You Got to Be Kidding Me!

“Starbucks …what, you really wanna walk another block?”

Posted in Economics by Stacy McMahon on March 13, 2007

Megan McArdle, guest-blogging at Instapundit, asks for help understanding the success of Starbucks and its bitter, terrible coffee.

Any free market economists want to take a swing at this one? I too would prefer less roasting. I have two conjectures: either they’re benefitting from first mover advantage, or stupid Americans have some sort of macho attachment to burned coffee, as if that charred flavour makes it somehow more authentic and manly.

I can’t speak to the role of machismo in coffee drinking, but Tim Harford spends a lot of time on Starbucks in his excellent book The Undercover Economist. Basically, his theory is that Starbucks isn’t on every street corner because it’s successful–it’s successful because it’s on every street corner. Coffee is coffee, and they know it as well as you and I do. So their strategy isn’t product, product, product like most retailers, it’s location, location, location like real estate developers (who, afterall, are selling you the same house downtown as uptown, but charging 2-3 times as much for the commuting convenience.) If Starbucks is right here, and Dunkin Donuts or whatever is four blocks away, hey might as well go with convenience.

I can’t add much else to that, except to suggest that another reason they might not be worried about the taste of their regular coffee is that they have a much higher profit margin on their fancy drinks, which are only loosely based on coffee. It’s the classic up-sell. In fact, that might even be it–why let a customer walk out having spent only $1.70 for a coffee when you can encourage said customer to spend $4.90 on a frappucino instead? Just make the coffee bad enough that they’ll be willing to pay for an alternative, but not so bad that they’ll walk that four blocks to someplace they can get a decent cuppa joe.

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5 Responses

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  1. Clint said, on March 14, 2007 at 1:07 pm

    I think what is often overlooked is that Starbucks is a DRUG DEALER, peddling out an addictive, stimulant drug.

    If you put a cocaine-stand at every corner, it would also do well, regardless of the quality of cocaine.

    If you put a liquor store at every corner, that only stocked bottom-shelf liquor — it would still do well. (Though probably not on as high of a profit margin as a frappucino!)

    Addiction changes economics. William S. Burroughs speaks loosely of the “algebra of need”. The equations simply become different when addiction is factored into it.

    And yes, people who need coffee to wake up in the morning are drug addicts addicted to a stimulant. Our society looks the other way because coffee was pre-established (like alcohol) as being okay before they passed all the other anti-drug laws. Plus, it’s based on the English tea tradition — caffeine has been in our society longer than U.S.A. has existed.

    Anyway, I’ve dabbled in caffeine a couple times since I was a kid.. and boy.. that Doctor Pepper.. I felt it… but I typically stay away from the stuff…. I might start having a soda at nite so I don’t fall asleep during TV. (I’ve dranken two Jolts in a row as a kid, and gone to bed immediately with no problem falling asleep.)

  2. Stacy McMahon said, on March 14, 2007 at 2:11 pm

    I’m not sure caffeine is on the same level as cocaine or alcohol (pot maybe..) but I see what you’re saying. I pretty much need a cup of coffee everyday, or I need to plan ahead to deal with a week of withdrawal. I do that from time to time. I do not need or ever have a huge craving for a caramel frappucino, even though they taste great and I always like it when I have it.

  3. Clint said, on March 14, 2007 at 3:29 pm

    I think it’s more on the level of cocaine, actually. It’s just legal, and that is the big difference.

    Cocaine can be as mild or intense as wanted, depending on its form (coca leaf, liquid extract, powder, crack rock). When drugs are legal people generally prefer milder forms, thus the Columbians chew Coca leaves and even have a “cocada” as a measure of distance – how long it takes to hike while chewing one leaf. If caffeine was illegal, we would see it in smokeable rock form within a few months or years. Cocaine is a stimulant, and when Coca-Cola had to stop using it, they looked for the next-closest drug to substitute — and that was caffeine.

    Cocaine is a schedule 2 drug, unlike marijuana, heroin, or LSD (for example). It is medically prescribed. Cocaine is physically addictive, as is caffeine, while pot is not. Alcohol addiction is the slowest to develop (esp compared to coke, which really tweaks out the “this is fun” part of the brain in weak-minded individuals). But the rates of toxicological deaths for daily alcohol users are 1/3rd that of daily cocaine users, and 1/15th for occasional users (it’s much easier to overdose on alcohol if you are NOT a daily drinker). Freud was adamant cocaine would usher about a new era in human conciousness. Cocaine was made illegal due to racism against blacks and is associated with racial stereotypes. It gets a bad rap (get it? rap? rap music? racial stereotypes? hah!).

    The biggest difference really is the legal status in my mind.

    Thanks for listening 🙂

  4. Christina said, on March 14, 2007 at 5:59 pm

    I don’t mind Starbucks. I don’t like coffee (my German coworkers used to joke that I like to have a dash of coffee with my milk). But if I happen to be in town, I’ll treat myself to a mocha latte. So clearly I’m no caffeine addict, I just like their sugary milk and espresso drinks. And with my MAYBE once a month habit, I don’t consider it a rip off. Going every morning, on the other hand, would do some serious damage to your budget.

  5. Carolyn said, on March 14, 2007 at 6:29 pm

    Mmm, caramel macchiato.

    I go to Starbucks for the specialty drinks. I can get “regular” coffee anywhere, including my own home with my one-cup coffee-brewer.


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