Micro and Macro analysis of Costa Coffee

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Micro and Macro analysis of Costa Coffee

  • Introduction

Business entities are usually run in environments which pose a lot of challenges. The challenges occur as a result of the several factors which surround a company as well as its partners. The factors are usually classified as either micro or macro. These factors are usually categorized depending on the way a company related to the specific factors.

These factors are usually viewed in relation to their effect on an organization’s demand, price elasticity, market structure, competitive analysis and legislation.

In the process of analyzing a company’s micro and macro aspect, it is important to look at the effect of an organization’s operations on GDP, interest rates and inflation among other issues.

2.0 The Company

Costa Coffee is one of the well established coffee places organization in the United Kingdom. This company has its headquarters in Dunstable. It is worth noting that this company is a subsidiary of Whitbread PLC. The subsidiary ownership is wholly by Whitbread PLC.

2.1 Brief history, development and growth Costa Coffee

This company was formed in the year 1971in London area of the United Kingdom. Sergio and Bruno Costa, brothers from Italy founded this firm at a place referred to as Lambeth in London. The company is operating about 1700 stores which bring a lot of business to the firm. The first transactions were under wholesale basis, but nowadays retail has become one of the company’s major business line since the year 1978. The wholesale business was focusing on supplying the local caterers and coffee shops with coffee referred to as slow-roasted blend Mocha Italia.

In the year 1995, Whitbread acquired the business as a wholly owned subsidiary. Since then the company has been performing pretty well up to a point of receiving an award during the European Coffee Awards 2012.

2.2 The Rationale of choosing Costa Coffee

The choice of Costa Coffee has been motivated by several factors. One of the factors involved in determining the suitability of this company in the analysis of micro and macro aspect of business is the fact that the company has been operating for a reasonable time. It is worth noting that the analysis of micro and macro factors requires a good period over which comparisons and observations can be done (Mises 149). This is important since it enables a person to make the analysis with consideration of the various economic situations over the time. This makes it possible for a person to look at the position of the selected company during a given economic situation. For example, a good period enables a person to analyze a company bearing in mind that recession as well as boom periods are covered over the period since the probability of their occurrence is usually high.

Secondly, the nature of industry in which this company operates in is good for this type of analysis. The coffee industry is one in which economic trends have the highest effect on. The volatility of this industry makes gives a good reflection of the various economic dynamics. The volatility gives someone an opportunity to understand the effects of certain economic factors to a business entity.

Additionally, the issues related to demand and supply are usually shown well by the type of industries in which Costa Coffee operates in. The issue of price movements is also reflected well in industries which bear features same as those of the coffee industry. The prices of coffee are usually affected by the demand as well as supply levels existing at a given point in time. This means that the analysis of Costa Coffee will be able to give a good understanding of the price elasticity concept.

  • Position of Costa Coffee in the industry

To understand the position of Costa Coffee in the coffee industry, it is important to look at the company’s position with regard to various aspects. These include;

  • Major determinants of demand

In all industries, there are certain factors which determine the demand of the products on offer. The determinants of demand are usually guided by the factors which affect the operations of a given business entities in the market (McGuigan, Moyer & Frederick 231).

One of the determinants of demand for coffee in the UK is price. Sometimes the prices for coffee become too high to a point where the consumers are not willing to spend on it. For example in the year 2012, coffee prices went too high to a point where retail sales for Companies with Costa Coffee included went up. Secondly, coffee culture counts a lot in determining the demand for coffee. People develop various coffee cultures which may work in favor or against the demand for coffee.

  • Price elasticity of demand

Generally, the demand is usually very dependent on the price of a good or service. This is the case in the coffee industry. The demand of coffee is very dependent on the price prevailing at given point in time. Costa Coffee has been able to deal with issues related to changes in level of demand depending on the price level prevailing at a given period of time.

  • Market structure

The UK coffee market structure is not too complex. This is because there is proper management of the market. The only interesting thing to note is that the business entities in the market operate only on categories determined by their strength in the market. It is common to find the big and small coffee business entities operating in the same market segment. The size of the transactions is what matters. This means that Costa Coffee has its operations in all levels of the market, a fact which explains the firm’s immense power in the market. The coffee cultures are sometimes influenced by the preferences that the people in the market develop overtime.

