Starbucks Company’s Hedging Strategies Essay
Starbucks is the company that is popular almost in every country across the globe. The company adopted outstanding globalization strategies that improved the business. The objective of the organization to create a unique place with a comfortable atmosphere in order for people to enjoy the taste of perfect coffee was accomplished. The company has a number of competitors, namely Dunkin’ Donuts and McDonald’s. The market environment is tense; however, Starbucks remain popular and successful.
Supplier and Potential Problems
Kana Coffee is a Cuban company that can function as a supplier of Starbucks. The challenges are the following:
- Correspondence to the norms of legislation (taxes, standards) because of difference between the countries;
- Currency issues. A different tempo of inflation.
The company might face certain economic and global risks:
- The amount of coffee is dependent on climate and weather peculiarities;
- The good can be politically compromised. For example, Cuban cigars were popular; however, they could not be sold because of political conflicts. The same situation can happen with coffee.
Market Risk and Hedging Strategies
As a matter of fact, market risks are typical for all the companies. In order to get a better understanding of the issue, the definition of a marketing risk should be taken into consideration. First and foremost, it is a risk of losses that can be stimulated by a number of factors and reasons, among them are the following ones, namely:
- Changes in price for the commodity;
- Foreign currency exchange rate;
- Equity price;
- Interest rate.
In order to be protected from the risk, the organizations usually adopt certain risk management policies. It is significantly important to understand the hedging strategies of Starbucks, evaluate currency risks, and outline possible strategies to mitigate the risks.
Foreign currency exchange risks should be taken into account. The majority of transactions in the company are made in an American dollar. However, in spite of the fact that the company is operating in the United States, one should take into consideration that the business is represented in other countries as well (Gaspar 121). The most popular currencies for transactions are the following:
- Canadian dollar;
- British pound sterling;
- Japanese yen.
Thus, with the consideration of the above stated information, the conclusion can be drawn that Starbucks can be engaged in a number of financial deals with foreign currencies. In 2008, the enterprise had “forward foreign exchange contracts that hedge portions of anticipated international revenue streams and inventory purchases” (Verbeke 72).
In 2012, the price for coffee was increasing. According to recent statistics, beverages make almost 75% of sales in Starbucks (Stickney, Brown, and Wahlen 53). Their strategy (hedging coffee prices) was directed on the elimination of the competitors from the coffee market. However, the problem can be found in the dimension of the price. The hedging strategies do not protect the consumers from the rising prices. These strategies will only postpone this phenomenon. The increasing price for the coffee can be explained by problems in Brazil. The advantage of the hedging strategies is considered to be fixed price.
It protects the company from potential losses and risks. Starbucks was losing positions because the increase in price, and thus, it was reasonable to find an approach to fix the market price. In case a company is sure that the price will increase, they will buy coffee for the below market price. The beneficial side of the hedging strategies is that it creates a profitable environment for the company as well as for a supplier. The company prevents possible risk of the increase in price, and supplier gets a buyer. However, it can be also seen as a disadvantage because the price can go down. Analytics can come to the wrong conclusion, and the price can decrease. Thus, the company will pay more.
Gaspar, Julian. Introduction to Global Business: Understanding the International Environment and Global Business Functions. Boston: Cengage Learning, 2014. Print.
Stickney, Clyde, Paul Brown, and James Wahlen. Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective. Mason: Thomson/South-Western, 2007. Print.
Verbeke, Alain. International Business Strategy: Rethinking the Foundations of Global Corporate Success. Cambridge: Cambridge UP, 2009. Print.