a treat rather than a necessity. There are also many available substitute goods for Starbucks within the coffee market. Starbucks markets itself as a purveyor of quality (or at least higher-than-average-quality) coffee so there is a limit on how much it can cut costs in terms of the price of its coffee beans and the input goods that go into its specialty beverages like Frappucinos which make the Starbucks brand so unique. Thus, raising prices a moderate amount (though not too much to upset the middle class consumer) is the logical choice. Justification for the amount was underlined by the sentiments of another patron: "I do love my Starbucks coffee, so if it's just 10 cents I will probably continue to go there, but if it starts to be another dollar, I'll probably reconsider" (Wirth 2004).

Q2. Can you discuss the effect of operating leverage as to why Starbucks had to close about 600 stores in 2008 and why they are being outcompeted by Dunkin' Donuts?

Dunkin' Donuts is cheaper than Starbucks and has the advantage of having a relatively unpretentious image, given that Dunkin' has English (versus Italian) size names and lacks a large range of pricey beans. Instead, it focuses on more sugary, popular frozen drinks in terms of its premium lines, and very simple bare-bones coffee for consumers who are highly price-conscious. Offering a narrow menu enables Dunkin' Donuts to keep its prices down, versus the wide array of Fair Trade and imported coffee beans at Starbucks. A true fast food chain, Dunkin Donuts prioritizes consistency and giving consumers what they want. Dunkin' Donuts also offers relatively similar in-house prepared items, versus Starbucks which offers seasonal pastries and a less consistent menu of pastries and food at different Starbucks.

By stressing speed in its operating model, versus quality like Starbucks, Dunkin' Donuts also is able to have higher turnover than Starbucks. Higher turnover results in more profitability, and although its quality may not be as gourmet as Starbucks, Dunkin' Donuts customers tend to have lower expectations. Furthermore, the quality of Starbucks has been viewed as declining somewhat (one reason the entire company shut down several years ago to retrain its baristas) thus dining at Dunkin's for its lower prices are not seen as much of a sacrifice of taste as in the past.