Specialty coffee industry analysis (is starbucks still the king?)

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Industry Analysis

According to Starbucks corporation, 66 billion cups of coffee are drunk every year in the U.S. and a full three quarters of those cups of coffee are enjoyed at home. The other 25% of coffee is drunk at the office, traveling, or in a coffee shop (CNN Money). Starbucks has no clear competition; however the closest competitors include other specialty coffee shops, doughnut shops, and restaurants. Starbucks holds a dominant position in the specialty coffeehouse market and has no single clear rival in the sector. In the specialty coffee market closest is Caribou Coffee, which has 415 stores in the United States which is less than 5% of Starbucks' 11,000 and counting. Its most intense specialty coffeehouse competition is dispersed among the thousands of independent or small-chain coffee shops around the nation and the world.

More recently an intense competition comes from long time fast food chain leader McDonalds (MCD) which became a Starbucks rival when McDonalds upgraded its coffee in 2006. In as recent as 2009, the McDonalds rivalry has been a major competitor to Starbucks in light of the recession. McDonald's has 14,000 stores in the U.S. and caters to a wider demographic than Starbucks; it also enjoys increased traffic from its variety of well-established breakfast options. McDonald's coffee sales increased 15% in 2006. In January 2008 McDonald's made yet another direct attack to take down Starbucks with an announcement that it would install coffee bars in all 14,000 of its U.S. locations. McDonalds has also launched aggressive marketing campaigns that have emphasized the large cost differential. That being said, there may be enough room for McDonald's and Starbucks to coexist. It should also be noted that McDonald's brew Seattle's Best brand coffee, a brand owned by Starbucks.

Privately owned Dunkin Donuts is another major competitor, with nearly 5,000 stores in the U.S. Although Dunkin' Donuts' retail footprint also overlaps largely with that of Starbucks, their customer experience is much more similar to the coffee-to-go model rather than the "third place to work and relax" model. Consequently, they are likely to compete more directly with McDonald's than with Starbucks.

The National Coffee Association estimates that the US coffee market will reach $29 billion in 2011 (Morningstar), and the markets the two competitors target are different. The former aims at the cheaper coffee to go, whereas the latter aims at providing a premium experience for a luxury price. McDonald's larger retail footprint may overlap more with Starbucks' core markets, but their bleak dissimilarities are reflective of the general differences between their core customers. Starbucks Background and History show that they have no need to compete with McDonalds for the lower-end market, and should continue focusing on the high end coffee market.