Starbucks Reusable Plastic Cup

Monopolistic Competition: Locating Starbucks

Jul 26, 2013 • Businesses, Demand, Supply, and Markets, Economic History, Economic Humor, Innovation, International Trade and Finance, Labor, Macroeconomic Measurement • 546 Views    No Comments

To understand why there can be a Starbucks on every block, we have to start with a can of Maxwell House Coffee.

From a 3.1 cup-a-day peak in 1961, US coffee consumption slid downward through the 1980s. It makes sense. The coffee was terrible. Made with low quality beans, sold in cans, pre-ground, sitting for months and maybe years, it did not taste very good.

Then, in 1983, Howard Schultz went to Italy and discovered the espresso bar. A home away from home, it was located on every block. Milan had 1500 espresso bars; Italy had 200,000. Schultz returned to Seattle to his bosses at Starbucks, pitched the idea and essentially got a “No.” After many twists and turns in the story, he started his own firm, returned to buy Starbucks and now we have an espresso bar on every block.

Commenting on the US coffee consumer, Schultz said that people wanted convenience. They wanted their coffee nearby to avoid a walk. They did not like standing in line. Not home, not work, they wanted a “third place.”  And, thinking of the 1960s coffee that existed in cans, they were ready for a European dark roast concept.

An economist might say that Schultz was perfectly competing in a monopolistically competitive market structure. Because you just need an espresso maker and some beans, market entry is easy. But to be successful, you need something unique–the monopolistic part. Starbucks, through its beans, its barista training and its store design competed successfully.

Also, facing monopolistic competition in large cities like NY and Chicago, they needed a store on every block.

Talking about Starbucks on every block, comedian Lewis Black is very funny in this 3 minute comedy segment.

Then, I suggest going to Slate to take their Starbucks, guess the city, geography quiz.

Sources and resources: Although you can skip sections that are PR laden, Howard Schultz’s books, here and here, provide insight and facts about the growth of Starbucks and the essence of entrepreneurship that online articles just do not have. For more smiles, do go to this econlife post on the Ellen Show and Dennis Quaid’s visit to Starbucks. And finally, if you would like to hear Howard Schultz, you will enjoy listening to this 7/25/13 Starbucks earnings call for investors.

Content has been slightly edited after it was posted.

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