Starbucks Case Analysis

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Since Starbucks is aiming in providing premium high quality coffee in the world with uplifting experience, customized service and well decorated store ambience, it is competing in the specialty coffee industry with the best flavored coffee beans. Threat of new entry: Products within the specialty coffee industry are quite differentiated with a large variance in quality, customer service, convenience and store ambience. The high degree of differentiation becomes difficult for new players to enter the industry. The capitals required in the industry are mostly fixed costs such as the specialized coffee machines and the lease of property. Existing players have an accessible channel of distribution in terms of favorable locations within metropolitan areas and specialized suppliers offering premium raw materials. Also, they have experience in managing the coffee quality and customer convenience over the years. Even though the start-up cost is not high in running a specialty coffee shop, it would be hard for new entrants to further expand their business. Power of suppliers: In order to increase differentiation in providing high quality products, specialty coffee shops usually purchase from original farmers. However as the industry grows, more companies start to purchase those coffee beans from them. Since premium coffee beans are the most significant input in making unique superior coffee, there will not be much suppliers that can reach their goal, making suppliers more significant even though most of them are in small-scaled business. Coffee bean farmers can also integrate forward by running small-scaled coffee shops instead of collaborating with large companies. Specialty coffee companies become less important to the farmers. Substantially, bargaining power of suppliers increases. Power of buyers: When choosing among various specialty coffee retailers, people tend to look at the quality of coffee and customer service, rather than price. Even though price of coffee goes up, buyers who like the taste of coffee would still come because buying a cup of specialty coffee does not contribute significant fraction of their cost of living. Thus buyers in this industry are thus less price-sensitive. Compared to basic coffee shops, specialty coffee shops tend to be more differentiated, offering a wide range of food and beverages in order to bring brand premium. Coffee shops recently are launching prepaid value cards. In that case, consumers’ switching costs become higher because the majority of them would go to the same shop as long as they use up all the money stored in the card. Last, consumers have limited information about the specialty coffee industry in terms of market prices and supplier costs, so it would be hard for them to integrate backward. All these factors dilute their bargaining power. Threat of substitutes: Threat of substitutes is quite high in the specialty coffee industry due to its low switching costs and offering of an attractive price-performance trade-off to the product. There is not much to prevent customers from trading in various specialty coffee shops or other quick-service restaurant substitutes. Instead of buying premium coffee in a specialty coffee shop, people can go other places like supermarkets, restaurants, basic coffee shops or even making their own coffee at home. Also, people may choose other places in occasions rather than going to a specialized coffeehouse, for example bars, where people can still relax and enjoy themselves while chatting with friends. In terms of beverages being offered, people nowadays focus more on healthier living and choose to buy decaffeinated beverages such as fresh fruit juices and tea from specialized stores rather than a coffee shop. These alternative options raise threats in running a specialty coffee business. Intensity of rivalry: There is an intense competition in the specialty coffee industry amongst established coffee shops that are competing in getting more...
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