  • Competitive analysis
  • Government legislation-The government is known to give a given level of legislation in the control of business entities. This is usually helpful in ensuring that the business environment is handled in a smooth way. Costa coffee has been able to face the government in the process of its legislation. This has been mainly through the policies that the UK government has been offering. For example, through the government’s economic policy in the 1970’s, the industries landscape was affected with Costa Coffee included. During this period, the government brought about the policy of privatizing most of the state owned companies. This means that the state corporations which were operating in the same industry as the Costa Coffee were able to get better in terms of operational efficiency. This means that Costa Coffee faced more competition which affected its business operations. This was through increased competition in the market which most of the time tends to reduce a company’s share of the available market.

It is interesting to learn that Costa Coffee is ranked first in the coffee industry in the United Kingdom. All the other companies who operate in the coffee industry cannot match the operational might of Costa Coffee. To show the impact Costa Coffee has had on the coffee industry, its potential makes it the second largest company in the world. Only Starbucks has been able to beat it when it comes to comparison. Smiths Coffee Company, Kenco Instant Coffee, The Roast and Post Coffee Company, Dorset Coffee Company, Ouseburn Coffee Company, Masteroast Coffee Company, Hands-On Coffee Roasters and Urban Coffee Company are some of the other players in the coffee industry in the United Kingdom. All these other companies are not able to offer the services that Costa Coffee offers to its customers. The market has been able to like the way the company runs its activities. This has been able to give the company an upper hand in the market. The company has ended up getting a bigger share of the market.

Secondly, through the government’s role in the handling of tax rates, Costa Coffee has been affected in a big way. Taxes are known to be one of the biggest tings that a company does not like paying. The government of the United Kingdom has overtime increased the corporation rate to levels which the companies have felt are high. This has been able to reduce the amount of profit which Costa Coffee and other companies in the industry have reported. This has been made worse by the fact that with general increase in corporation tax, the cost of production has ended up increasing. This is because most of the factors of production have ended up increasing.

The government is known to carry out several legal changes in the way things are done. This is usually motivated by the political landscape in the country. The political class in the country has ended up influencing certain policies which affect business in a big way. Certain restrictions regarding the sourcing of coffee have been put in place thus affecting the operations of Costa Coffee. For example, so as to impress the electorate, the government has been able to create certain labor laws which favor them in the expense of the companies. For example, the government of the United Kingdom has been able to cover those less than 18 years in the minimum wage law. This has ended up increasing the labor costs to levels which reduced the company’s earnings. Additionally, the United Kingdom has been able to create certain changes regarding the protection of consumers. This has been able to make Costa Coffee change some of the ways in which the consumers have been handled. This has been able to affect the operational procedures of the company. Additionally, through government legislation, companies are not able to do certain things without approval.  For example, government’s effort was able to discover and deal with Costa Coffee’s opening of an outlet in Bristol without fulfilling all the requirements.

  • Analysis of how past, current and future prospects of the economy (domestic and international) have an effect on Costa Coffee

The following factors are useful in analyzing the effect of UK’s economy future prospects on Costa Coffee

  • Gross Domestic Product (GDP) growth

The gross Domestic Product growth rate of a country is usually very important in determining the situation of a company at a given point in time. It is also useful in determining future situation of a company. For example, the GDP growth in the UK currently stands at about 1.9%. This shows that there is potential for Costa Coffee to grow at a rate close to this. This also gives an indication that Costa Coffee might be able to operate on a better GDP since it has been experiencing an increase even though slight. This means that Costa Coffee can position itself properly so as to gain from the growth in GDP.

  • Inflation

Fortunately, the inflation rate of UK has gotten lower over the time. The inflation rate stands at 2.1 percent which is the lowest the country has posted since the year 009. This means that Costa Coffee can be able to take advantage of this low inflation rate to benefit from the economy.

  • Interest rates

Currently, the interest rates in the United Kingdom are favorable for Costa Coffee. This is because the United Kingdom is experiencing the lowest interest rate ever of 0.5 percent. This is very low compared to the highest interest rate of 17.5 percent previously observed in the United Kingdom. This means that Costa Coffee can take advantage of this low rate and make economic benefits. Reliable forecasts show that the United Kingdom is going to experience more favorable interest rates in future. This is because with the continued decrease in the country’s inflation and increase in the Gross Domestic Product growth, the interest rates will be able to get lower.

