Starbucks is a large Seattle based company that provides barista service with fresh brewed coffee and espresso beverages among other drinks and snacks. The reason this company is considered to be a part of a perfect competition market is because…
- There are a large number of buyers and sellers in the market. There is a lot of competition from Tim Horton’s, McDonald's, A&W among the many “Mom and Pop shops” that have entered into the market.
- It is easy to enter into and exit from this market. As a result of the easy access to enter the market it creates a perfect competition because there are many products that are similar in nature and, as a result, many substitutes.
- In a perfect competition prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. If a company raises their prices and consumers are not willing to pay the higher prices then in a perfect competition market they have many substitutes and they can change where they buy that product from.
Starbucks has set themselves apart by producing an experience to coffee and drinking it. The eventual owner and chairman of Starbucks travelled to Italy and fell in love with Italian coffee bars and the romance of the coffee experience. He had a vision to bring the Italian coffeehouse tradition back to the United States. He wanted to create a place for conversation and a sense of community. From the beginning, Starbucks wanted to be a different kind of company. By setting themselves apart from most other coffee shops the company Starbucks was able to grow into the large company it is today with over 15,000 stores world wide.
Despite the company’s success in 2008 Starbucks announced that they would be closing 600 stores in the USA. Their expansion was happening very quickly and many locations of the company were too close together. They closed 600 stores that had been recently opened, since 2005, and that were a short walk away from another Starbucks location. By closing these stores they could cut a lot of their long term and short term costs. By having too many stores you create many expenses that may not be recoverable. With more stores you have more costs such as rent, utilities, salaries, machine costs and maintenance, and more supplies to provide to each of these locations. By closing these stores Starbucks states that they believe that people will still come to Starbucks other locations that are close by thus creating a larger profit because the costs to run fewer stores is less. Despite the costs associated with closing these 600 locations, in the long run the company will be more profitable.
Even though you always hear the statement “Starbucks coffee is way to expensive, I will never pay $5.00 for a cup of coffee” people still flock to Starbucks for their coffee fix. So from the success of the company and the long line that I stand in to get my Starbucks fix, I would assume that consumers do not actually think that what Starbucks charges for their coffee experience is too much. I believe that Starbucks does so well because they brew the best coffee and espresso and that they have created the ultimate coffee experience in their stores.
If Starbucks lowered their prices I believe that they may at first show an increase in profits but I believe that the experience and the mood of Starbucks would fail and that you would eventually loose customers. With the increase in traffic the stores would most likely see they would look to simplify things and their vast menu choices that they are know for could be cut back. The quality of the product could be lost with cost and time saving processes and it would become just another Tim Horton’s with rushed service and not a quality product. In the end I believe that it would do more harm than good the Starbucks brand and experience.
Image from: http://consumerist.com/2008/05/christian-group-calls-for-boycott-over-titillating-new-starbucks-logo.html
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