Does Starbucks Really Help the Competition

In a recent article at Slate, Taylor Clark argued that Starbucks is different from Walmart and

"Starbucks has been about as lethal a killer as a fluffy bunny rabbit. Business for independently owned coffee shops has been nothing less than exceptional as of late."

Clark's surprising conclusion is that:

"So now that we know Starbucks isn't slaughtering mom and pop, the thorny question remains: Why is Starbucks amplifying their business? It's actually pretty simple. In contrast to so-called "downtown killers" like Home Depot or Wal-Mart, Starbucks doesn't enjoy the kinds of competitive advantages that cut down its local rivals' sales. Look at Wal-Mart. It offers lower prices and a wider array of goods than its small-town rivals, so it acts like a black hole on local consumers, sucking in virtually all of their business. Starbucks, on the other hand, is often more expensive than the local coffeehouse, and it offers a very limited menu; you'll never see discounts or punch cards at Starbucks, nor will you see unique, localized fare (or—let's be honest—fare that doesn't make your tongue feel like it's dying). In other words, a new Starbucks doesn't prevent customers from visiting independents in the same way Wal-Mart does—especially since coffee addicts need a fix every day, yet they don't always need to hit the same place for it. When Starbucks opens a store next to a mom and pop, it creates a sort of coffee nexus where people can go whenever they think "coffee." Local consumers might have a formative experience with a Java Chip Frappuccino, but chances are they'll branch out to the cheaper, less crowded, and often higher-quality independent cafe later on."

However, what is the evidence for this conclusion? After all, Starbucks has demonstrated that it has a clever value add, a competitive advantage, making the location a necessary place to visit. The type of evidence need to sustain Clark's thesis are two maps: the map of independent coffee houses before Starbucks came to town, and the map of these same locations and other independent coffee houses after Starbucks came to town. If we saw the independents clustering around Starbucks in the second map, we would have sold evidence for the claim that "Starbucks creats a coffee nexus." No such evidence is presented. Clark relies upon interviews with "dozens of other coffeehouse owners", and a report from the Speciality Coffee Association of America. The problem with interviewing coffeehouse owners is well known: it is called survivorship bias. You are only interviewing coffeehouse owners who have survived the Starbucks invasion - you are only going to get evidence confirming your thesis that Starbucks doesn't harm the independents. Politely, it is nonsense -unless you have some independent evidence to support the claim. Clark thinks that he does have empirical support, from the above mentioned report. He claims that

"According to recent figures from the Specialty Coffee Association of America, 57 percent of the nation's coffeehouses are still mom and pops. Just over the five-year period from 2000 to 2005—long after Starbucks supposedly obliterated indie cafes—the number of mom and pops grew 40 percent, from 9,800 to nearly 14,000 coffeehouses. (Starbucks, I might add, tripled in size over that same time period. Good times all around.) So much for the sharp decline in locally owned coffee shops."

Is he right? Well, a review of the report also shows that while the market from 2001-2006 increased by 50%, the number of outlets in the same period increased by 70%. More outlets competing for less dollars. And consumers patronizing those outlets with convenience being the most important factor. If convenience is the primary reason for patronage, then Clark's thesis is false: coffee nexus is determined primarily by geographical considerations and not by Starbucks being the lead coffee tenant. We don't know whether Clark's thesis is true or false - it is simply not proven.