Question

In the spring of 2009, an article from Bloomberg News summed up the situation that Starbucks was in: “After more than a decade of sensational buzz, Starbucks is struggling nationwide as it faces slowing sales growth and increased competition.” The initial success and later struggles of Starbucks are a familiar pattern for firms in monopolistically competitive markets. When Starbucks began rapidly expanding, CEO Howard Schultz knew that fresh-brewed coffee was widely available in restaurants, diners, and donut shops. He believed, though, that he had a strategy that would differentiate Starbucks from competitors: Starbucks would offer a European espresso bar atmosphere, with large, comfortable chairs, music playing, and groups of friends dropping in and out during the day. From the mid-1990s through the mid-2000s, this strategy worked very well, and Starbucks opened nearly 17,000 stores worldwide. But the profitability of Starbucks attracted competitors. Other nationwide chains, such as Caribou Coffee, Peet’s Coffee, and Diedrich Coffee, and regional chains, such as Dunn Brothers Coffee, provided stores with similar atmospheres, as did many individually owned coffeehouses. In addition, McDonald’s and Dunkin’ Donuts began competing more directly with Starbucks. Dunkin’ Donuts began building more upscale restaurants, and McDonald’s began selling espresso-based coffee drinks for prices considerably below those at Starbucks. Schultz was also worried that in opening thousands of coffeehouses worldwide, Starbucks had made the customers’ experience less distinctive and easier for competitors to copy. Beginning in 2010, Schultz managed a remarkable turnaround, with Starbucks’ sales and profits increasing. Some of the success was attributable to an expansion in overseas markets, where competition was not as strong as in the United States. By 2013, the firm had sales of more than $1 billion in Asia and planned to open thousands of additional stores in China. But the firm’s focus remained on staying one step ahead of its competition in the United States. The revival of Starbucks in the United States was based on several factors: The firm gave customers more freedom to customize drinks; it started a loyalty program that included free refills and other perks for regular customers; it started a mobile payment system that allowed customers to pay with a smartphone; and it provided stores with machines that brewed higher-quality coffees. Stephen Gillett, the firm’s chief information officer, improved in-store Wi-Fi so customers could use it without having to go through a logon screen and could get free access to content from sources such as the Wall Street Journal and USA Today, as well as see exclusive movie trailers. The objective was to keep customers in the store longer so they would buy more coffee. The customer loyalty program, by reducing the average price for frequent customers, helped fight the impression that Starbucks coffee was too expensive to buy a cup every day. By 2015, Starbucks strategy seemed to be working. The firm had expended to 22,000 stores in 66 countries. “Anyone who suggested in ’08 or ’09 that Starbucks was reaching saturation in the U.S. was just flat out wrong.” In a monopolistically competitive industry, maintaining profits in the long run is very difficult. Only by constantly innovating has Starbucks been able to return to profitability after several years of struggling with intense competition from other firms. Question An article in Forbes magazine in 2013 discussed the reasons for the ability of Starbucks to remain profitable despite competition. The author argued the most important reason for the firm’s success was “Right market segmentation. The company has stayed with the upper-scale of the coffee market, competing on comfort rather than convenience....”

a. What does the author mean by “market segmentation”?

b. What does the author mean by the “upper-scale” of the coffee market? Why might it be more difficult for other firms to compete with Starbucks in that segment of the coffeehouse market?

Answer 1

a.

With market segmentation, the author means the fact that the Starbucks has divided its customers on the basis of their demand by giving them the option to customize their drinks. It also attracted the regular customers by giving the chance to refill their drinks for free, with the same time, provided the stores with the higher-quality coffee to attract the more caffeine-enduring people. Also, other perks were included based on the demands of students, elderly people, working class people which segmented the market further.

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b.

By upper-scale, the author means that Starbucks has retained its position as the leading firm in the coffee market by its new strategies and dynamic services. It might be difficult for the other firms to compete with Starbucks as Starbucks truly puts its customers first in every aspect. It notices the needs of the customers and even realizes the upcoming needs that the customers may have and fulfill them at the earliest, when the other firms are only at their initial stages of providing what Starbucks is already providing. Also, Starbucks keeps on adding new things, be it in their menu, or the services provided by them, which gives them the first-mover advantage over the competitors.