By: Darrin Duber-Smith
A quick look around any downtown area will tell you that coffee retailers, led by the far-too-ubiquitous Starbucks, have saturated the market with their shops. To say this market isn't crowded is to ignore the fact that "specialty coffee" can now be found not only at McDonald's, but also at many gas stations. It's everywhere, and that means that the industry is due for a shakeout.
There are now almost 33,000 coffee shops in the U.S., which is a 16% increase from only five years ago, a time when the market appeared to be rather saturated already. Traffic growth at large chains like Starbucks has been slowing (but still growing), while traffic in the mid-size and smaller stores is actually declining. But prices have not really declined as much as they usually do in a hypercompetitive marketplace. In fact, Starbucks, which controls over 40% of the shops in the U.S. has been busily raising its prices while also trying to find new ways to sell non-coffee related goods to its customers. But marketers there know quite well that the industry has matured.
Readers of KnowNOW! Marketing realize that retail is already a crowded sector overall, and we have been calling for a reckoning (which has still eluded us) for quite some time now. Solid economic growth has helped some of these "zombie retailers" like Sears and Radio Shack remain ambulatory, but soon another great culling of the weaker players should commence. Profit margins are thinning as industry prices begin to fall, but smaller retailers are unable to generate adequate velocity to compensate for these lower margins, and some of these players will begin to close shop. Perhaps even Starbucks will eventually have to lower its prices. Much depends on the consumer demand for coffee, which will be the subject of a future post.
Discussion: Can you name four major competitors to Starbucks (without looking on the Internet)? Now look on the Internet and find four competitors. Which of these brands is best positioned for the future? Which has the weakest position. Defend your answers.
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