In order to be considered as
part of a Perfect Competition market, a business must reach four criteria,
including:
1.
Many small buyers
and sellers all of whom are price takers
2.
No preference
shown
3.
Easy entry and
exit by both buyers and sellers
4.
The same market
information available to all
In our case study, Starbucks
cannot be considered as part of a perfect competition market. Although hitting three of the four criteria,
Starbucks cannot be considered as a perfect competitor because their customers
have preference. In a marketing report
by SEO Analysis (https://sites.google.com/site/seoanalysisnow/case-study-caribou-coffee-vs-starbucks)
46% of Starbuck’s customers are between the age of 18-34, while the majority of
the consumer base is Caucasian and Asians.
Starbucks tends to attract the richer audience due to its high priced
coffees and expensive merchandise.
Compared to its competitors, Starbucks charges $2.30 for a large (venti)
cup of coffee, while Second Cup is priced at $2.05, followed by Tim Horton’s
$1.50. (http://www.canadianbusiness.com/blog/consumer_insight/18140--which-coffee-gives-the-biggest-bang-for-the-buck)
In 2007-2009, Starbucks
closed down over 600 stores in the US alone.
The reason for the realignment of its stores is mostly due to a few
reasons; non-profitable stores, badly managed stores, and stores being too
close to each other. As these stores are
being shut down, over 12,000 employees will lose their job. Although Starbucks mention that these
affected employees will be quickly rehired and retrained, it is almost
impossible to fulfill every position as at least 2400 of these positions will
be management, and there are limited positions available in each district.
In an email from Starbucks
CEO Howard Schultz, Schultz stated that Starbucks had lost its heritage and
identity through the years with new technologies and store designs. For example, in an attempt to improve
quality, speed of service and consistency of their product, Starbucks
introduced automatic espresso press machines.
These machines are larger, build for industrial grade, better in many
aspects, but the communication between baristas and customers are gone, due to
the large build and height of these machines.
In Pike Place Seattle, where the Starbucks was first founded is the only
store remaining to still use the classic brewing style, hand grind beans and stove
top espresso presses. Closing 600 stores
is an attempt to save the “heritage” and “the Starbucks experience”.
Over the years, Starbucks
have been criticized for its expensive coffees.
For hand crafted speciality coffees like the famous “Caramel Macchiato”,
a venti (large) can cost as much as $5.88 while a pound of Espresso beans only
cost $14.99 on Starbucks Shelves. One of
the reason why Starbucks coffee are high in price is because you can customize
your drink and always have it prepared the way you wanted it. When you do a comparison, it is like having a
$3.50 burger at MacDonald’s verses going to an actual restaurant like Red
Robins to have a $13.00 burger, but unfortunately, people don’t compare it that
way, and only the real coffee drinkers will understand why their coffees are
worth the price they pay.
So, is it not possible to
tune down the price to attract more business and increase the sales
quantity? Of course, Starbucks can
decrease their price. In return, they
will have an increase in quantity demanded, and it would also increase their
quantity supplied. However, by doing so,
the quality of service will also decrease, customer service and quality of
beans supplied will decrease, and in an exact opposite direction as Howard
Schultz want it, and the “Starbucks experience” and “Heritage” will never be
the same again. Eventually, the market
will re-adjust itself, and a new equilibrium will be created. If Starbucks were to lower their prices to
match competitor’s level, then it will eventually become a “Perfect Competitor”,
reaching its last criteria, “No preference shown”.
-Panda
