Porters Five Forces Starbucks

Every company is affected by its competitive environment. The competitive environment is where different businesses compete within a defined marketplace. It relates to how an enterprise is affected by its competition and how it adapts its practices to compete effectively. An example of a firm highly affected by the competitive environment is Starbucks.

Introduction to Starbucks

Starbucks Corporation (Starbucks Coffee Company) is an American multinational coffee company and a coffeehouse chain. It was founded in 1971 in Seattle, Washington, United States, by three business partners, Jerry Baldwin, Zev Siegl and Gordon Bowker. It is the largest coffee chain in the world with over 32 thousand stores in 80 countries. Starbucks offers a variety of drinks from espresso and brewed coffee to hot chocolate and iced tea. Customers can also buy coffee beans, capsules and instant coffee to make at home. Besides drinks, the coffeehouses offer food items such as pastries, sandwiches, fruit and other snacks and sweets.

Porter's Five Forces Analysis

Below you will find the analysis of Porter's five forces based on Starbucks.

Competitive rivalry

Competitive rivalry is an external factor that has a huge impact on a business's overall well being and its existence in the market.

First of all, there are numerous companies that compete with Starbucks. Offering coffee, other drinks and food items, Starbucks faces competition from the brewery, foodservice and coffeehouse industries. The company's competitors can be coffee producers such as Nescafe and Lavazza. They can also be small local coffee shops and large coffeehouse chains such as Pret A Manger and Costa Coffee. Additionally, they can also be restaurants and bakeries such as McDonald's Cafe and Greggs. Therefore, the large number of competitors makes competitive rivalry a high force.

However, it must be noted that the variety of Starbucks' competitors is only moderate. Most of the businesses that compete with Starbucks offer very similar products and consequently, do not distinguish themselves. They all offer americanos, lattes and other types of standard coffee drinks. Moreover, they typically serve very similar food items. For this reason, Starbucks has an opportunity to launch a different product like another flavor of coffee or another style of coffee drink in an attempt to beat the competition.

Lastly, competitive rivalry also increases because of low switching costs . Since there are many coffee providers available, consumers can easily switch their providers by simply going to a different coffee shop in the morning.

To sum up, a large number of competitors, moderate variety and low switching costs make Starbucks' competitive rivalry a strong force, meaning that competitive rivalry is high in the industry.

New entrants

New entrants to the market is an external factor that can threaten a company's sales volume and market share.

To begin with, the costs of establishing a business similar to Starbucks are moderate. Here, the costs can vary since it depends on whether it is a small cafe or a large coffee shop chain the new business is trying to set up. Smaller cafes have much lower supply, labor and facility costs compared to large coffee shop chains. That is why it is easier for newly established smaller cafes to compete against Starbucks. However, since Starbucks has over 32 thousand locations in 80 countries, even though one small local coffee chain could drive one or two Starbucks stores out of business, there are still numerous Starbucks coffee shops that would remain profitable.

Nevertheless, if someone aimed to open up a larger coffee house chain, they would face high brand development costs. Not only would they have to pay for supply, labor and facilities, but they would also have to spend a lot of money on developing a strategy that would make it more successful than a global coffee shop chain like Starbucks.

To conclude, moderate costs of establishing a business similar to Starbucks and high brand development costs make new entrants a moderate force for Starbucks, meaning that the threat of new entrants is moderate.

Power of buyers

The power of buyers is the ability of customers to drive prices lower or higher.

First of all, Starbucks' customers can switch providers easily and cheaply. As we have already mentioned, there are many coffee providers available, so consumers can easily switch their providers by simply going to a different coffee shop in the morning. Especially in bigger cities, there are numerous different coffee shops on almost every street which enables customers to switch between them with no problems.

Moreover, there are many substitutes available that make consumers able to try out different types of coffee providers and choose the one which works best for them based on availability and taste preferences. They can, for example, go to a vending machine or buy a coffee machine to make coffee themselves at home.

Finally, the order size of an individual buyer is relatively small. That being said, if even ten or twenty Starbucks customers drop out, it will not have a large impact on the company. This is because there are millions of customers making small daily orders in different Starbucks stores throughout the world.

To summarize, customers' ability to switch providers easily and cheaply, high availability of substitutes and relatively small order size of an individual buyer make the power of buyers a strong factor for Starbucks, meaning that the bargaining power of buyers is high.

Power of suppliers

Power of suppliers is an ability that suppliers have to drive up the cost of inputs.

First, the moderate size of individual suppliers results in moderate bargaining power. If a supplier is not particularly big, it means that they supply relatively few businesses and consequently, they do not have that many customers. Therefore, they do not have the freedom to suddenly impose higher prices because they could simply lose their customers.

Additionally, since there is a high variety of suppliers available, Starbucks and other coffee shops are the ones who have the power, not the suppliers. Starbucks can choose from various suppliers and go for the one which is the most convenient.

Lastly, because of the large overall supply of coffee and tea all around the world, the power of suppliers is further weakened.

Overall, due to the moderate size of individual suppliers, their high variety and large overall supply, the power of suppliers is a weak force for Starbucks, meaning that the bargaining power of suppliers is low.

Threat of substitutes

Most products can be substituted for other offerings, not necessarily in the same category. This also applies to products offered by Starbucks.

To start with, as already mentioned by the power of buyers, there are many substitutes that customers can choose from.

Additionally, as we now know, the costs of switching to a different coffee provider are very low.

All in all, a high number of substitutes, low costs of switching a coffee provider and high affordability of substitutes make the threat of substitutes a very strong factor for the company, meaning that the threat of substitutes is high.

In conclusion, for Starbucks, competitive rivalry, power of buyers and threat of substitutes seem to be the strongest forces out of Porter's Five Forces whereas new entrants and the bargaining power of suppliers seem to be the weakest ones. Despite the risks, Starbucks Coffee Company seems to deal with these factors effectively as since 1971 it has been constantly growing.

Sources:

https://www.starbucks.com/coffee/

https://www.starbucks.co.uk/about-us

https://www.porteranalysis.com/porter-five-forces-analysis-of-starbucks/

http://panmore.com/starbucks-coffee-five-forces-analysis-porters-model