The coffee industry is a highly competitive industry in that coffee is served at almost every restaurant, diner, and convenient store in the nation. Most homes brew their own coffee as a more convenient and less expensive way of getting their daily coffee fix. Thirty years ago people who wanted a premium cup of coffee would head to their local coffee houses or their corner cafes in order to obtain the highest quality of coffee. Today with the onslaught of corporate chains these local establishments have become an archaic symbol of the past.
Starbucks has differentiated itself from its competitors by offering higher quality of coffee which it charges a premium price for. While its prices are much 7
higher then that of its competitors Starbucks has such a strong brand loyalty that it has been able to consistently outperform other coffee houses. Starbucks, as with all local cafés, also has to compete against home coffee producers such as Procter & Gamble’s (NYSE: PG) Folgers brand of coffee and Kraft Food’s (NYSE: KFT) Maxwell House brand. With a high concentration of competitors Starbucks has been able to thrive by offering a high quality product that commands a high brand loyalty.
Starbucks has a differentiated itself from its competitors by offering a vast array of coffee flavors from all ends of the spectrum. This allows them to create unique flavors that can only be found at Starbucks. Starbucks also offers baked goods, sandwiches, and recently added movies and music to its ever expanding line of goods. With such a wide variety of specialty goods available for sale Starbucks is able to differentiate itself from its competitors. 2001 2002 2003 2004 2005
Sales Volume $2,648,980,000 $3,288,908,000 $4,075,522,000 $5,294,247,000 $6,369,300,000 Total Assets $1,851,039,000 $2,214,392,000 $2,729,746,000 $3,386,541,000 $3,514,065,000 Stock Price
$7.14–$12.23 $9.40–$12.59 $10.05–$16.58 $16.45–$31.18 $22.78–$31.93 With an expanding market the likeliness of excess capacity is minimal. However if Starbucks were forced to close a store at a particular location the exit barriers would be small for such a large corporation. Any equipment in the closed store could be moved to a new store and there are now regulations for exiting the industry.
Threat of New Entrants
One area of concern for Starbucks is that startup costs for local coffee shops are relatively low and many people open cafés everyday in the hopes of offering a local alternative to the corporate chains. Fortunately for Starbucks, these cafés do not have any brand recognition or loyalty and more often then 8
not are quickly forced to leave the industry. However in the past few years many well established companies have started to move into the coffee industry by offering their own select blend of coffee and have kept startup costs low by offering them at their existing stores.
While companies have been offering coffee to people as a compliment to their featured product for decades, Starbucks was one of the first to actually specialize in making coffee as their primary objective. Before Starbucks people used to order coffee as a secondary product and Starbucks has reversed that trend making coffee the main attraction while everything else is secondary. This has allowed Starbucks to gain a competitive advantage over most of its competitors. Being the first mover in an industry is accompanied with many advantages. Starbucks has established a long standing relationship with its suppliers and they continually ensure that they are getting the highest quality goods at a fair price. The coffee industry has a high concentration of suppliers with new ones appearing almost daily. This has led to coffee being a relatively cheap commodity.
Threat of Substitute Products
One problem that all coffee houses face is that they are constantly battling the threat of substitute products. Substitute products for coffee can be found...