Starbucks meets some of the conditions which are necessary to be considered part of a perfectly competitive market. Those conditions are as follows (Morris & Sayre):1. Many small buyers and sellers all of whom are price takers
2. No preferences shown
3. Easy entry and exit by both buyers and sellers
4. The same market information available to all
Starbucks cannot be considered to be in the type of market that is considered perfect competition by economists because they don't meet all 4 conditions. One of the conditions that is not met is number two, that no preferences are shown. Starbucks charges more than most coffee shops and one of the main reasons they continue to sell their coffee is because certain customers prefer Starbucks as opposed to other shops.
The competition is strong in the coffee industry and in order for Starbucks to continue to succeed, they must come up with new and innovative ideas to meet demand and carve their place in the market. Unfortunately some of the new ideas did not mesh with one of Starbucks main goals, which is to show that they provide more than a cup of coffee; they provide an experience. The video below shows a few customers who feel they got more than coffee from Starbucks (http://www.starbucks.ca/about-us).
In 2007 Starbucks chairman Howard Shultz wrote a memo regarding Starbucks changes. They were losing their individuality and becoming like every other coffee chain (Shultz, Howard). He felt that it was necessary for Starbucks to realign their business practices to bring back the Starbucks experience.
Starbucks struggled to find the balance between trying to give customers an experience when they enter the store and keeping up with the demand. In addition, the economy became very turbulent which eventually led to Starbucks announcement in 2008 that it would be closing 600 stores (Allison). Because of Starbucks rapid growth, change in consumer demand and the state of the economy, they experienced diseconomies of scale.
The store closures had a large impact on costs and profits for the coffee chain. In an article by Melissa Allison, she wrote “Starbucks said the store closures will lead to pretax charges of about $328 million to $348 million, including $8 million in severance costs and $120 million to $140 million in lease-termination costs and future lease obligations (Allison).” The short-run costs are extremely high but they made the best decision when considering the long-run costs. By choosing to close the underperforming stores, they increase profits in the long-run.
Over the years, Starbucks has been criticized for the prices they charge. The question is, if Starbucks is too expensive, why do customers keep returning? How can Starbucks manage to charge such prices without losing customers to other, less expensive coffee chains? The answer is that among other things, they have been successful in creating a Starbucks experience and customers continue returning for the experience. Rachel Hennessey wrote an article about why Starbucks exceeds despite market shortcomings and she agrees that part of the success lies in the fact that customers like the ambience. She wrote “When you enter a Starbucks store, you will notice a rich warm color scheme, alternative music, organic-looking art, and baristas in green aprons (Hennessey).”
If Starbucks were to lower their prices, the quantity demanded would increase. This would drive the quantity supplied to increase as well. Eventually the market would adjust and a new equilibrium would be reached.
Allison, Melissa, Starbucks closing 5 percent of U.S. stores, http://seattletimes.com/html/businesstechnology/2008028854_starbucks02.html
site accessed on October 27, 2012
Hennessey, Rachel, 3 Reasons Why Starbucks Still Shines, Despite Market Shortcomings,
http://www.forbes.com/sites/rachelhennessey/2012/08/06/3-reasons-why-starbucks-still-shines-despite-market-shortcomings/
site accessed on October 28, 2012http://www.forbes.com/sites/rachelhennessey/2012/08/06/3-reasons-why-starbucks-still-shines-despite-market-shortcomings/
Morris, Alan; Sayre, John, Principles of Economics, p. 261
Schultz, Howard, Starbucks chairman warns of "the commoditization of the Starbucks experience",
http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html
site accessed on October 27, 2012
Is it safe to have coffee during pregnancy?
ReplyDeleteLease Assignment Agreement
Hello Gene,
ReplyDeleteSome people feel that drinking coffee while pregnant can be harmful but studies have been done that suggest otherwise. Unless large amounts of coffee are consumed, it doesn’t appear that pregnant ladies are adversely affected (Dr. Judith Reichman). As far as I can tell, there is no actual evidence that indicates coffee, or more specifically caffeine, is either harmful or beneficial for pregnant ladies. I believe that as long as reasonable amounts are being consumed, it is safe.
Alyssa
Dr. Judith Reichman, Will drinking coffee during pregnancy harm my baby?,
http://today.msnbc.msn.com/id/19932132/ns/today-today_health/t/will-drinking-coffee-during-pregnancy-harm-my-baby/,
accessed on October 31, 2012
Hello Alyssa,
ReplyDeleteI have to say that your thoughts are very similar to mine. Gret post!!! The only difference is that I believe though it sounds strange that lowering prices for beverages would lead to losing its personality for Starbucks. Simply they should still keep profitable level of their business and lowering prices means cutting costs. How do you think?
Olga
Hi Olha,
ReplyDeleteI see Starbucks as a company that prices their products so highly that they could be using a marketing strategy called prestige pricing. This is when prices are set higher than normal because lower prices will hurt instead of helping sales, also called image pricing. I feel that Starbucks has branded themselves as a luxury coffee store, from their coffee to the experience they give their customers, and people are often willing to pay more if they feel that they are getting a high end, luxury product.
In some cases, businesses can be harmed if they reduce their prices and I feel that this might be the case with Starbucks. Demand would definitely increase if they were to lower their prices but would it increase enough to offset the customers lost that would no longer buy coffee from Starbucks since it would no longer be perceived as a luxury brand? Maybe, but instead of lowering their prices, I feel Starbucks would be better off trying other methods to balance their costs and reach a profitable level.
Alyssa
Thanks Alyssa,
ReplyDeleteI agree with you in the statement that it is not the Starbucks' case to get more profits by lowering prices. The company got its niche on the coffee market and I would say not only because it is prestige but because the coffee they offer is grinded and brewed on the front of the customer. It definitely tastes better and any attempts to lower costs would affect the taste of coffee. And taste of their coffee not the prestige was a key factor for me to become their customer. This is also one of the reasons of a call for reorganization in the article of Howard Schultz.