10/11/2004

Is Starbucks Elastic or Inelastic?

With the oil prices rising, much of the products we take for granted are increasing in price. Oil prices are not the only thing going up. Recently, the price of sugar and coffee beans has had a quick increase in price. Starbucks, one of the leading coffee retailers, has announced an 11 cent increase to their coffee products due to sugar and coffee beans price increases. Starbucks is known for great expensive coffee. Comparing coffee from other stores, Starbucks is one of the most expensive by far. The management is betting on an addiction to Starbucks coffee to keep them from losing business.
I believe Starbucks will do financial fine with this price increase. Coffee is an inelastic good. On the other hand, Starbucks coffee is more expensive than their competitors. But Starbucks sells more than coffee, it is a coffee experience. Starbucks also puts in more caffeine per drink than other companies. This helps with an advantage to keep customers at Starbucks. This is what management is betting on.

2 comments:

Maudi said...

I agree people are trendy and they want to be cool. The only way to be cool in some peoples minds is to drink Starbucks. This trend is like any other people will do it as long as it is popular no matter the cost.

Dr. Tufte said...

Hey - how come a Starbucks post only got one comment in Utah? ;)>

Here's my two cents worth of trivia - coffee is the third largest international trade good, after cement and oil. And yes, it's wholesale price is very volotile, and its demand is very inelastic. This was a very big deal in the late 1970s when there were lots of fluctuations in coffee prices.