Coffee Inflation

After quite some time, I happened to pay for coffee today (Sunday) at a popular coffee shop in a famous shopping mall in the Western Suburb of Mumbai. Usually my wife would pay ! Ha Ha !!

I had a sticker shock, so to say. I recalled having paid some INR 65 (USD 1.50) or so last time I paid for my coffee not too long ago at another coffee shop (may be some 4 months ago ?). Today I paid INR 95 (USD 2.10).

How much is that in inflationary percentage in just 4 months ? Almost 50% ??!!

Now, this amazes me. A cup of coffee at 95 Rupees ? In a country like India, that is a bit surprising. I can understand that a cup of coffee is some INR 250 to 300 (USD 5.50 to 6.50) at a Five Star Hotel’s coffee shop. But in a normal coffee shop and with this kind of inflationary increase ?

In Singapore, a cafe latte (which is what I ordered today) would typically cost USD 3 to 4. It used to cost half of that when I left Singapore, but that was more than 5 years ago. So, a 100% inflation is OK when you look at the number of years which have elapsed. Consider also the fact that the average salaries for a worker in a coffee shop at a major shopping mall in Singapore is going to be atleast 5 to 6 times more than what an Indian worker gets paid for a similar job in India at a similar location. Given that the input cost pressures have not risen at the same rate of end-user price increase, I can conclude only one thing: that the coffee shop chain has incorrectly assumed that the coffee buyers would pay any price to get a place to sit and sip coffee at a shopping mall. Basically that the coffee prices will be inelastic, that is there is no real relationship between the price of the coffee and the buying pattern of end-users of the coffee shop.

May be they are right. May be they are totally wrong.

I looked around the coffee shop – it was 12:15 PM, the mall had been open from 10:30 AM and it was Sunday forenoon. There were 7 people in the coffee shop. There was a business transaction at one table, a small family at another table, and a pair of love birds at the third table. Lots of people were walking around in the mall. The other famous coffee shop chain was rather full, as it is priced somewhat less probably.

In a nutshell, I think a 40 to 50% price increase in something as common as a cafe latte (the other more exotic varieties are priced higher), is totally unjustifiable. I am going to watch what happens to this coffee shop on weekends, as I happen to go to the mall quite often. I will check to see whether the theory of price elasticity is a valid one by looking at the demand patterns !

In any case, let me share that the most famous coffee shop in town charges more at a nearby famous shopping mall – it is almost coming to USD 3 per cafe latte !

THe Government collects a VAT of 12.5% on top of these prices !!

Welcome to more coffee drinking – may be I should try the old Madras Cafe where it is still less than USD 1 for an excellent cup of filter coffee ! But it is not the price that I am concerned about – I am concerned about the potentially artificial price inflation that is being caused without considering real input price increases or the demand pattern.

Enjoy your coffee !

Vijay Srinivasan
11th Sept 2011


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