Filed under: International markets, Other issues, Products and services, Management, Consumer experience, Rants and raves, Competitive strategy, Microsoft (MSFT), Apple Inc (AAPL), Starbucks (SBUX), McDonald’s (MCD), Adobe Systems (ADBE), Serious Money, Commodities
We have seen this play before, and there are two scenarios as to how it could end. Starbucks Corporation (NASDAQ: SBUX) is being challenged like never before, having saturated the market place in some locations it is now facing the challenges of selling high-priced coffee in a slowing economy.
Would you rather pay $4 for a cup of coffee or a gallon of gas? You can find cheaper coffee but you have few options to find cheaper fuel. Amid the already difficult operating environment Starbucks is faced with competition from the largest restaurant chain in the world, McDonald’s Corporation (NYSE: MCD). McDonald’s is looking to steal its morning thunder with competitive offerings at a far lower pricing structure. The threat is very real no matter what spin Starbucks puts on it.
This brings to mind two similar situations both involving Microsoft Corporation (NASDAQ: MSFT) and past competitors. Early on there were two word processing programs that together probably had 90% market share. Those were Wordperfect and Wordstar. Both of them were fine programs offering strong features, and now they are nowhere. Microsoft displaced both of them with MS-Word integrated with their Office suite of products, and is now king.
McDonalds is attempting to do to Starbucks coffee (and others) what Microsoft did to WordStar. And like MSFT, MCD is packaging it’s coffee with its existing bundle of food products and experiences to gain market share. Besides offering lower prices and one stop shopping, they are wisely refurbishing stores in a mock-Starbucks motif, softening colors from bright yellow and red to beige and brown. They’ve added new furniture and also started to provide for Wi-Fi World wide web access. They are very good at what they are doing and early signs are that they’ll be successful and take market share from the specialty coffee houses.
There is however hope for Starbucks and others because there are other historic models that have resisted Microsoft’s tidal wave. Adobe Software (NASDAQ: ADBE) has maintained 90%+ market share in the graphics world with its suite of products and free Internet PDF standard. They did this by getting a high quality product to market early, pricing it right, and having free offerings that became a standard. This has proven easier to maintain then $4 coffee will be, so I anticipate that Starbucks is going to take a big hit to its profit margins, even if it can continue to be a successful growing enterprise.
Another example of success is Apple Inc. (NASDAQ: AAPL), led by Steve Jobs. Apple has created many leading edge products and such a unique culture that it is growing market share and holding it’s margins in numerous areas. It has also grown dramatically over the past few years. Howard Shultz has returned to grab the reigns of Starbucks, but can he reinvigorate the company and hold off the competition a la Steve Jobs? That is a very massive task indeed.
Starbucks needs to expand the strength of experience, offer more competitive products, and remain different enough to matter. They remain with some advantages in that they are suitable to smaller outlets and more unique locations and there are fewer screaming children to disturb one when doing homework, or meeting a date. Even though Starbucks is the biggest target for McDonalds and has been receiving the most ink, it is by no means the only one. There is room for more than one player in the market and it may be third and fourth tier chains that suffer much more and perhaps disappear.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of SBUX.
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