Exercise 6-2: Competing as Starbucks

I am not sure if we can talk about the coffee shop market to be perfectly competitive. However, the "fast-food" coffee is certainly not a public good. In Canada, there are a few companies in this business, however I would say the industry is dominated by the big two: Tim Horton's and Starbucks. On the outside looking in are McDonald's (McCafe), Second Cup, Timothy's and a few even smaller chains.

Reading through the email send by CEO Howard Schultz (see the email here) I agree with the Starbucks experience being on the declining side of things. In a matter of fact, my wife and I used to go to Starbucks and sit there and drink our coffee. We haven't done this in a while and I do agree that it used to be nice to see how our beverage get's prepared and see the barista preparing it. The new machines do block the sight and I had no idea they actually grind coffee there too. In a matter of fact, after ordering the beverage, you can't see much until you actually get it at the receiving end of the shop.

This is how Starbucks started to built it's brand and it has gone away from that in order to be faster. Starbucks should stand for it's quality and the experience though while McDonald's is less about the experience and more about fast food and the children play-ground.

I can understand the closure of some of the Starbucks stores in 2008 and 2009. Because people didn't have as much money and were worried about their job's, they would substitute the "expensive" Starbucks coffee for home made coffee. If they cared about the taste of Starbucks coffee they would most likely buy the grinded Starbucks coffee and brew it at home instead of enjoying it in store or at the drive-thru.

This would result in lower quantities of coffee produced in many stores. Some of them, as discussed in these two articles (CBC and The Seattle Times) would operate at or below the break-even price and eventually get to the shutdown price, once the price drops below the average variable cost. Below this point the store won't even cover it's variable expenses anymore and produce losses higher than the fixed costs. This is where stores have to be shutdown, at least temporally.

Personally I do think the coffee at Starbucks is too expensive. I rather go to Tim Horton's and have my coffee there or have a K-Cup machine at home and drink my "fancy" coffee this way. However, there are many fans of Starbucks that support the brand itself. Starbucks seems to almost be a "status symbol" in an office. So is Tim Horton's. I think the brand has such a strong reputation, that people are willing to pay for it.