Question

What should managers in coffee sectors like Starbucks be especially attentive to based on trends in current GDP growth, inflation, and interest rates?

Answer 1

The first point to determine is the elasticity of demand for Starbucks. It is important to note that a majority of customers would look at Starbucks as a luxury than a necessity with cheaper alternatives available in the market. Therefore, it is very likely that the price elasticity of demand for Starbucks is elastic.

It is for this single reason that managers should be attentive to trends in GDP, inflation and interest rates.

Just as an example, when the economy slips into recession and there is an increase in unemployment rate, it is very likely that individual and household consumption of Starbucks coffee declines. However, since demand is elastic, a relative decline in prices can boost revenues. As a general, rule, when demand is elastic, price and total revenue move in opposite directions. Therefore as price is reduced, total revenue trends higher even as margins can be relatively compresses.

Similarly, when inflation is higher than expected or raw material inflation is high, Starbucks cannot afford to pass on the cost increases entirely to customers. If all cost increase is passed to consumers, demand can possibly decline significantly since demand is elastic.

Therefore, it is important for a manager to track the trends in current GDP growth, inflation, and interest rates as it impacts the company's pricing decision, revenue and key margins.