Lauren's Economic Expressions: Competing as Starbucks

Starbucks may be confused by some as part of a perfect competition because coffee is the primary good being sold. As an establishment, Starbucks is providing service, a variety of products and most importantly, the experience which differentiates them from similar businesses. Although it does meet the perfect competition requirements of easy market entry and open access to market information, this coffee mogul is more characteristic of a monopolist competition. We know they have some control over pricing since they are typically charging double that of the competitor and obvious to almost anyone, Starbucks is preferred by many consumers.

A lack of originality which the company once possessed, has forced closed the doors of 600 stores in the U.S., accounting for 19% of American locations. The condition of the business has faltered due to a number of stipulations. The most common reasoning for its failures is that Starbucks executed an extreme development during a time of economic recession. Included in the closures, were 70% of which were opened after 2006. Howard Shultz among others, seems to think the experience and service provided to Starbucks customers became too common. The efficiency that resulted from improved technology came at the cost of a unique and personal transaction between the barista and consumer, who were suddenly paying 4 dollars for a coffee they could make at home. Although it may seem that reducing prices would have been beneficial, this would only result in less revenue but costs would remain the same. This is shown in the two graphs below when price changes from P1 to P2.

Starbucks decision to close such a large number of store came with its fair share of pitfalls. They spent approximately 328 million in the short-run to cover for severance packages, lease terminations and future obligations. I believe this drastic decision will lead to profits in the long-run since the company will no longer be carrying the dead weight of so many unsuccessful locations. With the objective of getting back to the company's roots, Starbucks success should be reinforced with their recent actions.