Nov 11, 2008

Recession: A Reason for Less Coffee?

It can no longer be denied that the U.S. economy is suffering from a recession. With shops closing after being opened for less than a month, a plunging stock market, thousands of people being laid off daily it is clear that the U.S. is now facing tough times. Starbucks, the world's largest chain of coffee shops reported a major 97 percent plunge in their fourth-quarter profits. Does this mean less people are drinking coffee? Each time you step into a coffee shop its hard not to notice all the businessmen lined up waiting to purchase their daily cups of coffee. With thousands of caffeine strung bankers out of work, has this lead to a decrease in the demand for coffee? Then chances are both yes and no. Yes in that with more people out of work, less coffee is needed to get the working population through each work day. No, in that many newly unemployed caffeine fiends will still need their coffee to get them through their job hunting days. The difference is that they now turn to the cheaper kind of coffee. The dollar cup from 7 11 or McDonald’s or even just making it at home using their 20-dollar Mr. Coffee machine is now the alternative to lining up at Starbucks and ordering a Grande coffee. Recessions have always caused a change in consumer spending and even the small luxury of coffee has begun to feel this.

Not only has Starbucks profits drastically dropped but Starbucks Corp recently reported that fewer international stores would be opened and offered a pessimistic earnings forecast for the coming year. Aside from a decrease in openings internationally, Starbucks shares have plunged by 50% this year alone, and in June they closed around six hundred stores. Many make the mistake of thinking that Starbucks drop in profits and sales means there has been a decrease in the consumption of coffee. Although the coffee industry may somewhat be affected, reports have shown a more significant change in consumer spending than a decrease in sales for coffee. An article by Time looks into the demographics of Starbucks and McDonald's customers and clearly states at the beginning that "McDonald's is planning to capitalize on the public's willingness to pay $4 for a cup of coffee by hiring baristas" while Starbucks has "lagging business". According to CNN Money Starbucks same-store sales were down 5% for the fiscal year while McDonald's sales "rose by 8.2 in October alone." This is a clear indication that more are turning to the cheaper alternative of coffee rather than a cut in the consumption of coffee.

Many have always felt that Starbucks and other major coffee shops are extremely overpriced, but only now are these chains feeling the consequences of selling at such a high-price. By looking at the demographics it can be seen that Starbucks consumers were generally older and consisted of those who earned more than $60,000 while McDonald's consumers were around the ages of 18-34 who earned less than $60,000. Therefore this change in consumer spending illustrates that people are simply trying to save more here and there rather than drastically cutting their spending. If overall coffee sales were plummeting along with decreases in sales of coffee by all stores this would signify a more drastic cut in consumers willingness to spend. Therefore, this signifies that the current economy is not in a depression as many are still spending onthe luxury good of coffee. Simply put, those of higher class status, the upper class and upper-middle class are feeling recessionary pressures and see the importance of cutting back. If the vice president of Boston Consulting Group still thinks that "the core group" of brand conscious consumers is enough to maintain Starbuck's Corporation he may be proven wrong. The first of many problems would be trying to prove this "core group" has not already changed their spending on coffee. Is it only a matter of time before this statistic further drops especially as more people are being laid off?

It is clear that Starbucks is suffering from the financial crisis. Yet their decline does not mean that Americans are consuming less coffee. Ultimately the recession has caused for a change in consumer spending where people are having to cut back or alternate their spending on luxury goods. During these times the stock market turns into a bear market where shares of low-priced businesses such as Target, Wal-mart and McDonald's increase in price as more people begin to shop at these stores. The slowdown and change in consumer spending has not just been felt by the U.S.: Starbucks has reported decreases in sales in the U.K. and Canada. The global economy and markets have undoubtedly started to the feel the negative effects of the crisis, luxury-good companies such as Starbucks are feeling the pinch by consumer pockets, their regulars both businessmen and even college students are no longer willing to pay or an expensive cup of coffee. It is clear that millions of Americans will remain caffeine energized, only this time without Starbucks.

1 comment:

Lauren Ford said...

Jacqui, I really enjoyed reading your post! You chose a unique and interesting way to illustrate the profound effects that the market has had on consumerism. I've been kind of wondering what the new McDonald's coffee surge had done to sales at Starbucks. What do you think this shift in consumer spending represents? Is it that people are simply trying to save an extra dollar or so here and there? Or is this a mad scramble to save every last penny? I don't know much about the field of economics, so what I really liked about your post is that you were able to address the economic crisis in a way that was not too bogged down with industry jargon. Additionally, I appreciated that you took time to explore many of the possible ways the outcome you are describing could have been caused and I think this greatly strengthened your argument.

In my own writing, I often find it difficult to be conversational with the reader when discussing a topic that they may or may not know about. You did an excellent job of achieving a balance between conversational prose and professionalism through your use of pointed questions. For example, in your intro paragraph, you immediately call the reader to think critically about the issue and form their own opinion before you go on to explain your point of view. This strategy engages the reader from the start. Further, your use of quotations effectively grounds your post in relevant evidence.

It was hard for me to find anything to critique! One minor thing I might suggest is tightening up your thesis in the intro so that your position on the issue stands out in a more profound way. As it is written, I was able to decipher your thesis, but I feel you might have eased into it instead of stating it as an arguement by spreading it out over several sentences which blunted its effect a little. Secondly, Starbucks (the brand name) is plural - so using the possessive would be "Starbucks'" instead of "Starbuck's." Its weird I know.

Anyway, thanks for yet another great post and I look forward to hearing about your final post next Tuesday!

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