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What's Cookin' in Coffee?© 2006 Stuart Daw Dow Jones Newswires issued a March 21 bulletin describing how McDonald’s were rolling out a new program that Dow called “high-end Java” at “very competitive prices to a cup of Starbucks.” The sheer influence of the giant burger chain promoting coffee in its 30,000 world-wide establishments may encourage further growth in per capita consumption. As the National Coffee Association points out in its latest survey, in the US for example, 56% of Americans drink coffee daily, as opposed to 49% just two years ago. There is no doubt that the Starbucks phenomenon has had a powerful influence on the numbers. One intriguing thing about the alleged looming coffee battle between the two retail giants is the price gap, with McDonald’s in New York selling a cup of coffee at $1.09 vs the Starbuckian $1.69 (both before taxes). For in terms of the intrinsic value of black coffee, it should be noted that the cup cost difference between the two, even if Starbucks paid 50 cents per pound more, would only be one cent. And the 50 cents per pound difference could only happen if Starbucks used high grade coffees such as we do at Heritage, and McDonald’s scraped the bottom of the barrel, which I am sure is not the case. Besides, any coffee aficionado could have told McDonald’s that to match Starbucks after duplicating the grade of green coffee, all one needed to do was roast a bit darker and put more coffee in the pot, both of which I understand they are doing. So what other factors prevail that will allow Starbucks to fetch 60 cents per cup more than their big competitor, assuming both coffees are of equal quality? Starbucks has become deeply associated with the word “coffee,” though the coffee itself may be receiving more of the credit than it should, in view of many other important factors such as brilliant promotion and organization, and a rather catchy, sexy name, to cite but a few. All this has been put together in an ambiance that exerts tremendous power over any human’s sensory apparatus. The combined aromatics of coffee, chocolate and multiple flavors one experiences on entering a specialty store are very seductive, with an almost erotic appeal. In that “sense” McDonalds is at a distinct disadvantage, with its meat-cooking orientation hardly titillating our olfactory nerves. Another is what Starbucks likes to call “the Starbucks experience,” a social connotation that one can hardly expect from a visit to McDonald’s. Can you imagine the scene at McDonald’s if a group of college students landed in with their computers to set up camp for a couple of hours? In fact, there is a prevailing atmosphere of speed in that eatery that is a large part of their appeal. It’s not quite the same at Starbucks, and Starbucks gets away with it. For example, we see long lineups at their airport locations with competing restaurants just across the aisle. A lineup more than two deep at a McDonald’s and we see impatient, fidgeting customers. Remember, we’re not just buying coffee in these stores, we’re renting a piece of expensive real estate for a certain period of time, and the cost of the rent gets into our coffee cups. Further, Starbucks seems to make a virtue out of the finicky dog and pony show required to get that cup into the customer’s hands. What’s the result? Higher labor costs. It will be interesting in the evolution of the Starbuck’s empire to see what if any further action it takes to automate and reduce labor costs. On the issue of quality control, it has been pointed out that McDonalds have most of their restaurants under franchise agreements, with some leeway granted to store owners in the preparation of food and beverages to be served. On the other hand, Starbucks Chairman Howard Schultz can apparently walk into any store and put a lock on the door if he sees something wrong with the coffee. Given over 38,000 stores, that’s a lot of walking. With the memory of the 10 cent coffee we enjoyed in 1950 (and here, may I add, generally speaking the coffee in that era was superior to that available today), I wonder at the impact of inflation, and how we arrived today at $1.69 for a single cup, more than the farmer gets for a pound containing around 3,500 beans. For the coffee farmer, revenues today are barely higher than those of 1950, while inflation in the more advanced economies has risen at least to the power of ten. Thus we have a disconnect between the raw cost of green coffee and the final retail price of a cup. Starbucks likes to remind us of the voluntary premium it pays to certain origins for green coffee in the name of uplifting the lifestyle of the local farmers. While this does not add much to per cup costs, given their huge volume the aggregate effect on their bottom line is substantial. This is in keeping with the modern tendency, especially with new corporations such as Starbucks, to reward not just the owners, the stockholders, but what they like to call their “stakeholders,” every entity that has any role in affecting their business, including suppliers. But in spite of this intended noble effort, the disparity between grower and retailer income is wide. This is a sad indication of the difference between life on a family farm and life in the big city. And given the laws of supply and demand, and in spite of the efforts of those who are altruistically trying to bridge the gap, it will likely remain so. McDonald’s and Starbucks’ promotional activity might help increase world demand, but that will only encourage more planting and higher production. One hundred years ago around 60% of Canadians and Americans were involved in the production of food. Today less than 2% of us are living on the farm. So for poor Third World farmers, one can only hope for a similar move into industrialization. Meanwhile let us applaud the efforts of McDonald’s and Starbucks to promote good coffee, an activity from which all of us in the business will benefit. Visit Stuart Daw's coffee article archives.
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