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Writing Assignment 5.1:

Chapter 10: Mini-Case Starbucks Fair Trade Line

Galtsetseg Bold

Isabela Cristina de Souza Amorim

Poojan Patel

Sarah Osama Arafa Gaber

Stela Leka

TsungTse Li

University of the Potomac

BUS530:17:VA Marketing Management

Prof. Dina Rady

April 9, 2023
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Contents

Introduction 3

Mini-Case Starbucks Fair Trade Line 4

Case Discussion Questions 5

Conclusion 9

References 10
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Writing Assignment 5.1:

Chapter 10: Mini-Case Starbucks Fair Trade Line

Starbucks is known worldwide for its quality coffee and cozy

atmosphere. Founded in 1971, the first Starbucks coffee shop was located

inside a public market, called Pike Place, in Seattle, in the United States,

and was the result of the collaboration of three partners.

Popular for its wide selection of coffee drinks, ranging from espresso to creative seasonal

beverages, they also offer a variety of teas, cold drinks, smoothies, and more, making it a

versatile option for any palate. Additionally, free Wi-Fi and comfortable seating areas make

them a popular spot for students and professionals who need a comfortable and productive

environment.

The brand commits to sustainability and supports small growers through the project

C.A.F.E. (Coffee And Farmer Equity), a program that has contributed to Starbucks creating a

long-term supply of high-quality coffee and positively impacting coffee farmers’ lives and

livelihoods from financial reporting to protecting workers’ rights to conserving water and

biodiversity, among other things.

In this assignment, we are invited to analyze this relationship (Starbucks vs Small

suppliers) and discuss double marginalization problem scenarios and channel profits. We will

examine whether the prices set by Starbucks are fair and how they are distributed among the

parties involved, as well as potential implications of these findings.

Mini-Case Starbucks Fair Trade Line

Like a lot of massively successful consumer companies who want their customers to see

they have big hearts, Starbucks offers a line of coffees for purchase made from small growers

who meet certain economic and ethical standards. A challenge for Starbucks is that these coffee

growers are usually on a small scale that cannot offer any economy to the company for shipping,

pickup, and processing. As a result, the costs to Starbucks are higher than for the mass suppliers

of their standard coffees. Starbucks typically passes along some of those higher costs in higher

prices to customers, reasoning that customers who care about such matters will happily pay for

the extended benefits and feelings of goodwill.

Costs to growers continually rise, sometimes modestly, sometimes sharply. It’s getting to

the point where Starbucks wants to take a number of the pricier growers back to the table to

negotiate better deals (for Starbucks), and of course, Starbucks holds the threat over their heads

that the supplier will be dropped.

In answering the case questions, assume the following:

1. Current price is $8.00 for a bag of this coffee

2. Manufacturer costs have been $2.00

3. Manufacturer mark-up has been $2.00 (and they’re seeking more)

4. Retailing costs have been $1.00

5. Retailing mark-up has been $3.00

Iacobucci, Dawn. 10. Channels of distribution. In Marketing Management (6th ed, pp 192). Cengage Learning.

https://ebooks.cenreader.com/#!/reader/76cc2f86-5bc5-4166-aee1-4c6fcfcf5e62/page/20135669c9b1b747a572b67287bc688a
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Case Discussion Questions

1. What kinds of power does Starbucks hold over their suppliers in this case?

The power that the brand or a company have normally helps them to negotiate with the

suppliers or customers in the market from different perspectives. In this case, Starbucks holds

several sources of power over their suppliers:

1. Economic Power: Since Starbucks has been very famous in the coffee factory for a long

time, Starbucks can purchase coffee beans from various suppliers, including small-scale

growers. As a large and influential company, Starbucks can demand lower prices from

suppliers or risk taking their business elsewhere.

2. Market Power: Starbucks is a major buyer in the coffee market, giving it significant

influence over the prices of coffee beans. The amount and the volume of coffee beam

Starbuck purchased lead them the big market power to negotiate the price to the

suppliers. Starbucks can use its market power to negotiate better deals with suppliers or

drop them altogether if they refuse to comply.

3. Brand Power: Considering Starbucks in the brand perspective, Starbucks has been a

well-known and respected brand in more than a decade, which gives it significant

leverage over its suppliers. Suppliers may want to maintain a relationship with Starbucks

to enhance their own reputations, leading them to accept lower prices or other

unfavorable terms.

4. Legal Power: In terms of the big volume and amount purchased from the suppliers means

that they will sign the contract with Starbuck for a long-term relationship to maintain at

lower price. The contract gives Starbucks legal power to set the rule or term for suppliers
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who want to work with them. Starbucks can use these contracts to enforce its demands or

impose penalties on suppliers who do not comply.

