Starbucks CaseStarbucks began as a seller of whole coffee beans in Seattle, Washington in 1971 with the intention of finding the best coffee in the world and bringing it to people who would never otherwise have the opportunity to have it. Starbucks became a corporation in 1985 and became the leading coffee retailer in the world. There are over 16,000 Starbucks coffee stores internationally. In addition to coffee sold in its retail stores, it also produces teas, ready to drink coffee beverages, ice cream, packaged coffee, flavorings, and it even has its own music and books. Its retail stores also sell fresh foods like sandwiches, pastry, and salads (Camacho 2007).
In discussing the structure of the coffee market, Martin Pitek shows that Starbucks has managed to inflate the price of its coffee products while maintaining a fierce hold in the marketplace. People have remained loyal to the Starbucks brand, and its line of luxury beverages as competition began to mimic Starbucks’ beverages. Throughout the rise and fall of economies, Pitek says, Starbucks has capitalized on its ability to differentiate itself from its competitors such as Dunkin’ Donuts and McDonald’s, fast food chains that followed Starbucks in introducing coffee as a way of life. Starbucks has managed to create a brand that makes it hard for competitors to imitate (Pitek 2009).
Georgia Flight, in her essay for CNN’s Money online division, reminds us about a memorable movie scene in 1999s Austin Powers sequel. As Dr. Evil plots to take over the world from his headquarters in the Seattle Space Needle, an outside shot of the Needle shows the iconic landmark emblazoned with a Starbucks logo. Talk about a symbol of global domination (Flight 2007). But it is not just the logo, and it is not even the coffee, it is a way of life that Starbucks has introduced the world to, and with an annual revenue of over $8 billion, Starbucks proves that the enjoyment of consuming a commodity may be more important than the commodity itself. In fact, the commodity is propelled into a luxury item with a price tag to prove it (Holmes 2001).
Pitek cites the 2013 National Coffee Drinking Trends Report when talking about bargaining power. While substitutes like Dunkin’ Donuts and McDonald’s have items that taste very much like the specialty coffee beverages sold by Starbucks, they fall short of creating the feeling of luxury that only a coffee house can deliver, the study suggests. For this reason, the premium that Starbucks placed on its coffee beverages was hard for competitors to realize. In order to gain new customers, competitors like Dunkin’ Donuts and McDonald’s worked on creating products that were substitutes for Starbucks’ beverages through maverick marketing strategies. Understanding the market is paramount to understanding how to control the setting of prices. Pitek says that the above referenced study shows that 18 to 24 year olds are the largest contributors to the
Pitek cites the 2013 National Coffee Drinking Trends Report when talking about bargaining power. While substitutes like Dunkin’ Donuts and McDonald’s have items that taste very much like the specialty coffee beverages sold by Starbucks, they fall short of creating the feeling of luxury that only a coffee house can deliver, the study suggests. For this reason, the premium that Starbucks placed on its coffee beverages was hard for competitors to realize. In order to gain new customers, competitors like Dunkin’ Donuts and McDonald’s worked on creating products that were substitutes for Starbucks’ beverages through maverick marketing strategies. Modeling the “normal” and “excess” of a consumer’s dollars is not a simple task.
Coffee is not just a tool for customers to keep for themselves. Pitek’s study goes even further by comparing the rise in coffee prices and the influence of the low average price on the quantity of coffee they buy, to the rise in the average number of ounces sold in the U.S. (1.) This is more like an advertisement: Starbucks pays a premium to consumers who keep their coffee at home on a week’s notice. Because of this, the U.S. coffee sector has a problem.
Figure: A. Coffee consumption trends based on U.S. consumer dollars in 2013
Data from 2006 to 2017 show that consumers are consuming a higher portion of the American dollar compared to their counterparts in Germany and France. When the dollar is high enough, most consumers can easily afford Starbucks. However, when it’s low enough, consumers rarely pick up on pricing and tend to overprice at the grocery store. Pitek says the following: The amount of high-dollar coffee consumers prefer to enjoy is largely down to a combination of factors, though it varies by region. “We’ve heard of people in Europe who are happy because they’re in a good economic mood and feel the price of the cup is much lower at some grocery store than they are in the U.S. And that sort of perception continues to be quite common among people from various places in Europe. If you look at those countries, the high levels of the quality of coffee are not just a result of being priced high, but very high.
“Also, there’s been quite a bit of research demonstrating that high-dollar coffee is more expensive because you have a lot of retail outlets but can’t afford it for a lot of items. In some areas of South America, consumers don’t really seem to enjoy Starbucks in large part because of poor sales. Some of the people from Europe who are very happy are the customers they have with their high-dollar Starbucks,” says Pitek. So, even though a good deal of consumers are paying significantly more than prices the other way around, they do not necessarily feel the presence of prices in the coffee world. When the costs of buying and consuming have been reduced because of their low prices, it is less expensive to enjoy high-dollar coffee in the future.
Figure: A. Coffee consumption trends based on U.S. consumer dollars in 2013
Data from 2006 to 2017 show that consumers are consuming a higher portion of the American dollar compared to their counterparts in Germany and France. When the dollar is high enough, most consumers can easily afford Starbucks. However, when it’s low enough, consumers rarely pick