Tuesday, May 3, 2011

The coffee shop's latte factor

The "latte factor", as coined by David Bach, has been a constant refrain in personal finance new and blogs.  Opining on how Americans are in the red in part because of their love of fancy, over-priced coffee, there are many calculations of how people could save way more without it.  It's even been pervasive and treated as a hard and fast rule enough that there's even been a blow back movement against it like at I Will Teach You to be Rich.  But, controversy aside, I'd never seen numbers around the coffee shop's side of the story.

Bach and others' rhetoric implies that your Starbucks coffee is wildly over priced and you're better off without it.  But an article at the Washington Post counters the first claim.  Unpretentiously titled "Why a 12-ounce latte costs $3.25", the article outlines the major costs in producing the latte as follows:
Cost to consumer $3.25
Overhead $1.30
Milk .25
Espresso .88
Labor .40
Cup .70
Lid .40
Sleeve .20
Cost to coffee shop $2.96
Profit to coffee shop $.29
After expenses coffee shops are only left with a 9% margin on the latte.  That's well within general retail norms.  Even for Starbucks or other major chains (the numbers above reflect independent stores) the profit only rises to a 13% margin which is hardly exorbitant.  As the article notes, the latte is an expensive drink for shops to make because of the milk and additional labor over regular coffee.  The regular coffee would probably have a higher margin.  Starbucks makes a killing on large sales volume.  The only thing getting killed on your particular latte purchase is your wallet.

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  1. Starbucks' coffee is..well, Starbucks' coffee. They sell because of their reputation as a result of their marketing. However, there are emerging coffee machine business that offers affordable price and can quite challenge the taste of Starbucks' coffee.

  2. A lot of people would choose Starbucks over other coffee shops regardless of its overpriced items. I find this also a challenge for restaurant internet marketing companies, on how they would fit or adjust into this marketing situation.

  3. Starbucks is already an institution and I think maintaining its brand name is not a problem at all. I’m impressed on how they build their name quickly globally, did they read some seo wiki to improve their marketing strategy?..

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