Exercise 6 - 2 Starbucks



STARBUCKS: An Investigation into Perfect Competition

Starbucks is an American success story. The company, started in Pike Place Market in Seattle by Howard Shultz in 1971, has grown into a large multi-national company, buying 4% of the total coffee market all premium Arrabica beans. Starbucks original artisan coffee practices have become more automated with their astounding growth and subject to the public scrutiny. Recent store closures, increasing competition, fair trade issues and a degradation of their core products have resulted in a company under re-alignment. (Fellner)

Coffee is a homogeneous product and an example of a business operating in a monopolistic competitive market is the coffee house.The coffee house industry has many buyers and sellers who are price takers. Preference is shown in the core product as most shops have  different specialty and/or multiple coffee products, the market has easy entry for buyers and sellers and market information is readily available.(Sayre, Morris) Starbucks would be considered to be operating in perfect competition if and only if they were competing amongst themselves and even then, the heterogeneity of the service industry will still exert some preferences for certain stores.

The coffee market has a storied history, one full of human strife and agony in many developing countries of the world since the Middle Ages. To lessen the brutal realities associated with the coffee trade, Starbucks, in a accordance with their re-alignment, have increased their profit sharing with the coffee bean growing countries to further sustain their developing economies. Challenges to business associates to have a  more entrepreneurial spirit are continually stressed by founder, Howard Shultz .(Fellner)

Store closures are resulting from numerous factors as outlined in Starbucks Gossip ..the commoditization of the Starbucks experience. The infamous "memo", from Starbucks founder Howard Shultz recognized generic stores, impersonal staff, machine processed coffee and increasing competition as the major reasons for store closures.(Starbucks Gossip.com) Starbucks total revenue has rebounded since the low 2008 levels, proof that their re-alignment to some extent has been successful.(Starbucks Gossip.com)

To gain increasing returns on their business, Starbucks has compromised many of its original benchmarks in order to maximize profits and increase productivity. The degradation of the products and services Starbucks is experiencing, as mentioned in the "infamous memo", shows a diminishing return in response to an overly saturated marketplace. Risks involved in decisions made regarding training, automation and service were relatively small but have become increasingly large when the accumulated effects were observed.(Starbucks gossip.com)

Starbucks uses only select quality Arrabica beans, grown only in  temperate climates at high altitudes.  The patented flavour valve on their coffee bags, which retains the coffees freshness, allows for mass production and storage. Starbucks is therefore able to control the price of their coffee as the coffee industry goes through cycles of glut and scarcity.(Fellner)

Coffee prices at Starbucks although slightly more expensive than their major competitors (and depending on level of service), are justified since the coffee beans have a higher perceived quality. If coffee prices at Starbucks were lowered it would result in lower revenues as coffee as a product is inelastic.

Sources:
http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html
http://www.cbc.ca/news/business/story/2008/07/01/starbucks-closures.html
http://site.ebrary.com.libresources1.sait.ab.ca/lib/sait/docDetail.action?docID=10251786
Wrestling with Starbucks : Conscience, Capital, Cappuccino
Fellner, Kim
Pages: 295
Publisher: Rutgers University Press
Location: New Brunswick, NJ, USA
Date Published: 06/2008
Language: en