Saturday, 25 August 2012

Competing as Starbucks


In theory, perfect competition describes markets in which no participants are large enough to have the market power to set the price of a homogeneous product.  The four conditions that must exist for an industry to be perfectly competitive are:
1. Many buyers and sellers all of whom are price takers
2. No preference is shown by either buyers or sellers
3. Easy entry and exit by buyers and sellers
4. The same market information available to all

Starbucks is an example of in part of perfect competition market.  It is a freedom entry into the coffee industry for new firms.   And most of the firms sell the homogeneous product – coffee.  For example:  Second Cup, Tim Horton, MacDonald or some small specialities coffee shops.  
In year of 2008, Starbucks closed 600 stores to realign its growth strategy and compete effectively with its competition.  The 500 additional stores set to be closed had been on an internal watch list for some time. They were not profitable, not expected to be profitable in the foreseeable future, and the "vast majority" had been opened near an existing company-operated Starbucks, Bocian said.”  Starbucks stores were closed to restructure finances and its profit line.   Starbucks said the store closures will lead to pretax charges of about $328 million to $348 million, including $8 million in severance costs and $120 million to $140 million in lease-termination costs and future lease obligations.

If most firms are making profits in the short run, an expansion of the output of existing firms and new firms into the industry. Firms are responding to the profit motive and super normal profits act as a signal for a reallocation of resources within the market. The addition of new suppliers causes an outward shift in the market supply curve. This is shown in the diagram below.

Making the assumption that the market demand curve remains unchanged, higher market supply will reduce the equilibrium market price until the price equal to long run average cost. At this point each firm is making normal profits only.
Source:  tutor2u.net/economics/content/topics/competition/competition.HTML

 All the investors of Starbucks were looking for the long run gain after closing the non-profitable stores by saving on long-term costs.
In my own opinion, the price of Starbucks coffee is an expensive coffee.  But they have their own brand image - the heritage, the tradition and the passion that’s unique and different from the other coffee shops. Reducing price may not be the ideal core at this point.  But some promotions may help to increase the revenue in the long run.

Sources:
·         Starbucks Gossip
           (http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html)

·         CBC News
           (http://www.cbc.ca/money/story/2008/07/01/starbucks-closures.html)

·         The Seattle Times
          (http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html)


 



 

 

 

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