H.J. Heinz Co. the world’s largest ketchup producer 1 has a global market share including the U.S. Focusing on the U.S., Heinz markets its ketchup in various ways hence creating some kind of comparative advantage over other suppliers. Heinz supplies its ketchup to restaurants including those of Wendy’s International Inc. and Burger King Corp. 1 . Although it enjoys supplying to other restauratnts, Heinz has not captured the McDonald’s restaurants. Heinz also stocks its ketchup in supermarkets including Wal-Mart Stores Inc. that only gives shelf space to top brands forcing Heinz and its competitors to focus their portfolio to concentrate on their top ranked brands which for Heinz includes ketchup.
Being the top producer, Heinz has the advantage of economies of scale over other companies. Supplying ketchup to numerous restourants and super markets gives Heinz the cushioning in the case of a fall out with one of the customers for example where McDonald’s loss was unlikely to have been a bad hit for Heinz 2 since they only supplied a ketchup to a small fraction of the restaurants initially. This is unlike Golden State who rely on McDonald’s restaurants for more than 80 percent of its revenues 1.
McDonald’s has substantial negotiating power over Heinz because of the large amounts of ketchup and other products consumed in their restaurants, having their own ketchup that has a taste preffered by its consumers 1. This is also true in international markets because the volumes of ketchup consumed in McDonald’s restaurants is still large.
On the assumption that Heinz’s selling points are true, McDonald should consider using the ketchup as this would improve their advantage over other restaurants in terms of customer satisfaction and save on employee time hence reassign the time to other higher value activities.
Starbucks is reducing the price by $1 per bag of coffee sold to grocery stores which is a 10 percent discount on its emponymous beans 3 , a 12.5 prcent reduction on its lower price Seattle’s Best brand. The move is in hope to entice customers to switch to their brand. Having already drinks to capture the top of the market, Starbucks hopes to take the lower end of the market with this move especially with the ever widening inequalities in income. Economies of scale advantage is also on their strategies having closed the previous year with $816 million worth of coffee beans in warahouses, the move is also aiming to gain advantage over its competitors.
Taking risks, capturing both ends of the markets and aiming to achieve efficiency and economies of scale over your competitors is the lesson to collect from the move made by Starbucks. Investors keen on this Starbucks story should pick that the industry is heading for a downward trend in profit margins but the long term situation is under control by the management.
The facts in the story are; in the last quarter Starbucks had $380 million sales outside its cafes and had $816 million worth of coffee in the warehouses at the end of the previous year, there is a widening iequality in income and coffee prices had been at a low for the previous 3 years. Starbuck is doing well in the current situation because it has already captured the top of the market, has economies of scale and it is efficient than the competitors. The economies of scale is clear given the $860 million worth of coffee beans in warehouses at end year. The price of coffee was at a low for 3 years and Stabuck’s competitors reacted by reducing their prices hence one would expect Starbucks to also reduce its prices. The elephant in the room is that coffee prices are going down and might prompt major economic decisions with major consequences.