Starbucks Faced a Generally Favorable Competitive Environment.

Starbucks faced a generally favorable competitive environment. The company competed against smaller coffee chains, other fast food sources of coffee, independent coffee shops and drinking coffee at home. At the time of the case the other coffee chains were the biggest source of competition. These chains tended to be regional in nature. Some examples were Caribou Coffee and Gloria Jean's in the Midwest, Peet's on the West Coast, and Dunkin Donuts in the Northeast. The latter, along with other donut and bagel shops, competed by offering food to go along with their coffee. The coffee was of lower quality, and lower price. An advantage that chains like Dunkin Donuts had was that they were well-established, with strong brands and retail networks. In addition, because they offered a different atmosphere and product lineup, they were differentiated from Starbucks.

The coffee shop chains like Peet's and Caribou had arguably borrowed from the Starbucks model of a comfortable "third place" with gourmet coffee beverages. Peet's was a contemporary of Starbucks, but grew at a smaller pace and started its growth much later. Caribou and other regional operators had very similar in-store experiences to that of Starbucks, albeit with a different gimmick in the case of Caribou. A company like Gloria Jeans or Peets, however, bears little differentiation. These companies directly compete against Starbucks because they are so similar, but they also represent a threat to Starbucks because their regional strength can make it more difficult for Starbucks to enter that region with the same level of penetration that it has in markets without that type of regional competitor.

Starbucks is larger than any of its direct competitors, save for Dunkin in the Northeast. The saturation strategy that Starbucks has embarked on has served the company well, because now it has superior buying power, strong word of mouth and a better brand in most American markets. These facilitate the growth of Starbucks in new markets as well, because the brand equity precedes the firm's arrival. This is something its competitors can seldom say. Therefore, Starbucks should be oriented towards a strategy that allows it to leverage these advantages over its domestic competition.

Coffee drinking at home remained a threat to Starbucks. The company's differentiated, high-end coffee preparations were priced at the high end of the market for coffee, leading many to opt for enjoying coffee at home instead. Nestle, for example, is one of the world's leading buyers of coffee and other major food conglomerates also have strong coffee brands. A move by any of these companies into flavored coffee or other specialty coffee-based drinks would put the competitive squeeze on Starbucks.