Competing as Starbucks

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