Starbucks: Harford's Undercover Economist

The “Coffee Wars – The Big Three: Starbucks, McDonald’s and Dunkin’ Donuts” article focuses on the company analysis of the Starbucks brand and how its main competitors, McDonald’s and Dunkin Donuts, has affected their brand and driven competition higher. Even though there are many companies trying to enter the specialty coffee market, these three companies own the majority of the market share. With Starbucks’ top quality and above average prices they hold a different market than the fast coffee/food market of Dunkin’ Donuts and Starbucks; yet the competitive moves Dunkin’ Donuts has made over the years in order to compete with Starbucks and surpass McDonald’s has driven competition up between all three companies. The competition has stiffened ever more in the past ten years due to the changing economy. This led to “the big three” to come up with different techniques to gain competitive advantage over the other. Although the competition between these companies is to gain most of the market share, consumers are still loyal to a certain brand; this makes it difficult to gain each other’s clientele. McDonald’s continues to appeal to customers who want value and speed, Dunkin’ Donuts focuses on the middle-class, while Starbucks a customer who desires a higher quality product along with being recognized for using the brand.

Since Starbucks entered the coffee retail business, the company has made many trade-off business decisions. The first major trade-off was made when Howard Schultz wanted to acquire present day Starbucks from three entrepreneurs Baldwin, Siegel and Bowker. Therefore, Schultz prior to the acquisition made the trade-off to open his own coffee bar in 1986 instead of staying at Starbucks as the manager of retail sales and marketing. A bold feat, Schultz was able to replicate success and was offered to buy Starbucks for $4 million. At the time of the acquisition, many investors, including the former Starbucks owners, would not expect that the American consumer would pay a premium for coffee products. Schultz, after calculating the opportunity cost, was convinced that Starbucks would become a large coffee chain not only in the United States but internationally too. Reflecting this approach, Schultz’s trade-off worked. Starbucks, according to our book has revenue exceeding $13 billion and nearly 200,000 employees. The company has also expanded to 40 countries with 17,000 stores (Hill et al., 2015).

Starbucks could be called one of the largest success stories in American history. The company started from humble beginnings and worked its way to the top. Starting from a small building in Pike Place market in Seattle Washington, there are now more than 20,000 locations worldwide. The company’s mission and goals have allowed it to succeed in a fast pace world, and Starbuck’s loyal customers have stuck by their favorite brand through it all. The Starbucks experience is unique from all others. The history and progress of the company have contributed to the Starbucks lifestyle we all know today.

starbucks Corp., an international coffee and coffeehouse chain based in Seattle, Washington, has expanded rapidly since its opening in 1971. These outrageous success was due to its well-developed strategy vision which lay out the company's strategic course in developing and strengthening its business. Starbucks is a global corporation that sells authentic coffee in 30 countries, reporting revenues of nearly $5.1 billion in 2006. The main goal of Starbucks is to embrace diversity by applying the highest standards of excellence. Starbucks strives to perfect the relationship with the working class by making the service as fast as possible because they believe that every customer has their own personal rate. One

It’s a known fact that Starbucks is one of the leading brand in the market.When we analyse the market we find that Mcdonald 's and Dunkin are the competitors in the same product segment. So comparing Starbucks with these competitors will throw light on its grey areas, process and competitive edge in the market.

2) Garthwiate, Craig; Busse, Meghan; Brown, Jennifer; Merkley, Greg “Starbucks: A Story of Growth” Harvard Business Publishing, July 2012.

