Unit 6 Exercise 6-2 Competing as Starbucks

In order for a market to be perfectly competitive the buyer and seller characteristics is such that there is no direct influence on the market supply/demand and price. Four conditions are cited by Sayre/Morris, Principles of Microeconomics 6e, page 261, in order for a perfectly competitive environment to exist. These conditions are:

1. Many small buyers and sellers all of whom are price takers;
2. No preference shown;
3. Easy entry and exit by both buyers and sellers; and
4. The same market information available to all.

Reflecting on the world market for coffee and the monopolistic competition created by the coffee houses Starbucks is in fact part of the perfect competition market. However, one may challenge point number four with respect to market information depending on how one construes the meaning. Internal market information such as trade secrets regarding blends and roasting methodologies particular to a certain supplier may be of competitive advantage, however, in my opinion it is not the driving force that the industry is seeking. One of the true governing sources of information available to all players is made available by the International Coffee Organization (ICO) whose mission is to “tackle the challenges facing the world coffee sector through international cooperation.”[1]

The demise of Starbuck resulting in six hundred store closures over the 2008-2009 time frame are noted in “Starbucks Gossip: Starbucks chairman warns of the commoditization of the Starbucks experience”.  The memo from Starbucks chairman Howard Schultz to CEO Jim Donald in February 2007 refer to automated machines, lack of passion and sterile, cookie cutter atmospheres as directly impacting the bottom line. While this may all be very well and true it comes down to an aggressive expansion strategy plan that was implemented to improve efficiencies and increase profits while sacrificing Starbucks history and traditions on which it was founded in 1971. Not to mention the economic recession that also played a role in the downturn of their profits and return on investment, however, the recession is not the pitfall and it was the internal management expansion strategy that caused the original impact.

As part of their restructuring plan short-run items for Starbucks scrutiny may be capital equipment, leases, wages or benefit packages. In the long-run global coffee sourcing ought to be reviewed and perhaps a marginal shift from fair-trade coffee sourcing should be added to their mix in order to reduce coffee costs.


I perceived Starbucks pricing structure to be higher than their competitors. How Starbucks can conceivably charge customer’s higher prices for burnt coffee is beyond me. Nonetheless, their burnt smelling and tasting coffee has filled a niche in this caffeine addiction market that satisfies their die hard customers. Should they choose to reduce their pricing structure through cost saving measures Starbucks ought to operate at a marginal loss which in the short run may benefit the company as opposed to store closures. Eventually they will see a resumption of demand for their product by gained customer base and would be in a position to slowly increase pricing again to reach the breakeven or profit making point.

[1] Cited from International Coffee Organization web page  http://www.ico.org/mission.asp?section=About_Us

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