When we talk about markup like that, we're only including the cost of the raw ingredients - beans and water. We're not talking about the other costs of running a business.

Paying rent on the location, building and maintaining the cafe, keeping utilities on, paying employees, advertising, insurance etc. all add up to significantly more than the cost of the raw ingredients. Add all of that stuff together, and it's not like your local coffee place is running an 80% profit margin. They're managing a few percent. And if they run a profit of more than a few percent, then someone else will come in and undercut them - either taking a share of their customers, or forcing them to drop prices back down. It happens all the time.

That's why if you ever tell them "hey, I didn't like this coffee," they'll make you a new one, no questions asked. The cup of coffee is pennies lost for them; all of the other costs stay the same. They'd rather have a happy customer and lose those pennies than risk their future profit.

TLDR: It's not worth it, and it won't work.

"Specialty" coffees (e.g. espresso-based) require a significant investment in equipment and training. Trying to significantly undercut say Starbucks will require a lot of sunk costs up front. In other words, you will not be able to undercut them and turn a sufficient profit until you're established.

Furthermore, people are (generally) OK with paying current costs for specialty drinks. If you started up a coffee shop and sold drinks at half of *$ cost, you wouldn't suddenly have a lineup of customers. Marketing to actually get people in the door will cost a lot, especially when you're up against the behemoth competition.

BUT, let's say for the sake of argument, that you manage it. You have established yourself as a popular destination that makes good drinks for three bucks less than then competition. You've opened up a few franchises, and things are going well.

That's when Starbucks (or whoever) drops their price by $3.50 to squeeze you out. They can afford it. They can afford to give coffee away for probably six months in a major single market, without suffering too much.

Other TLDR: Capitalism is cruel.

Starbuck's margin is about 10 to 10.5%. They have massive scale and buying power.

It isn't the cost of the coffee. It is the rent, labor, insurance, marketing costs, etc, etc.

Plus all the energy it takes to burn the beans

Over roasting is quite costly indeed.

That's actually 2 different questions: Why hasn't anybody charged less?

They have. Little ma and pop cafes charge less for more and do pretty good against Starbucks in their little areas.

Why hasn't anyone taken market share?

Because of overhead which dictates cost as much or more than materials cost. And because it takes a huge amount of up front cost to start a chain. A company would have to offset the startup costs by charging more for coffee and their advantage would.be lost.

Also worth noting that because of everything you said, you actually DO see companies coming in and dramatically undercutting if they have a different business model.

• Dunkin and Starbucks have a similar business model so they have (roughly) the same markup which is relatively high.
• If you go to a diner, you'll find that not only is their coffee cheaper, but it often has free refills which makes it much cheaper. This is because their business model is even more skewed toward higher priced meals being where the money is made rather than coffee.
• Even farther along the spectrum, if you go to a car dealership to get your car serviced, you'll often find they'll give you free coffee because their business model is so heavily skewed toward the service fees for the car.

When did the world decide that dark roast coffee was the only choice?

I can only buy one bag of coffee at Costco that isn't dark or French roast. My all-time favorite cup of coffee is a Kona light roast peaberry, fresh brewed at the source.

Plus if they moved beyond mom and pop status and somehow kept their costs dramatically low, there's always a bigger company willing to buy them out to protect their spot.

Or just buy you for a huge (to you) price. Happens so much in every industry.

Yep, I was going to mention that as well but I had Starbucks on the brain, and their MO is to crush, rather than buy out.

(Unless it's equipment. Then they do both )

Starbucks DOES like their destruction! Haha

My old car dealership used to have a masseuse and snacks!

My old car dealership used to have a masseuse and snacks!

When running a national food chain one of the most important characteristics is making all your products taste pretty similar. Your prime customer is someone who comes in regularly and gets the thing he expects each time.