The industry’s saturation is moderately high with a monopolistic competition structure. For new entrants, the initial investment is not significant as they can lease stores, equipment etc. at a moderate level of investment. At a localized level, small coffee shops can compete with the likes of Starbucks and Dunkin Brands because there are no switching costs for the consumers. Even though it’s a competitive industry, the possibility of new entrants to be successful in the industry is moderate. But this relatively easy entry into the market is usually countered by large incumbent brands identities like Starbucks who have achieved economies of scale by lowering cost, improved efficiency with a huge market share. There is a moderately high barrier for the new entrants as they differentiate themselves from Starbuck’s product quality, its prime real estate locations, and its store ecosystem ‘experience’. The incumbent firms like Starbucks have a larger scale and scope, yielding them a learning curve advantage and favourable access to raw material with the relationship they build with their suppliers. The expected retaliation from well-established companies for brand equity, resources, prime real estate locations and price competition are moderately high, which creates a moderate barrier to

Locally, Starbucks operates in a monopolistic competition market. As stated in The Micro Economy Today this market structure is define as,” A market in which many firms produce similar goods or services but each maintains some independent control of its own price.” (page 238, Schiller). Indeed, coffee lovers have a variety of options as to where they get their caffeine fix. Due to a large amount of substitute for coffee and beverages Starbucks cannot price their goods higher than others. If they raise their prices too high, consumers will simply turn to other suppliers and Starbucks will suffer a loss in profits. In addition to having an abundance of substitutes another characteristic of having a monopolistic competition is low barriers to entry. The cost to enter the coffee market is relatively low and people who desire to enter the market cannot be kept out. New entrants threaten

Starbucks can follow some strategies to differentiate their product even more that will lead to vary their menu prices. For example, Starbucks might create “saving menu” by selling some products at a lower prices to attract even more customers. Also, Starbucks might take into consideration the strategies of opening “Starbucks carts” that open in smaller express places that don’t fit for a whole store. Those “Starbucks carts” will attract even more customers because it is easier to get access to. “Starbucks carts” may provide the customers with low cost products to draw larger market base. To be a best cost provider in the market will allow Starbucks to be the most attractive company in the coffee market internationally. Thus, Starbucks will have a competitive advantage over its rivals by fulfilling the needs of a huge customer base in the market, by providing a high quality products and provide products with the best costs.

In general the coffeehouse industry in the United States was experiencing an increase in coffee consumption per capita due to the “Starbucks effect”. At this time Starbucks was operating approximately 20,000 stores in the United States and was living a fast expansion strategy worldwide.

Starbucks provide a large in store seating with free wi fi and a take-out service which only a few retail shops offer. The main target customers for Starbucks are office workers, with enough income, whom are able to afford the high prices of their products (Gaudio, 2003). The company has worked hard to establish itself as the brand leader with its branding as the most frequently drank coffee and noticeable brand logo. Introduction of promotions like the Starbucks Card, allows a more convenient way for a person to
pay for
your
drinks
and
earn
rewards
for
your purchase (Starbucks Coffee Company, 2011).
Furthermore, in‐store
promotions
accompanied
by
new
products and
amenities like free internet use are all strategies that Starbucks use to maintain their position in the market (Vasudha, 2011).

This paper will explore the science of Managerial Economics, the cost effective management of scarce resources, through an exploration of the Starbucks Company. This will include an assessment of relevant market forces, market structure and the economic theories that guide business decisions for this company.

Many coffee companies are currently in the market, making competition fierce. Although Starbucks has a strong reputation in North America, direct and indirect competitors still pose a threat. To establish market niche, competitors use location,

The CEO (Chief Executive Officer), Howard Schultz pointed that the main reason from the decline of “Starbucks Experience” was that the number of Starbucks shops increased sharply from only 1,000 to 13,000 within ten years. Other people considered their brand has been commercialized, and the customers hadn’t had enough enthusiasms to appreciate every moment of their coffee any longer. He suggested that Starbucks should re-find its origin. Nevertheless, his advice apparently was opposite to the

Following its success in the United States, Starbucks ventured overseas and quickly became a globalization icon. With its rapid globalization strategy, Starbucks expanded from about 5000 stores to an estimated 15,000 stores in 2000 (Groth, 2011). By mid-2000s, Starbucks’ supply chain faced many issues, resulting with challenges of having to fulfill expansion strategies yet minimizing escalating operation expenses. By 2008, Starbucks’ stocks fell by 42% (Schultz, 2011). The rapid expansion took a toll on the sales growth and stretched the limits of the existing supply chain, which then rippled down to erode the customer-valued ‘Starbucks experience’ (Gibbons, 2011).