Essay: Starbucks Corporation

Starbucks Corporation is an American coffee giant that was founded in 1971 in Seattle. It is a premier retailer, marketer and a roaster of speciality coffee all across the globe. Starbucks is a major retailer and competitor in the coffee and snacks store industry. The market is largely occupied by Starbucks and Dunkin Donuts and this makes the market monopolistically competitive. The industry levels of saturation are moderately high. A monopolistically competitive market has few players who have majority of the market share and they are able to set premium prices for their products (Geereddy, 2012).
The new entrants are few because in the industry because the barriers to entry are significantly high for retail snacks and coffee industry. This is primarily because new investors need to make huge investments in terms of leasing stores, equipment and also need to build a reputation in the market to compete with established giants like Starbucks, Costa Coffee and Dunkin Donuts. Here, the large brand identity requirement becomes a major hindrance to entry into the market. Large companies like Starbucks have been able to attain their economies of scale through large scale production and distribution which in turn helps them to lower costs and increase their production margins. New companies will not be able to produce such a large scale very easily when they do not have a well established market.
The core competency for Starbucks Corporation has been its ability to leverage on their product differentiation strategy by way of using a unique product mix of high quality of snacks and beverages along with a unique Starbucks experience that is derived from extreme high levels of customer service and well maintained stores. Again barriers to entry also become really high for new entrants when established giants like Starbucks differentiate their products based on high quality, premium location of their stores and also a great experience within the store ecosystem. Starbucks use premium quality inputs that help them make the best coffee in the world in terms of quality. It becomes extremely difficult for small new entrants to match the quality at industry prices and thereby remain sustainable.
From an analysis of the company’s annual report, it was found that the company makes use of very little funds into advertising. It relies primarily on word of mouth marketing. The company’s marketing initiatives have been limited and one could think that they could benefit largely if they tried to increase their visibility through increased investment in marketing and advertising initiatives.
How does the industry structure affect the strategies used by Starbucks?
The industry within which Starbucks Corporation operates is monopolistically competitive where Starbucks shares the majority of the market followed by Dunkin Donuts and Costa Coffee. The close competitors also have quite a significant portion of the market and this puts high competitive pressure on Starbucks. The customers of retail coffee and snacks industry do not have a large coast associated with switching from one brand to another and therefore, Starbucks relies on product differentiation strategy as their main tool to retain its consumer base. This industry has attained the matured stage in the business cycle because of which the competitive advantage lies primarily in product differentiation strategy. The industry presently does not operate in overcapacity because of which it is still possible to make surplus profits in the monopolistically competitive industry of coffee and snacks.
To what extent does market structure explain the financial performance of Starbucks?
The industry within which Starbucks operates is monopolistically competitive. Here, competitors differentiate based on location, store environment and product mix with an aim to establish a niche within the market and thereby gain premium profits for their unique offerings. This implies that Starbucks is able to gain surplus profits and its financial performance can be explained by the market structure within which it operates. Also, because the barriers to entry are very high, the company has to focus largely on product differentiation rather than cost reduction to compete from other firms. This also reduces expenses on research and development. Starbucks however, does not use advertisement to differentiate its product from its competitors. It relies on development of strategic alliances to offer unique products which form the base for its competition in the market.