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Starbucks Porter's Five Forces Analysis: Competition in the

Coffee Industry

Porter’s Five Forces model is a simple and yet effective tool used
for analyzing the level of competition in an industry. It helps to
analyze how the business itself is positioned relative to its
competition and its competitive strengths. The tool was named
after Michael E Porter who developed it. It is used to analyse five
important forces that shape competition in the business world.

From the bargaining power of suppliers to the potential threat from

the substitutes, the tool is used to analyse all the forces that can
have an impact on the competitive position of a business firm.
Especially, this analysis becomes highly relevant in the global
environment and in the case of large firms. Following is an analysis
of the five forces that influence the competitive position of
Starbucks in the industry:

Threat of new entrants: moderate

The threat of new entrants for Starbucks is moderate. The barriers

are not very high and the initial investment to start a coffee brand
is not high either. The level of saturation in the industry is
moderately high. New entrants can compete with brands like
Starbucks at local level. However, their possibility of being
successful remains low to moderate. Starbucks has grabbed a large
market share based on its infrastructure, efficiency and product
quality. Still, switching costs being low, the new brands can attract
customers using lower prices. So, the threat of new entrants
remains. However, it gets mitigated to a large extent by brand
image, market share and other factors like brand loyalty. An
important factor that gives the Starbucks brand a competitive edge
is its access to raw materials and suppliers. Based on its size, scope
and ability to pay, Starbucks has access to better quality coffee and
a larger number of suppliers globally. All these factors act to
moderate the level of threat posed by the new entrants. The threat

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has increased to some level due to the entry of McDonalds in this

line through McCafe.

Threat of Substitutes: Moderate to high

The number of substitute products for the Starbucks brand coffee is

high. From juices to tea and alcoholic as well as non-alcoholic
beverages there are several substitutes available in the market.
There are pubs and restaurants that provide both good ambience
and quality products. Another source of threat in this area are the
homemade products that the consumers can make at home. Apart
from it the switching costs are negligible. These all factors make
substitute products a moderate to big threat. Still, there are some
factors that moderate this threat to some extent. Apart from the
premium quality coffee, excellent customer service and a great
ambience, Starbucks also sells premium packaged coffee and coffee
makers. Premium quality and brand loyalty moderate the threat of
substitutes to some extent.

Starbucks Five Forces Analysis

Bargaining power of buyers: Moderate to low

The bargaining power of buyers in case of Starbucks is moderate to

low. The size of individual purchases is small and so single buyers
do not hold enough influence. Apart from it the coffee brand has a
diverse customer base. Its customers are mainly quality sensitive
and willing to pay higher prices for premium quality products. Still,
the prices cannot be excessively high because customers watch for
such trends and would start switching. Moreover, the product mix
of Starbucks is diverse. Based on all these factors the power of
buyers remains low.

Bargaining power of suppliers: low to moderate

Suppliers can exert only low to moderate pressure on Starbucks.

The brand has its own supplier diversity policy that it uses to select
the suppliers. Ethical sourcing is another major policy at Starbucks.
The brand sources Coffee ethically from several parts of the world.

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It is also growing with the coffee farmers directly that has helped it
gain higher control over its supply chain. It eliminated the
mediators and started sourcing from the farmers directly. Starbucks
has developed great relationships with both tea and cocoa farming
communities to educate them, about better cocoa farming practices
and to help them derive maximum profits from it. All of this has
worked to reduce the clout of the mediators and the suppliers.
Moreover, the number of suppliers is high and Starbucks has plenty
of room to exercise choice. So, its excellent supply chain
management in the last decade has reduced the bargaining power
of suppliers and brought it low.

Competitive rivalry: Moderate to high

The intensity of competitive rivalry in the industry is moderate to

high. It is because there is monopolistic competition in the industry
and the number of firms competing for market share is high. The
entry and exit barriers are small. The main factor that moderates
the competition for Starbucks is its market share. It has the highest
market share followed by Dunkin and McCafe. However, the
premium quality and product based differentiation that Starbucks
uses also give it some edge over its competitors. However, the
industry has matured and growth rate has moderated as a high
number of players are competing for market share. Still, overall
there is always space in this industry for new players, which adds to
the intensity of competition in it. Based on all these factors the
intensity of competition against Starbucks remains moderate to
high.

This analysis shows that Starbucks has been able to moderate the
competitive threat against it based on premium quality of its
products as well as quality of customer service. Apart from it, the
global coffee brand has excellently managed its supply chain which
has reduced their bargaining position. The Porter’s five forces
analysis of Starbucks shows that the brand has remained strong
against competitive threats by virtue of its core competencies.
Overall, the strength of the five forces discussed as a part of this
analysis is moderate. Starbucks has acquired some excellent

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competencies and built a strong brand that gives it a competitive

advantage in the industry and moderates these forces.
Sources:

https://www.starbucks.com/responsibility/sourcing/suppliers

http://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf

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