International Coffee Market Essay

Due to the international coffee bean price significantly fluctuate from 1996 to 2009, the global coffee also has same change between this year. This paper will look at changes on global coffee market based on five parts. First of all, describing several reasons cause variation of global coffee market. The second part will illustrate market structure of international coffee industry. Then, based on coffee market structure, explaining which strategy they are using and reason of coffee companies choosing these strategies. Furthermore, indicating the cost and benefit of strategy used by coffee companies. Finally, this paper would focus on the relationship between macroeconomic changing and coffee industry. Since global economic dramatically growing, there are three events effect coffee bean price in terms of new planting supplies, increasingly less coffee famers planting coffee beans and establishing new coffee market. Due to outstanding coffee beans productive capacity in Vietnam and Brazil, there are 113 million bags for supply and 106 million bags for demand, it is 40 million bags bean as a gap between demand and supply in 2002(John, 2010:37). As a support, John (2010:36) stated that when a or more than one crucial of supply change (except price events), the whole supple curve will shift. It is indicated by figure 1 in the appendix which shows S1 shift to S2, contributed by new significant supply (Vietnam and Brazil). As a result, whole coffee bean market get a new equilibrium point at e2 which has lower price in Pe2 and higher quantity in Qe2, comparing with e1. However, John (2010:36) also clam that most of coffee market workforce worked in poor financial circumstances that living as debt, and others abandon their land and property in farmland to migrated into city. Otherwise, lots of farmers in order to chasing higher profits by quit coffee industry, especially, Vietnamese famers instead growing coffee bean to illegal substances—coca. It is obviously decrease capacity of coffee bean production. Finally, some research reported that the annual GDP growth rate of China was approximately in 8%, which means Chinese disposable incomes increase steady from 1980. Consequently, with improvement of life style in China, the demand curve of international coffee production is shift (from D1 to D2). In that case, new equilibrium point move from e2 to e3 (figure 2). It is clear that price of global coffee bean price would be influenced by establish new market which mean other alternative factor of demand except price would shift demand curve, and equilibrium point would move into new position(John, 2010:36). The international coffee market is leaded by several roaster coffee firms which are classified as oligopoly Over half of international coffee productions are dominated by 4 firms: Kraft, Nestle, Procter and Gamble (John 2010:37), this market structure is named as oligopoly which include two main features. One of the main feature is, in oligopoly the dominated firms establish various barriers for preventing new firms entrance. In this case, new coffee roaster firms are tough to participate in this industry, because most percentage of coffee productions processing, which include processing line and coffee manufacturing technology, and coffee bean import or export market are under dominated firm control. However another feature is each of firms in oligopoly structure is compete with their rivals in changing price, adverting strategy and target market. This is supported by John(2010:136) who argued that anticipating rivals reaction is very essential and crucial for oligopolist adjusting their action. In the oligopoly coffee roaster firms, it is lack of competitor in this industry. Thus, these multinationals could influence merchandise of coffee in supermarket or retail coffee shop. In this case, these firms are easy making price of each coffee production, even price of global coffee bean is fluctuated during these decades. This is followed by an explanation, John (2010:37) argued when a consumer purchased a $3 regular cup of coffee, it is only include 25 cents cost of coffee bean. Most of consumer’s payments of coffee contained wages of staff, overheads and advertising expenses plus enormous profit earned by coffee roaster companies. In economic theory, firms could maximise profit when marginal cost (MC) equal to marginal revenue (MR). As result of price leader firms control the market average price, these firms could sell goods in a higher price but same quantity, in that case, oligopoly firm could earn more profit. However, in a non-collusive oligopoly situation which means evens few firms dominated the coffee market, each of rivals changing merchandise price and market strategy could significant influence other firms decision. This firm’s choice of strategy is known as game theory which is described by table 1 (John 2010:141). In today international coffee market, these coffee roaster multinational always alter their price or marketing strategy to attracting more consumers prefer to their brand or products. Otherwise, optimal strategy could beat other main competitors in international coffee market. This is followed by an example, Bhaskar (2009) indicated that Starbucks implemented a well-integrated marketing program that would utilize a marketing mix 4P (product, price, place, and promotion) that would satisfy the needs and wants of its target market. Especially, Paul (2009) reported that Starbuck recently offer $1 per bottomless in 8 oz, with unlimited refills to emphasizing Starbucks’ products with less price cost but higher value in normal business and social performance. Utilisation of these aggressive strategies Starbucks attract increasingly customers from other rivals and earn massive profit to becoming a multinational in global coffee market. Whereas, as game theory shows that both Starbucks and other competitor could not maximise profit for each parts. Furthermore, this competition between these firms could increase average cost in entire coffee market, as a result, profit of whole coffee industry would drop in a long term. In macroeconomic, the international coffee market contributed into two parts: unemployment and income. Householders willing to purchase more quantities than before due to disposable income increasing, when entire economic growth steady. Consequently, huge profit of coffee market is created by increasingly customer consumption. After that ratio of employment is growth, because coffee companies improve product capacity to content vast householders demand of consuming coffee in daily life. However, the rate of employment and disposable income of householders would decline, when the recession is coming. It is clear that relationship of householders and coffee industry could describe as a circular flow, each of these two parties influence to both sides in a significant effect in macroeconomic environment. To sum up, this essay has analyse a brief overview of alternative in nternational coffee market in five fields: firstly, the several direct reason of global coffee market. Secondly, it argued coffee market as a type of non- collusion oligopoly which using aggressive price and marketing strategy in coffee market. Furthermore, this paper also illustrates benefit and cost due to this strategy is used by dominated firm. Finally, the effect of macroeconomic in coffee industry is like a circular flow, which means coffee industry and householders could influence and relate to each other.