My wife walked into a Duncan’s Donut shop for a black-no-frills-coffee and was promptly asked to pay $2.23 US dollars for it. Now if you are reading this 20 years from now that may not seem like much. But today that is a sizeable amount to charge for something that cost only 30 cents to make.
Back in the days of the early 60’s and 70’s most establishments offered low cost or free coffee just to bring in your business. That was when coffee was not the actual commodity. The commodity was a friendly sit down meal. Starbucks and other coffee houses have since turned coffee itself into a commodity. And that has upset the theory of supply and demand.
Supply represents the rarity of an item. So what is the rarest item on earth? Certainly not coffee. Most people would say diamonds. But that’s not true. We have more diamonds than we could throw away. They are expensive because of a perceived shortage of supply. And a shortage of supply causes prices to go up, real or perceived.
If you only have one thing-a-ma-jig then it is pretty rare. And if twenty people want to own that single thing-a-ma-jig then the highest bidder gets it. So the price goes up and up and up. But what if we have 100 thing-a-ma-jigs and only twenty people want to own one? Then you have to keep lowering the price until the last of those twenty people finally decides it’s worth it to buy it. And you still have 80 sitting on the shelf that you have to pay storage for. Once I worked for K-Mart and at the end of the season we were forced to throw away about $2,000 worth of spring clothing. It was cheaper to throw it away than to store it until next spring. I suggested to the manager that we give it to charity but was told that liability prevented that. Apparently some homeless people tend to make lawsuits for anything, like pinching skin when it gets stuck by a K-Mart zipper.
But anyway, that’s basically how supply and demand is supposed to work. And for the most part it does a pretty good job in a free market economy. Unless vanity is involved.
One of the offshoots of supply and demand is perception and vanity. Back in the late 60’s and early 70’s we learned that sports shoes could be profitable. Before that there was a very limited number of sport shoes available, like Converse which were made from some sort of canvas or denim material. And of course there were generics like the KMart brand and such. So although the variety of sport shoes were in short supply, sport shoes themselves were not in short supply. Addidas was one of the first to come out with a “better” sports shoe. It’s high price indicated the fact that it was a better shoe than other sport shoes. Which was probably true. But it’s high price also became a status symbol for quality and since perception and vanity play a part then probably half of their sales were from kids who bugged their parents to get them the latest and greatest shoe and had nothing to do with sports.
Later on Nike came out with the most beautiful leather sports shoes with a “swoosh”! How cool were they? Everyone had to have a pair or two regardless that they sold for more than ten times what it took to make them. There was no shortage of leather or shoe strings or “swooshes.” Let’s face it. Buying them at those prices was pure vanity. And then in the ensuing years shoes like Michael Jordan’s skyrocketed, and soon gangs were attacking children waiting for their school buses in the morning to steal their expensive shoes and starter jackets. Some kids were actually beaten and killed. Vanity. It upsets supply and demand.
Back to coffee. I want you to imagine the last Starbucks building you were in. I mean an actual building, not like at the mall or airport. But maybe there too. How much do you think Starbucks paid for prime real estate in a heavily trafficked business area? A half million? Probably. And then they spent another roughly half million on the building and taxes. So let’s say that it cost Starbucks a million dollars just to put that store there. So when you or I go in and spend $5 on a mocha latte with whipped cream – where is most of that money going to? To pay off the building, of course.
And added to that they have their mall and airport shops, which are much more profitable because the overhead is significantly lower. So these shops are the meat and potatoes of the companies main profit. So the company and any shareholders (if they are public) get the profit.
Now let’s look at the supply of coffee. Has the supply dwindled since the 50’s or 60’s? No. In fact the supply has actually increased. If that’s true then why has the price of coffee grinds at the grocery store risen – if supply hasn’t fallen? It’s because Starbucks and these other coffee houses are willing to pay higher prices for their product because they can afford it. So we grocery shoppers are competing with these coffee houses for our own coffee. And the price continues to rise.
Kuerig owner? The smart Kuerig coffee shopper waits until their favorite coffee goes on sale for about a dollar a cup. That’s a dollar per cup of home brewed coffee. If you don’t know, a Kuerig cup is a small plastic container with about a dime’/s worth of ground coffee inside.
In the end vanity of shoppers who “must” have their Starbucks every day is what causes the price of our own coffee to soar through the roof. As I’ve always said, this world would be wonderful without other people. At least in terms of Americans spending $5 on a cup of coffee to enrich business owners while people in many other areas of the world do not have safe, clean drinking water or food.