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Threat Of Substitute Products Marketing Essay

The porter`s five forces model make a clear view of internal and the external environment of the industry. It allows strategies to create a strategy to gain competitive advantages and to remain the same level for a longer period. Hence, it is important to analysis in order to have an overview of the industry and the underlying the pressure will face by company and understand the objective that facing by Starbuck.

Threat of substitute products:

Switching cost, buyer propensity to substitute and performance of substitute

Rivalry among existing market

Smaller privately own coffeehouse, unique character and structure

Bargaining power of buyers:

Variety option available in the market, a lot of brands available due to no of competitor

Bargaining power of suppliers:

A crowded market in coffee market, supplier raising the price of coffee bean and choose supplier based on economic and environmental issue

Threat of new entrants:

Product differentiation and control access to distribution channel, innovation.

Industry Competition

The greatest among the five forces is perhaps industry rivalry. It has the biggest potential to influence the competitiveness of the industry and in turn the rate of profit for companies. Although the collective strength of the five forces determines the ultimate profit potential for an industry (Porter 1998b, p. 21), industry rivalry is the deciding factor for the determination of such profit rate. If competition within the industry is mild, or there are only few competitors, the rate of profit is generally higher, but if the competition is intense, companies cannot expect to earn “spectacular returns on investment” (Porter 1998b)

The coffee industry has a structure or characteristics that are difficult to define or to set a boundary from which it can be differentiated with other industries (Larson 2008). Although it can be easily recognised from a single commodity, which is the coffee bean, the coffee industry’s characteristics are unique in that its scope is much larger than what it appears to be. The coffee industry can be divided into two categories, the productionbased segment and the retail-based segment. For purposes of this paper, the production-based segment will be confined to those companies and individuals who plant and grow coffee beans, whilst the retail-based segment is confined to the specialty coffee sector, wherein the coffee beans are sold to consumers directly, either in the coffeehouses or in retails stores, department stores and supermarkets. It is on the latter segment that the focus of this analysis will be given.

In 1987, when the company was bought and formed by Michael Schultz, Starbucks faces competition against other small coffeehouse chains across Seattle. In the entire United States, a number of coffeehouses are established. Most of these coffeehouses are small and medium sized and they are owned by individuals or families. Today, although there are several companies that compete against Starbucks, these competitors were relatively smaller and most often are concentrated only in a certain area or region. In the coffeehouse sector, Starbucks’ competitors are Second Cup, Gloria Jean’s, Coffee People and other similar coffeehouse chains, which are now either situated in a specific state or are expanding or planning to expand their domestic and international operations. Gloria Jean’s for example, started its international expansion in the 1990s when the Starbucks stores overseas are already numbering by the hundreds. Among these direct competitors, it appears that Gloria Jean’s is the primary competitor for Starbucks, as evidenced in an online survey conducted.

The company is also engaged in the consumer products segment selling bottled coffee drinks, whole grain coffee beans or ready-to-drink coffees in packs, and other similar product descriptions. In the consumer products segment, the company’s noted and biggest rivals include Procter & Gamble, Nestle and Kraft. The latter companies have been in the packaged coffee sector for a significantly longer period, in fact they have been in this business for more than a century, than Starbucks, which started to enter this sector only a few years ago with the formation of its Global ConsumerProducts Group segment. Apart from the two large consumer product companies, the Starbucks products also face competition with substitute products such as soft drinks, energy drinks, and other non-alcoholic beverages.

The specialty coffee industry competition is, however, not price-based unlike the other industries. In this particular industry, consumption of coffee is not dependent on the price of the product or commodity but on the differentiation between each product and several value adding variables such as the quality of customer services, brand, brand recognition or image of the company. Hence, the specialty coffee industry is not sensitive to price adjustments or movements.

Threat of New Entrants

The entry of new players in an industry can bring the competition into new, higher levels. New entrants, most especially large ones, bring new capacity, the desire to gain market share and often substantial resources that could cause a shake-up or a rearrangement of the current competitive positions of companies within the industry (Porter 1998). In order to protect the players’/companies’ positions in the industry, they have to set up high barriers for new entrants. These barriers include economies of scale, product differentiation, capital requirements, cost disadvantages independent of size, access to distribution channels and government policy (Porter 1998). Major players often force new entrants to come in at a cost disadvantage by compelling the latter to spend or invest large amounts of money on production, research and development, marketing, distribution channels, financial resources and all aspects of the business.

The specialty coffee industry today is undoubtedly dominated by Starbucks, having no equal or larger company in size that competes directly against the company. However, the industry is open to all potential rivals, especially to large companies engaged in the consumer products and retail chain business. For example, the new entrants in the coffeehouse business today are McDonald’s and Dunkin’ Donuts and Burger King, three large companies which are challenging Starbucks’ dominance in the industry. These new entrants can equal Starbucks capabilities in the aspects of distribution channels, marketing and other areas. They have the capacity to bring new resources that can cause a shake-up in the industry, but not yet enough to topple Starbucks from its current dominant position. With the three big companies’ entrance into the specialty coffee retailing segment, Starbucks’ position is definitely shaken.

Despite the openness of the specialty coffee segment to new entrants, barriers to the successful entry of new players appears to be tall. First, product differentiation in the industry is high. Specialty coffees are so differentiated in appearance, presentation, taste and even in image. Brand recognition is especially important for consumers, along with excellent customer service and the overall ambience of the coffeehouse. These barriers were successfully established by Starbucks long before McDonald’s or Dunkin’ Donuts decided to venture in this industry.

