Friday, January 06, 2006

Starbucks revealed

I used to think that Starbucks was just an overrated product, an easy and convenient way to get coffee without much consequence. However, two things have changed my outlook: one, I now work for The Second Cup; two, I've had some decidedly bad cups of coffee at Starbucks lately. Since I also work at Chapters, it is difficult to not go to Starbucks, but I feel that even the trip to Tim's is worth it over a cup at Starbucks. Tim Harford, I think, agrees with me: his recent Slate article examines the economics of the "tall" cappuccino. At the Second Cup, our regular size is smaller than the SB's tall, making it a better drink (we also add a touch of love). Coffee drinkers and economists, and especially coffee-drinking economists, will enjoy this article.

Starbucks Economics


Scott McC said...

As a non-coffee drinking pseudo-economist, I was interested in this and actually used it as a lesson on price discrimination in my econ class when I first read about it in Harford's book "The Undercover Economist". What the hip Starbucks-bashing coffee drinker should remember is that this practice is not at ALL unique to Starbucks, and is actually extremely common in almost every retail/service industry, and like every other retailer, Starbucks is merely attempting to capture as much of their consumer's willingess to pay as possible.

All that's really happening is that they are charging over their marginal costs for the large coffees - as with most beverages, there is a volume discount (the price per mL is lower in the bigger sizes), but because most of the costs of producing that cup of coffee are fixed (rent, wages, marketing) and independent of the size you buy, the seller has very small marginal costs for producing the larger size, yet can charge a substantial amount more. Fair? You decide.

Either way, I'm sticking with Pepsi.

Garry said...

I see your point: a business is a business. But Starbucks isn't even trying, it seems. They've got the customers, they've got the market, why bother with service? My concern is the quality of the product. Yes, every business should strive for maximum profit margin; yes, the customer willing to pay more should be encouraged to do so. But what about my coffee? It's shite!

Scott McC said...

Well, it's all shite, but that's another matter. The point is, you don't have to drink it. If enough people agree with you (that Starbuck's coffee is shite), then they will either a) go out of business or b) change their product to better reflect their customer's tastes. Starbucks is a big company, for sure, but it is FAR from being a monopoly - there is easily enough competition from other places, like your employer, to put some pressure on them to improve their product. Markets, eh? Beautiful.

Yes, big companies do get slothful sometimes. And it usually comes back to haunt them (think of American automakers getting overtaken by the Japanese who offered a superior product and a better understanding of the market). I would expect that if you're right (that Starbucks coffee sucks), the same thing will happen to them, over time.