Current Competitive Force
Porter’s first force that Porter describes is current rivalry among existing firms. In the specialty eateries industry, Starbucks’ current and direct U. S competitors are Diedrich Coffee, Seattle’s Best Coffee, and Einstein/Noah Bagel Corporation (hoovers. com). The competition, however, is not equally balanced. Diedrich Coffee operates 370 coffeehouses in 37 states and 11 countries (hoovers. com). Seattle’s Best Coffee operates 160 coffee cafes and 20 Italian coffee cafes in 17 states and 8 countries (hoovers. com).
Einstein/Noah Bagel Corporation operates 460 bagel cafes in the U. S (hoovers. com). Starbucks has 4,709 locations in over 20 countries (hoovers. com). It is clear that Starbucks has few major competitors, and the competition has nowhere Starbucks’ volume of operations. Starbucks is the leading retailer, roaster and brand of specialty coffee in the world. Smaller competitors, however, pose potential threats to the company. For example, the average Starbucks location draws on a population base of 200,000 (msn. com).
In San Francisco and Seattle, Starbucks draws on population bases between 17,000 and 19,000 (msn. om). In cities where Starbucks does not draw on small population bases, smaller competitors can attract some of Starbucks’ 200,000 person population base. A slowing industry market growth is another threat facing Starbucks. According to the market research firm Allegra, compound market growth between 1997 and 2001 was 57% (hoovers. com). From 2002 to December 2004, the market it estimated to grow 14%. (hoovers. com). Competitors are selling similar products, including specialty coffees as well as high quality foods. In this slowing market, competition is high.
Threat of Potential Entrants
Porter’s next force is the threat of Potential Entrants. Starbucks, being the world leader in its industry, has controlled access to distribution channels. Starbucks has exhibited this control over distribution channels by setting guidelines for their suppliers to follow. These guidelines will be discussed in more detail in the discussion of the industry bargaining power of suppliers. Starbucks is Fortune’s number one most admired company in the food industry (fortune. com). One of their key attributes to success is innovation, where Fortune ranks Starbucks number one in the industry (fortune. com).
Starbucks is constantly innovating and showing strong product differentiation in their industry. The industry, following Starbucks’ lead, is becoming more differentiated. For example, five months after Starbucks introduced a prepaid Starbucks debit card, Seattle’s Best launched its version of the marketing product (hoovers. com). This industry differentiation is an opportunity for Starbucks, and a threat to potential entrants. Statistics have shown the industry to be slowing down, therefore making competition high and the threat of new entrants low. Some believe, however, that there is a different kind of potential entry threat.
Ted R. Lingle, executive director of the Specialty Coffee Association of America, believes that national food servers like McDonalds and Denny’s could create strong coffee menus and become “the strongest competitor for Starbucks’ business. ” (msn. com).
Bargaining Power of Buyers
Porter’s next force is Bargaining Power of Buyers. Starbucks’ customers are the buyers. The Preferred Office Coffee Provider is a plan developed by Starbucks in which companies can buy the ingredients and tools necessary to brew “the perfect cup of Starbucks Coffee,” in large quantities for their offices (starbucks. om).
This is the only opportunity found in Starbucks. com for a customer to buy large quantities of their products. Starbucks’ typical customer buys small quantities of their products. Products purchased at Starbucks are highly differentiated and unique. From personal experience, we know that there is an enormous selection of coffees at a Starbucks’ coffee shop. At Starbucks. com, it is possible to buy a large number of products, from coffees, ice cream and Frapuccino ™, to music and coffee mugs. This is an opportunity for Starbucks.
Customers will face no switching costs in switching premium coffee suppliers from Starbucks, to, for example, Seattle’s Best. This is a threat to Starbucks. Another threat to Starbucks is that their customers have the ability to brew their own coffee. Starbucks has tried to offset this threat by offering Preferred Office Coffee Providers as well as directions on how to make the perfect cup of Starbucks Coffee at home, called the “Four Fundamentals of Coffee” (starbucks. com). The perfect cup of Starbucks Coffee includes, of course, Starbucks’ ingredients! It is clear that Starbucks customers have some bargaining power in the industry.
Bargaining Power of Suppliers
Porter’s fourth industry force is bargaining power of suppliers. Coffee is the world’s second largest traded commodity (Bruce). South and Central America produce the majority of coffee traded in the world. Starbucks depends upon both outside brokers and direct contact with exporters for the supply of green coffee (Bruce). The supply of coffee is affected by weather conditions, and the health of coffee trees. According to the article “Coffee Industry to Adopt New Pricing Plans,” the major players in the coffee industry have seen profits decline because of over-crowding of the market (Brains Trust).
An over-crowded market will give the coffee suppliers bargaining power. According to a 1996 Starbucks Case Profile, the price of the coffee bean could rise in the future due to lower supply, and heightened demand. For the industry, these are alarming threats. The quality of coffee sought by Starbucks is very high, and Starbucks has traditionally paid premium prices for its green coffee, at least $1. 20 per pound (starbucks. com). There are no substitute products for the coffee beans Starbucks must buy. This is a potential threat to the company.
Starbucks, however, has exhibited how little control its suppliers might actually have. In 2001, Starbucks announced new coffee purchasing guidelines, developed in partnership with The Center for Environmental Leadership in Business (starbucks. com). These guidelines are based on the following four criteria: Quality baselines, social conditions, environmental concerns, and economic issues. Only suppliers who can meet Starbucks’ coffee standards will be able to supply the giant company. The supplying industry to Starbucks, therefore, has few companies. This is a potential threat.
Starbucks will offset this threat by paying a premium of up to ten cents per pound of coffee to vendors based on how well their coffee meets Starbucks’ standards (starbucks. com). Glenn Prickett, executive director of the Center for Environmental Leadership in Business, said, “With these guidelines, Starbucks is taking a leadership role in addressing the environmental and social issues surrounding the global coffee industry. ” Starbucks has a degree of control over its suppliers in an industry where it is possible for suppliers of premium coffees to have an enormous amount of bargaining power.
Threat of Substitute Products
In the premium foods and coffees industry, there are substitute products. According to Mary Coulter, the best way to evaluate this threat is to ask whether other industries can satisfy the customer need that this industry is satisfying (Coulter). Other beverage industries can satisfy the customer’s need for a drink, and other food industries can satisfy the customer’s need to eat. There are obviously good substitutes to Starbucks’ products. This is why image is very important for Starbucks, as well as the company’s ability to innovate and differentiate.
Starbucks has added a line of tea, Taza teas, to their menus, and will be adding beer to their menus in the future. The article “Hot Prospects,” notes Starbucks fashionable image. “Frapuccinos are a kind of badge; People like to be seen with them,” said the author (hoovers. com). There is a large threat of substitute products in a food and drink industry. Starbucks has created an image, and has differentiated so that many of their substitute products are part of the company. At a Starbucks coffee shop, a customer can eat ice cream, and drink a Pepsi, while his friend drinks tea while eating a pastry.