Starbucks Analysis

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Industry Rivalry : The industry rivalry within the specialty coffee industry has changed dramatically since 1987. Unlike the early days of the specialty coffee industry when Starbucks competed primarily against other small-scale specialty coffee retailers they now compete against companies of varying sizes and different exposures to specialty coffee. Starbucks competes with a variety of smaller scale specialty coffee shops, mostly concentrated in different regions of the country.

The current impact of the industry rivalry force created by the competition between specialty coffee retailers is very high, especially as contrasted to what it was at the time of Starbucks’ rapid expansion twenty years ago. The growth of the industry has slowed while the number of competitors within the industry has increased. The largest industry rival currently facing Starbucks is the McDonald’s restaurant fast food chain. The key to McDonald’s success has been the consistent quality standards they achieve for their food, coupled with their quick service and low prices.

The specialty coffee industry has experienced explosive growth over the past 20 years. As a consequence, many companies have recognized the potential for profit and have tried to capitalize by entering the industry. This has resulted in a drastic increase in competition within the specialty coffee industry. The diversity among these competitors still remains very high but the grounds on which companies are differentiating themselves are changing. As larger and larger companies enter the industry the strategic stakes become higher, pushing some companies such as Dunkin’ Donuts and McDonald’s to differentiate themselves hrough price superiority.

In summary, the current impact of the industry rivalry force created by the competition between specialty coffee retailers is very high, especially as contrasted to what it was at the time of Starbucks’ rapid expansion twenty years ago. The growth of the industry has slowed while the number of competitors within the industry has increased. Both of these factors, in addition to Dunkin’ Donuts and McDonald’s high strategic stakes in the specialty coffee industry, have caused this change from weak to strong industry rivalry.

Potential for New Entrants : The primary deterrents to entry in the specialty coffee industry are the various barriers to entry. The economies of scale within the specialty coffee industry have increased as the size of the top players has increased. Larger companies are able to economize on their accounting operations and marketing budgets by facilitating their specialty coffee operations from the same department as for all segments of their businesses.

Companies which have national distribution channels can transport their specialty coffee at a relatively low cost compared to potential new entrants who have no such developed distribution systems. There is numerous cost disadvantages imposed on new entrants that are independent of the economies of scale considerations. As the industry matures, the ability to access distribution channels and select from the highest quality coffee beans has becoming increasingly difficult.

Most of the favorable store locations within the larger metropolitan areas have already been occupied by current competitors within the specialty coffee industry. Product differentiation within the specialty coffee industry has moved away from the purely objective and defined traits such as the taste of the coffee, convenience of the stores and prices charged. The industry has progressed toward more subjective traits such as the ambience of the store, the social responsibility of the company and brand identification.

Many companies have gained very loyal customer bases stemming from their past advertisements, customer service, objective product differentiations and early entry into the industry. All of this makes it more difficult for new entrants to gain a solid customer base. From the analysis above, it can be ascertained that the barriers to entry in the specialty coffee industry have increased substantially. As a consequence, the potential threat of new entrants has gone down. Substitute Products : The force created by substitute products in the specialty coffee industry has decreased.

Many companies that presented the specialty coffee industry with a threat in the form of substitute products have actually entered the industry and now compete directly by offering their own premium coffee selections. The primary substitute products still posing a threat to the specialty coffee industry are the caffeinated soft drinks offered by Pepsi and Coca-Cola. However coffee has gradually gained preference over carbonated soft drinks. This is mostly attributed to the health concerns associated with carbonated soft drinks and the new evidence showing coffee as a relatively healthy alternative.

Exp: Tazo Tea Company, Seattle’s Best Coffee, Torrefazione Italia, Hear Music and Ethos Water. Supplier Bargaining Power : when the first Starbucks was conceived, the farmers from whom Starbucks purchased its premium coffee beans were numerous, small and unconnected to one another. Currently, many of the farmers who sell to Starbucks and other premium coffee chains are united by an initiative known as fair trade certified coffee. Originally, specialty coffee retailers such as Starbucks comprised the vast majority of sales made by the premium coffee farmers.

As the industry has grown, more companies and restaurants, specializing in a broader array of products than just specialty coffee, have begun to purchase from the premium coffee farmers. This has made the relative size and importance of the companies, such as Starbucks, within the specialty coffee industry less significant to the farmers. With other customers to supply, the coffee farmers are less constrained by the specialty coffee industry and its specific demand. This acts to increase the bargaining power of the coffee farmers.

When Starbucks first began purchasing premium Arabica coffee beans in the late 1980s, they executed purchases incrementally throughout the year. Currently, they lock their coffee suppliers into long-term contracts to dilute potential price volatility. These contracts have stipulations within them which place a financial burden on the coffee suppliers if they choose to supply a different company. By creating these switching costs for the premium coffee suppliers, Starbucks has diminished their ability to play one buyer against another, which decreases their bargaining power.

It is apparent that suppliers are more powerful today. The increased unity among the coffee farmers, decreased significance of specialty coffee retailer’s purchases as a proportion of premium coffee bean sales and increased importance placed on high quality coffee beans by the purchasers have all acted to increase the bargaining power of the supplier group. Although Starbucks has locked some of the coffee suppliers into long-term contracts not all suppliers are affected; thus, the supplier bargaining power is only marginally diminished by that tactic.

Bargaining Power of Buyers : there are a few buyers who purchase in large volumes. These large buyers are typically other multinational corporations who choose to serve Starbucks brewed coffee in their offices. However, the effects of losing one of these buyers to a competitor would not be detrimental to a company with a large sales volume such as Starbucks. This makes the buyers less sensitive to price fluctuations and gives the players within the specialty coffee industry more control over pricing.

This acts to decrease the bargaining power of both the buyer groups. The expansion of the specialty coffee industry created a wider array of competitors who offered high quality specialty coffee. This made it much harder for the players in the specialty coffee industry to differentiate themselves through quality and turned quality into the industry standard. In addition to the increasing quality standardization which specialty coffee has undergone, the buyers face no switching costs and have an enormous selection of retailers from whom they can buy.

The ability of buyers to backward integrate is enhanced by the availability of all information regarding the demand, market pricing, and supplier costs in the specialty coffee industry through sources such as the World Wide Web. With full information, the buyer is in a better position to ensure that they pay a favorable price and receive an appropriate level of quality from the product. The amount of bargaining power that can be exerted by the buyers within the specialty coffee industry has increased as a result of the availability of information regarding market variables.

This along with the other previously discussed changes to the dynamics of buyer bargaining power has increased its overall magnitude from the level it was at in the late 1980s. Conclusion: Specifically, the force created by industry rivalry has gone from one grounded in strategies of differentiation and focus while discouraging price wars to an extremely competitive environment where differentiation is increasingly difficult and price wars are looming.

The strength of the force imposed by the potential for new entrants has decreased as a result of more formidable barriers to entry. The bargaining power of both suppliers and buyers has increased as a result of increased unity among the suppliers and the accessibility of information to the buyers. The threat of substitutes is still insignificant given the continued declining sales of carbonated soft drinks compared to coffee and specifically specialty coffee.

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