  • Unemployment rate

Luckily, the unemployment rate in the United Kingdom has gone down to 7.4 percent. This means that spending in the country will increase. The business entities operating in the market such as Costa Coffee will be able to benefit from the increased spending power of the people in the market. This means that Costa Coffee should be able to position itself well so as to gain from the positive effects of the decrease in the unemployment levels in the United Kingdom.

5.0 Conclusion

From the position of Costa Coffee in the industry, it is possible to make long strides in increasing the level of profitability. Especially with the leadership position in the market, the company is capable of moving forward in the market. The favorable prospects of the economy are able to move Costa Coffee forward if well taken advantage of. Low inflation rate, low unemployment rate and low interest rates are a good indicator of a better business environment (Heijdra & Ploeg 78). This means that things would get better in the United Kingdom’s coffee industry, hence giving company’s such as Costa Coffee an opportunity to progress.

6.0 Recommendations

Firstly, I would recommend that Costa Coffee views the government as a friend of business entities. This would be very helpful in fostering a good relationship with the government. This means that the good relationship will be able to assist Costa Coffee in progressing in the industry. According to Varian (59), the government’s friendship with the business community comes through financial assistance and advice among other forms of business aids.

Secondly, Costa Coffee should be able to look for better ways of coping with the negative effects associated with several economic policies that the government comes up with. This will be very important in ensuring that the company does not suffer as a result of such policies being put in place by the government. It is important for the company to position itself properly in ways which will enable it remain stable despite the unfavorable situation created by specific economic factors brought about by the government.

Additionally, Costa coffee should be able to understand the value obtained from proper management of economies of scale. Costa Coffee should come up with proper analysis of the cost associated with all its production in the company. This will be able to tell the management of the company the cost benefit that would be obtained from carrying out large size production. This should be carried out in a way which factors the diseconomies of scale. The fact that average costs in the long-run will end up rising should be taken care of.

Another thing that Costa Coffee should do is considering the specialization concept in its operations. Specialization is known to be one of the most effective things in increasing the level of output in an organization (Ruffin & Paul 123). It is known to increase the output level of one more laborer. This occurs when the process of production is arranged according to the specific components. The components are allocated to individual employees who man them. In the process of handling the specific components of the production process, the employees eventually become more skilled and experienced. This makes them more productive than when no specialization is being used by an organization. This should be carried out in consideration of the fact that the increase is usually up to a given point up to which it halts if other constraints are not at the recommended level.

Moreover, Costa Coffee should carry out proper analysis and planning regarding the short-run and long-run aspect of the business operations. This will be able to give the company an insight regarding the way the company’s costs vary within the specific production periods. This will be important in ensuring that the best production decisions are made. The decisions will be able to give the company a good position regarding the balance between output and cost involved.

Since Costa Coffee is ahead of the other companies in the UK coffee industry, it is important to take that opportunity and gain more from the market. The fact that the company is attractive in the market places it in a place where a lot of benefits can be obtained. Costa Coffee can appraise all the processes to ensure that all the loose ends are tied. This will be important in ensuring that the company retains its position I the market. There should be no loss of that position due to lack of proper planning of affairs of the company. Costa Coffee should be able to carry out more research regarding the things that can make the company gain more competitive edge in the market. This should be coupled up with the best strategies possible.

To make things better, it is advisable for Costa Coffee to seek the services of experts in economic issues. The experts will be able to advise the company regarding the best ways of taking advantage of low interest rates, inflation and favorable gross domestic product. This will be able to give the company an opportunity to manage its affairs efficiently.

References

Heijdra and Ploeg, van der. Foundations of Modern Macroeconomics, Oxford University Press.  2002. Print.

Mises, Ludwig Von. Theory of Money and Credit, Yale University Press.1912. Print.

McGuigan, James and Moyer, Charles, and Frederick, Harris. Managerial Economics: Applications, Strategy and Tactics. South-Western Educational Publishing, 9th Edition: 2001. Print.

Ruffin, Roy and Paul, Gregory. Principles of Microeconomics. Addison Wesley. 2000. Print.

Varian, Hal. Microeconomic Analysis. W. W. Norton & Company, 1992. Print.

 

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