Compteting as Starbucks

In order for a perfectly competitive market to exist there must be four conditions that are met:

·         Many small buyers and sellers all of whom are price takers

·         No preferences shown

·         Easy entry and exit by both buyers and sellers

·         The same market information available to all

Looking at Starbucks it looks like all of these conditions are met. The only thing missing on Starbucks’ part would be no preferences shown. There are a lot of different coffee stores to choose from whether they are chain stores like such as Starbucks or local independent businesses and preferences are shown by consumers.

In the US, Starbucks closed 600 of its stores over the summer of 2008 (Allison, 2008). According to the company’s Chief Financial Officer Pete Bocian, the stores closed because they were not profitable and were not expected to generate profits in the future (Press, 2008). The closed stores “were being cannibalized by nearby Starbucks locations” (Allison, 2008).  It looks like the company was improving its efficiency with these closures.

In a 2007 memo, Starbucks CEO Howard Schultz stated that as the company has become more efficient over the years, the company has paid a price by “watering down the Starbucks experience” (Rebel, 2007).

Starbucks are known to sell expensive drinks. I believe that their prices are high because they are a brand that is recognized worldwide and that there is an “experience” when visiting the stores. There is a laid back atmosphere when entering a Starbucks store. It is also a very fashionable brand. Many celebrities are pictured with the famous Starbucks cups. Motiv Strategies’ Joy Thomas points out that “Starbucks coffee is widely perceived to be a small luxury, and people understand they are paying a premium for it” (Thomas, 2012).

If Starbucks lowered their prices, then demand would increase. Starbucks’ main competitors such as McDonalds or Tim Horton’s have lower priced coffee so right now Starbucks profits for coffee is higher. If Starbucks lowered their prices they could potentially steal customers from the competition. Once the demand increases, then the supply will increase. If we look back at the Elasticity article from earlier on in this blog, the same effect would happen to Starbucks. The demand is elastic based on price.  If the price of a Starbucks drink is reduced below $5, then demand would be inelastic and profits will begin to drop.

Since Starbucks have closed their selected locations, this means there are sunk costs related to building and operating costs. Closed locations mean laid off employees so in the short term at least, there are reduced employee wage costs until the company decides to hire more people.

Allison, M. (2008, 07 02). Business & Technology - Starbucks closing 5 percent of U.S. stores. Retrieved from The Seattle Times: http://seattletimes.com/html/businesstechnology/2008028854_starbucks02.html

Press, C. (2008, 07 02). Starbucks Boosts Planned Store Closure to 600. Retrieved from CBC: http://www.cbc.ca/news/business/story/2008/07/01/starbucks-closures.html

Rebel, B. S. (2007, 02 23). Starbucks Gossip: Starbucks chairman warns of "the commoditization of the Starbucks experience". Retrieved from Starbucks Gossip: http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html

Thomas, J. (2012, 01 09). Starbucks is Raising its Prices, But People Probably Won’t Occupy Starbucks. Retrieved from Motiv Stragegies: http://motivstrategies.com/motiv_blog/2012/01/starbucks-is-raising-its-prices-but-people-probably-wont-occupy-starbucks/