COFFEE CRAVERS

IGNORING BEAN-PRICE SURGE

THE INELASTICITY OF COFFEE

BACKGROUND INFO

• THE COST OF COFFEE REACHED IT’S PEAK IN 2014 AS PRESSURE WAS GROWING ON $80 BILLION U.S. COFFEE INDUSTRY WITH COST OF ARABICA BEANS SKYROCKETING

• DROUGHT HURT CROPS IN BRAZIL, THE WORLD’S TOP GROWER

• EVENTUALLY MEANT HIGHER PRICES COSTS FOR COFFEE DISTRIBUTERS

• STARBUCKS (LARGEST COFFEEHOUSE CHAIN) AND OTHER SELLERS HAVE HUGE STOCKPILES OF CHEAPER BEANS BEFORE THE RALLY

• EVEN IF THEY DO RAISE PRICES, HISTORY SHOWS NO DETERRENT FOR AMERICAN CONSUMERS, THE BIGGEST DRINKERS

DOMESTIC DEMAND JUMPS 44%

• IN THE PAST DECADE, DOMESTIC DEMAND JUMPED 44% TO 100.3 BILLION CUPS EVEN AS PRICE INCREASED, DEMONSTRATING LOW ELASTICITY OF DEMAND FOR COFFEE

SUBSTITUTES?

• Would people who drink coffee regularly substitute tea or soda if prices rise? No.

• Coffee drinking is ritualistic; American’s drink one of every four cups globally

• 32% demand for coffee outside of the home• Social Aspect to coffee drinking • When consumers can easily switch between

other products or markets, they will be more responsive to changes in price of a particular good. For any small rise in price, there will be a large decline in quantity demanded.

• “IF PRICES WERE RAISED 200 OR 250 PERCENT, I WOULD PROBABLY DRINK LESS… I BELIEVE IN PAYING FOR QUALITY NOT QUANTITY” –FELICIA WONG TO BLOOMBERG

• WHEN DEMAND IS VERY PRICE SENSITIVE, A SMALL CHANGE IN PRICE WILL LEAD TO CHANGES IN QUANTITIES DEMANDED

• MARKETS WITH LESS PRICE RESPONSIVE DEMAND HAVE ELASTICIES THAT ARE SMALL IN MAGNITUDE

“COFFEE IS ONE OF MY PLEASURES IN LIFE. I WOULD PAY DOUBLE.”

• PRICES WERE RAISED IN JUNE 2014 WHEN COST OF RAW COFFEE WAS SOARING

• PRICE OF ARABICA BEANS SURGED ALMOST 100% FROM A LEVEL OF 106 CENTS PER POUND TO AROUND 220 CENTS IN MID-APRIL 2014

• STARBUCKS STILL ENDED ITS SECOND FISCAL QUARTER IN 2014 WITH A 5% COMPARABLE SALES GROWTH

COFFEE UPDATE!! (JULY 2015)• 42% decline in Arabica beans futures prices

from a peak last year• Starbucks still raising prices slightly on some of

its beverages to cover rising costs including wages and rent even as prices for raw coffee has been falling

IN CONCLUSION…“I need it -- it’s like crack”