2. Use the double marginalization problem and solution guides to structure two

alternatives:

a. Prices to consumers are maintained at $8 and profits are split 3:1 in favor of

Starbucks

The double marginalization problem arises when both the manufacturer and retailer mark

up the price of a product, leading to higher prices for consumers and lower profits for both

parties. In the case of Starbucks and small-grower coffee, the double marginalization problem

occurs when the small growers are unable to offer economies of scale, and Starbucks incurs

higher costs to purchase and process the coffee.

To address the double marginalization problem. An alternative where Prices to

consumers are maintained at $8, and profits are split 3:1 in favor of Starbucks. Under this

alternative, Starbucks could maintain the current price of the small-grower coffee at $8, but

instead of splitting profits evenly between themselves and the suppliers, they could take a larger

share of the profits. This would allow Starbucks to improve their own profitability while still

providing a market for small growers who meet their ethical and economic standards.

This alternative could work well for Starbucks as it allows them to maintain their ethical

and sustainable brand image while still increasing their profits. However, suppliers may feel that
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they are not being adequately compensated for their efforts, and this could lead to tension

between the suppliers and Starbucks. Additionally, customers who purchase the small-grower

coffee may feel that Starbucks is prioritizing its own profits over its ethical and sustainable brand

image.

b. Prices are raised 25% to $10 and profits are split 2:1 in favor of Starbucks

Selling price to consumer = 1.25*$8.00 = $10.00

Manufacturer and retailing costs are maintained at $2.00 and 1.00 respectively, hence

Manufacturer costs = $2.00

Retailing costs = $1.00

Total system costs $2.00 + $1.00 = $3.00

Total system markup = $10.00 - $3.00 = $7.00

Margin split manufacturer: retailer 2:1

Manufacturer markup = 2/3 * $7 = $4.67

Retailing markup = 1/3 * $7 = $2.33

3. What are the resulting mark-ups for the manufacturer and retailer (Starbucks) under

each scenario? How will suppliers and consumers respond to either scenario?
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With scenario 1, say the price won’t change which is $8 and the profit split is 3:1 in favor

of the retailer, retailer would receive $6 on each sale and manufacturer receives only $2.

Consumers will not react or even know about this. If they find out about this, some of them may

refuse to encourage Starbucks and start to avoid making a purchase from them. As an important

player, manufacturer, taking 25% of the profit is not fair enough and not ethical. But they deal

with this profit split as they are suppliers who are small growers, due to fear of being dropped

from Starbucks business.

With scenario 2, Starbucks receives $6.66 and growers receive $3.33 on each sale. Since

Starbucks drinks are products that can be substituted, if their price rises, consumers may tend to

substitute other coffee shops drinks. For the suppliers it can be profitable with the increased

mark-up.
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Conclusion

Starbucks as a robust company has dominated the market clearly establishing itself as a

leader. Throughout the years they have established a brand power, while offering a premium

coffee brand, where most of its customers belong to the upper economic segment. In this

assessment, we are invited to analyze this relationship (Starbucks vs Small suppliers) and discuss

double marginalization problem scenarios and channel profits.

We have examined whether the prices set by Starbucks are fair and how they are

distributed among the parties involved, as well as potential implications of these findings under

the double marginalization circumstances impacting the coffee supply chain. We discussed the

implications caused by the markups in a distribution channel and how that impacts profitability

and harms consumers.

We discussed the differences scenarios and possible outcomes for each. Nevertheless

both Starbucks and the small suppliers need to be transparent, work together to ensure that they

are able to solve or reduce supply chain costs, and find strategies to improve efficiency, to

maintain the profitability while ensuring they are competitive and not harming the consumers.
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References

● Starbucks Archive. https://archive.starbucks.com/

● Coffee. https://www.starbucks.com/responsibility/sourcing/coffee/

● C.A.F.E. Practices: Starbucks Approach to Ethically Sourcing Coffee. February 28, 2020.

https://stories.starbucks.com/press/2020/cafe-practices-starbucks-approach-to-ethically-

sourcing-coffee/

● Starbucks announces coffee-specific environmental goals. March 22, 2021.

https://stories.starbucks.com/stories/2021/starbucks-announces-coffee-specific-

environmental-goals/

● Iacobucci, Dawn. 10. Channels of distribution. In Marketing Management (6th ed, pp

192). Cengage Learning. https://ebooks.cenreader.com/#!/reader/76cc2f86-5bc5-4166-

aee1-4c6fcfcf5e62/page/20135669c9b1b747a572b67287bc688a