Wednesday, August 09, 2006

Are Long Queues Good for Starbucks?

No, according to Starbucks. Those long queues have hurt sales. Here is Marek Fuchs of

Starbucks, long a quality operation, reported disappointing sales and had a weather-related explanation that twisted anyone who listened into a nasty knot. In sum: The hot weather hurt sales because it helped sell more cold drinks, which take longer to make than hot ones. Lines grew too long for the cold, hurting the hot.
Why aren’t long queues a profit opportunity for Starbucks? Can’t Starbucks raise prices for cold drinks during the summer? Aren’t those Starbucks power drinkers willing to pay a little more to avoid a queue? Maybe Starbucks should introduce something like Disneyland’s FASTPASS.

Well, not so fast. Daniel Gross of Slate provides an explanation for why sales are down that is quite different from the company line, one that may impact Starbucks for longer than a hot month or two:

What gives? For years, betting on the ability and willingness of high-end consumers to spend was a winning formula for both retailers and investors. The ranks of the mass affluent were growing, their wallets filled thanks to tax cuts and rising home values. And thanks to the phenomenon of trading up, plenty of people on the lower rungs of the income ladder were splurging on things they were passionate about: golf clubs or shoes, for example. Now the powerful trend seems to be going in the opposite direction. Well-off consumers are reining in spending, and there is likely to be a growing phenomenon of consumers trading in steaks at Morton's for Whoppers at Burger King. As the Wall Street Journal reported, "Burger King Chief Executive John Chidsey told investors during a conference call that the Miami-based chain is benefiting from a slowdown in spending at sit-down restaurants that is prompting some consumers to trade down to fast-food chains." ...

Clearly, the bite of inflation, rising interest rates, slow wage growth, low savings, and higher prices is starting to work its way up the income ladder. After all, people with higher incomes pretty much spend everything they make, too. In fact, there's a degree to which upper-crust consumers could be feeling the pinch disproportionately. Depending on where they live, how they work, and what they spend, consumers experience inflation differently. Someone who takes a subway to work won't feel the pain of rising gas prices, while someone who drives a pickup 70 miles to work each day certainly will. A person who takes a loan to buy a gas-guzzling power boat will find that the cost of buying and operating the boat has gone up dramatically; someone who buys a kayak made in China will find that the price of boating is falling.

Merrill Lynch economist David Rosenberg has examined the spending and consuming habits of his colleagues and clients on Wall Street and has created his own "Wall Street core inflation index," which tracks the rise in prices of the necessities of yuppie life: "jewelry, spas, lawn care, health care, sporting goods, housekeeping services, tuition, airlines, hotels, salons, legal/financial services, and dry cleaning." His conclusion: The price of spoiling yourself rotten is rising rapidly. "The Wall Street core CPI is running at 4%, nearly double what it is for Main Street," he wrote in a report on July 28.

In other words, forget about the heat and the Frappuccinos. Sales at Starbucks and its sister high-end retailers may be faltering because the cost of living well is rising more rapidly than the overall cost of living.


Anonymous Anonymous said...

but doesn't that analysis rest on the assumption that Starbucks is considered a luxury good(part of the idea of living well)?

given the proliferation of Starbucks outlets, i would think the consumer impression of Starbucks is pretty similar to fastfood. so wouldn't a rise in the cost of living well lead to a rise in demand for Starbucks as people switch from more gourmet coffee to Starbucks?

12:03 AM  
Blogger a singapore economist said...

To me, a Starbucks coffee is a high end coffee, particularly if you normally buy Frappuccinos for around $5. If you are feeling the pinch, you may switch to regular Starbucks coffee for around $2 or some no name coffee (like a kopi) for less than $1.

12:46 AM  

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