Production Inputs and Costs
The Starbucks latte requires two
types of inputs: fixed costs, which remain unchanged regardless of production,
and variable costs, which change based on the company’s production output (Miller,
Fixed Costs. One of the most important
fixed inputs for production of the Starbucks latte is the espresso machine,
which is used to brew the coffee portion of the latte. Commercial grade
espresso machines are durable goods, as they typically last anywhere from 5 to
15 years, depending on the brand, type, and quality of maintenance (“Lifetime
and maintenance,” n.d.). A latte cannot be made without an espresso machine, so
this is an essential input which each Starbucks store needs before latte
production is possible.
Variable Costs. Just like most businesses,
Starbucks incurs the labor and maintenance costs of running the shops where
their lattes are crafted and sold— such as rent, utilities, equipment, and
employee wages. The Starbucks latte itself has multiple inputs, each with their
own costs. The main inputs to produce this product include coffee beans, milk,
sweetener, cups, and cup sleeves, all of which incur costs of importation,
processing, distribution, and labor.
The most complex of these inputs is the coffee
itself, as Starbucks imports green coffee beans from farms around the world,
keeps them in one of numerous storage facilities, and then has them roasted and
packaged around the US (Cooke, 2010). On this front, Starbucks benefits largely
from economies of scale, because as a large corporation, they have the
resources to run their own storage facilities, which is more cost effective in
the long run as compared to smaller companies that continually pay to store
beans, or are unable to order in bulk at all.
Ordering in bulk is beneficial to Starbucks for
not only coffee beans, but for the rest of the latte inputs as well, since the
average fixed cost decreases with the production of more units (Miller, 2016).
In other words, the more you buy, the less each individual product costs.
Because of these advantages, Starbucks is able to keep costs low in comparison
to smaller specialty coffee shops, but sell their lattes at the same price,
which gives them a higher profit margin than those smaller shops are able to
When choosing its latte inputs, Starbucks places
careful consideration on quality, value, and ethics (Starbucks, n.d.). In order
to maintain brand loyalty, they need to produce good quality coffee that is in
line with the values of their consumers (Neac?u & B?rbulescu, 2015), which
leaves little room for sacrifice in the face of price. Because the latte is
fairly price inelastic, Starbucks is able to raise prices when necessary, to
account for factors such as an increase in the price of raw materials or
production costs. The combination of price inelasticity and importance of a
quality product mean that Starbucks should avoid settling for less than the
best whenever possible, even if that means raising consumer prices.
Starbucks should not switch to lower quality beans, but instead continue to
find ways to capitalize on economies of scale to keep costs low even if bean
prices do fluctuate. Buying the beans from a variety of suppliers and countries
also works to their advantage here, as they can turn to another supplier for
more beans if the cost goes up at another supplier, rather than changing their
beans entirely which could sacrifice quality and consistency. Similarly, since
Starbucks consumers value sustainability (Starbucks, n.d.), Starbucks can
afford to spend a little more on compostable paper products to hold their
latte, rather than cheaper, lower quality cups and cup sleeves which would
lower costs and allow for lower prices.