Starbucks

17/3/2013

Economy

Starbucks and Scarcity

How can Starbucks get away with charging $1800 for coffee that does not even cost half of its price? The answer is location, making its scarce resource conveniently located coffee. Anybody can set up a coffee place so Starbucks has to out bid other people in order to get these conveniently located sites. This makes the price for the rental higher and therefore it means that Starbucks has less profit, making a big part of the profit go to the landowner since coffee is not really a scarce product while well located sites are.

I visited three Starbucks where two of them are located in the most expensive areas in Santiago to rent a site. The first one was located at Alonso de Cordoba, which is a street filled with boutique type stores where people visit often. The next one quite close by was the one on avenida nueva costanera, which is also one of the most expensive places to rent a site. It is a place filled with good restaurants that are all very popular and a place where many people pass by. The last one I went to was one at the portal la dehesa mall. The coffee shop is located at the main entry of the mall making it a very expensive site as well, since everybody that visits the mall passes by this place making it an expensive but great and busy site. This makes up for Starbucks high prices and it also allows them to receive many customers from upper class society that are willing to pay a high price for coffee. One can say that Starbucks has used scarcity power since its locations are scarce and it has cornered the market on convenient and busy locations to build its shops.

The first impression of walking in to a Starbucks is its high priced coffee, but if on analyzes the reason behind this it justifies its pricey coffee with expensive, well-located sites. This makes up for the cost of the site or else there wouldn’t be any profit for this coffee shop if its prices were lower. When something is scarce it makes its price increase because there is a limited amount of that good, since there are quite limited amounts of good located sites, the price for rental goes up. So next time you go to a Starbucks remember why its price is so high and why you are paying for it.

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