What Would You Give Up for a Cup of Coffee?

What Would You Give Up for a Cup of Coffee?

First Starbucks, then Maxwell House, now Keurig – anybody who sells coffee is raising prices, and no wonder.  Thanks to a drought in Brazil, coffee prices have risen by a staggering 50 percent over the past year.  That means companies are passing on the costs, and consumers are gulping them down. Question is, if everyone pays more for coffee, where exactly is that money going to come from?

Keurig, the company behind those little single servings of coffee that go into the fancy machines, is the latest to announce a price hike. They will raise prices by 9 percent starting in November.  Other companies have already put in place their price increase, and consumers can decide whether to keep consumption the same or to find something else they want to drink. Chances are, they will go with the former.  Coffee is what economists call an ‘inelastic’ good. That is, when prices go up, consumption does not change radically. Coffee drinkers are addicts in their way. They would change a lot of things before they give up their drug of choice.

So if people spend more for coffee, does that mean they will spend less for other things? Chances are, yes.  According to a 2012 survey, American workers spend $1,000 a year on coffee. That’s not a really complete number by the way, referring only to coffee bought outside the house during the workweek, but let’s use it as an example anyway. A 9 percent increase in that figure would cost American workers an extra $90 a year, just for coffee consumed outside the home, plus whatever they spend inside the home.  Let’s assume that is an even $100 a year, which is no doubt a conservative estimate. That is $100 that has to come from somewhere else – from savings, or eating out, or going to the movies or whatever. It represents a real, tangible loss somewhere else in the economy.

What interests me about the increase in coffee prices is that at this point it is entirely supply-driven.  A bad harvest this year could be a good harvest next year and all will be well, right? Well yes, except that the real long term issue for coffee drinkers is likely to come from the demand side.  One of the big stories – the ‘economorphic change’, so to speak – of the next decade will be the rise of the middle class in places like China, and the influence that their newly-acquired wealth will bring to prices. When people have more money they spend it, and they spend it on goods like coffee. Starbucks knows this: the company has been aggressively expanding operations within China, with the goal of creating a rapidly expanding pool of coffee drinkers. As more coffee addicts are creating, the demand for the luscious beans will go higher, and prices will as well.

For North Americans, particularly North American workers, coffee is often thought of as a necessity. As it gets more expensive, that necessity may change its status to ‘luxury’ just a little.

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