Competing as Starbucks

Perfect competition is a theoretical or ideal market that is often used as the benchmark to describe other market structures. This market is best described as one where the four following criteria are met:

1. An infinite number of buyers and sellers exists giving no one the power to change the market single-handed. Also known as "price-takers".
2. There are no preferences shown as all products are homogeneous or undifferentiated.
3. There is easy entry and exit into the market for both consumers and producers. No association fee's etc.
4. All buyers and sellers have the same access to market information regarding availability, prices and quality of product being sold.

Starbucks does not meet all of the above conditions and therefore cannot be part of the ideal market known as perfect competition - not that any market has ever been or ever will be "perfect". I believe that Starbucks is in a league of it's own when it comes to the coffee market as their prestigious prices could only be compared to the smaller Ma & Pop stores that have much higher production costs due to lower sales. Starbucks however has nearly 17000 stores and more than likely buy their products at a reduced cost due to the high quantity they would be purchasing. I personally think that the price of a coffee at Starbucks is quite extreme (although I still treat myself a couple times a year) but they have managed to gain a great reputation even though customer service is not what it once was. Starbucks is a very trendy coffee shop, and the people who drink it and are willing to pay the outlandish prices will continue to do so religiously.

After reading the Starbucks Gossip memo that was allegedly sent in by Chairman Howard Schultz, I'd have to agree when he says that the extreme growth they have experienced since 2006 has lead to "the watering down of the Starbucks experience". They seem to have lost sight of their original ideas to spread their love of coffee in exchange for popularity and huge profits; but isn't this what all entrepreneurs strive for? A retirement plan? In the short term, the costs for breaking leases which was an estimated $120-$140 million according to Melissa Allison and a reported $8 million in severance packages would be a hard pill to swallow. However, in the long run, the reduction of overhead and non-profitable stores would lead to more efficient employees and greater profits.

I think that the closure of so many stores across the nation was a smart business decision for such a large franchise. In my opinion, there really isn't much point in keeping an unprofitable location open when there is another doing well just down the street. At one point on Robson Street in Vancouver, there was an intersection with a Starbucks on every corner, taking over all prime locations in order to prevent competitors from getting a piece of the pie. Overkill? I think so.

References:

Allison, Melissa, Starbucks closing 5 percent of U.S. stores, http://seattletimes.com/html/businesstechnology/2008028854_starbucks02.html

site accessed on November 30, 2012

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 November 30, 2012