Displaying different strategies, McDonald's and Starbucks call a 16 ounce cup different names.

More Conspicuous (Coffee) Consumption

by Elaine Schwartz    •    Mar 11, 2011

The same story.

But now it is about coffee. Increasingly affluent, the Chinese have begun to drink more coffee (in addition to using more oil, eating more meat and buying more handbags). When talking about China, the International Coffee Organization says that coffee is an aspirational commodity. For a culture of tea drinkers, coffee represents “cosmopolitan sophistication.”

Still though, the typical Chinese person drinks lots of tea and (a tiny!) 5 cups of coffee a year. By contrast, in Japan, annual per capita coffee drinking is 300 cups. Recognizing that the Japanese also had been tea drinkers, coffee retailers like Starbucks, with 200 Chinese stores, and Nestle see huge potential in China. And, the story is the same in India and Brazil.

Meanwhile, on the supply side, coffee yield is down. Citing rains that damaged cherries in key growing areas, Indonesia predicts 2011 production will decrease 30%. Colombian growers are talking about the massive impact of temperatures that average just 1 or 2 degrees higher. Requiring new planting techniques and bug control, yield has plummeted, price has soared, and Yuban is charging 25% more.

Also, espresso machine orders are up.

The Economic Lesson

Again, we have a classic demand and supply scenario. Demand shifts to the right as people in developing nations decide to conspicuously consume coffee. Supply, perhaps temporarily, shifts to the left as rain and heat diminish productivity. When demand is up and supply is down, price has to rise.

As economists, we know that when price rises, 2 things happen. On the demand side, eventually, people want less. On the supply side, attracted by high prices, producers grow more, new firms enter the market and price drops.

 

« »