Favourable access to raw materials is also an important barrier in this industry. Starbucks have exclusive access to quality coffee beans from several suppliers around the world. The beans Starbucks bought from its suppliers follow the Fair Trade criteria established in the industry. This characteristic is simply costly for Starbucks competitors since they have to assure their customers that the coffee they serve is made from the finest coffee beans similar to Starbucks’. On this aspect, cost disadvantage will be experienced by the new entrants, such as McDonald’s and Dunkin’ Donuts. However, at present, McDonald’s, Dunkin’ Donuts and other potential rivals are still targeting the lower end of the market, leaving the high-end bracket who are still attracted to Starbucks. However, these new entrants are now shaking up the industry, pressuring Starbucks to cut its price to maintain its rate of investment as the coffeehouse chain’s market share is now being eaten up by the rivals.

threat of Substitute Products

Substitute products, as explained by Porter (1998), are those products that come from other industries and can pose as a trade-off for products in the underlying industry. In the specialty coffee industry, substitute products can be those non-alcoholic beverages such as tea, soft drinks, fruit juices and energy drinks and other caffeinated drinks. These are sources of substitute products which the consumers can purchase in place of coffee. However, the only true direct substitute for specialty coffee is the basic coffee, but the basic coffee is considered to be a substantially lower quality than specialty and as such does not present threat to specialty coffee.

On the other hand, whilst there are several potential substitutes, a cup of specialty coffee is still what consumers prefer to purchase. Product differentiation and brand image plays an important role in this industry. The specialty coffee products are different in many aspects from the substitutes. Coffeehouses offer not only a cup of coffee but the experience of sipping the specialty coffee on a luxurious ambience, such as what Starbucks is offering. Soft drinks companies and non-alcoholic beverage producers are on a mass marketing, selling their products in retail stores, supermarkets and department stores. Coffeehouses, on the other hand, offer an exclusive place for its consumers to enjoy their coffee. Hence, the threat of substitute products is not significant or is not considered a major force in the specialty coffee business.

Buyer’s Bargaining Power

Customers are a powerful force in an industry. They can pressure the companies to cut down their prices, demand better services from the company and can pit one company against another (Porter 1998). In other words, customers can influence the rise and fall of rate of profits in a particular industry. According to Porter, buyers or a buyer group become powerful if:

They are concentrated or purchases in large volumes.

The products they purchase in an industry are undifferentiated or standard.

The products they purchase form a component of their own products or a significant fraction of its cost.

They are of low income levels which create incentive to lower their purchase costs.

The industry’s products are unimportant to the buyer’s quality of services or products.

The buyer does not benefit from the product.

They pose a credible threat of integrating backward to make the industry’s products

These powers can be acquired by the consumers if they act as a group. However, in the specialty coffee industry, the largest fraction of buyers is the individual consumers, and they do not act in unison (Larson 2008). In the specialty coffee industry, individual consumers compose the largest purchasers of the product and these buyers tend to be less concerned with the price of the product (Larson 2008). This decreases their bargaining power further. Product differentiation in this industry is so high that consumers tend to look more for the quality of services and the image of the brand than the price of the product or where did the product’s raw materials come from, or what is the price of the raw materials, etc. hence, the bargaining power of the buyers are low.

Bargaining Power of Suppliers

Similar with the buyers, suppliers can also exert influence on the players in an industry. Suppliers can gain bargaining power and can be potential threat to industry players in terms of industry profits. They have the ability to increase or decrease the quality of products in a particular industry (Porter 1998). Michael Porter also outlined the major sources of bargaining power of suppliers. The author said a supplier group is powerful if:

It is dominated by a few companies and is more concentrated than the industry it sells to.

Its product is unique or at least differentiated, or if it has built up switching costs.

It is not obliged to contend with other products for sale to the industry.

It poses a credible threat of integrating forward into the industry’s businesses.

The industry is not an important customer for the supplier group.

Again, similar to the buyers’ situation, the bargaining power of suppliers can only

Be increased if they act in unison and they are highly concentrated. However, in the specialty coffee industry, suppliers generally have less bargaining power due to the number of coffee farms and plantations spread across several continents, namely Latin America, the Pacific Rim and East Africa (Larson 2008). Whilst there is only one variety of coffee needed for the industry, Arabica, there are however practically thousands of plantations and individual coffee growers growing this particular type of coffee bean, giving the coffeehouse companies more choices to replace existing suppliers should the latter demand higher prices for their coffee beans. Hence, the suppliers are diverse and spread and the industry players exert more influence and get a larger share of the profits of the industry over the suppliers.

To sum up the five forces analysis, it can be concluded that the specialty coffee industry today is generally attractive and highly competitive. Despite the monopoly of Starbucks in the past two decades, a number of small, individual and family-owned coffeehouses have sprouted. The buyers and suppliers have less bargaining power and the threat of substitute products is insignificant. Thus, the rate of profit in the industry is highly concentrated upon the major industry players, particularly to Starbucks. However, with the entry of new players such as fast-food chain giants McDonald’s and Dunkin’ Donuts, Starbucks’ dominance in the specialty coffee industry is being threatened.


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