With coffee that means you want all your coffee to taste the same day after day, and year after year. Doesn't matter if your buyers bought extra beans from Brazil or Sumatra or Ethiopia because those were the years those nations had perfect weather and bumper crops so your bill of materials is down 15%, the coffee needs to be the same or close to the same every single cup.

So roasting enough that most of the flavors are coming from the roast is a really good way to ensure consistency. And because everyone's chain coffee is like that, they want their home coffee to be like that too. So dark roasts sell better and soon light/medium roasts become a niche product.

When a product is marked up, much of that difference goes to covering other expenses... rent, employee labor, utilities, condiments (milk, sugar, cinnamon), loyalty/rewards programs, marketing in general, etc. So there isn't a ton of profit left after all that. After all that, maybe 10% is left.

Saves em money on buying good beans too!

Good description, but to add:

I have a business degree.

You're asking a good question. But generally there's less money to be made in cheaper products.

Compare a Dollar General to an Apple Store, it's pretty obvious which company is more successful.

Krispy Kreme and Five Guys come to mind as businesses that were focused initially on one singular product. But they weren't necessarily focused on being cheaper. They used the savings of focusing on singular products to increase their overall growth.

Also... when it comes to coffee the cost savings you're describing aren't necessarily enough to motivate a consumer.

A small cup of coffee at starbucks is $1.55, at McDonalds $1... at this point it's kind of like driving out of your way to save a few cents on gas. Some people do, but not necessarily enough to motivate an entire new business model.

All drinks are marked up a significant portion--it's where most profits come from in the restaurant world. You can buy coffee for a lot less. It probably won't be as fancy, but it'll probably be of similar quality for less.

People also generally perceive something that costs more as tasting better (this has been shown in several blind wine tastings). It's also something of a status symbol (although the people getting it probably won't admit it). Look at me I can pay a lot for a fancy looking cup of coffee. This is the same reason will buy a purse for thousands of dollars when one of essentially the same quality could be made and sold for under $100.

Maybe mom and pop shops can beat them when it comes to black coffee, but I can think of one small place I've ever been to where anything beyond that saves money, it's usually the opposite. Those lattes and shit are not cheap even when the big places can buy the actually valuable ingredients at high scales. And I'm pretty sure that one place that competed was campus subsidized. It was also not good coffee.

Iirc the local place I went to back when I lived nearby sold black coffee at about 70 cents cheaper for a large cup, and being the local place with maybe three employees ever on at a time in a liberal neighborhood, was absolutely packed during any rush time. That 70 cents isn't going to kill Dunkin, their convenience, familiarity, app preorders, bigger menu, often ideal locations for being on the go, etc. I believe the local place near me now is more expensive than dunkin, so it's not even assured that local places can even try that.

There's a demographic of people who want a local place that is cheap and familiar to them, but there's a much, much larger one that wants the convenience of a chain, or if not that a place that specializes in gourmet coffee like a roaster, which also isn't going to be cheap. And if people are super money conscious, they'll make coffee at home, or gas station coffee on the go, which isn't all awful. A coffee place at a cheaper price point than what's out there right now doesn't seem very viable at all.

It would also take away from the aura of "premium" coffee.

I honestly get better coffee brewed on my own from Hills Brothers than I do from Starbucks or Dunkin.

There is basically no room to under sell current coffee shops. Indie spots barely turn profit and the big names successfully sell low tier product for premium prices. If a good latte is 4 bucks and you charge 2 you need to sell twice as many to cover rent. I worked at a place that switched the espresso beans to a cheaper mass produced product to up the margin. People stopped coming immediately, the quality was important.

The better model would be to attract a lot of customers with cheaper coffee, but also offer premium options.

McD's have some free coffee offers in some markets too, to try and incentivise people to come buy McBreakfast. That's probably more like what u/Educational_Sir3783 was thinking.

Take a random 10hr shift. Let’s say you get an 80% markup on your coffee, so while you charge $1.00 for it, you only paid .20c for actual coffee, and make .80c per cup. On a regular 10hr shift, you sell 200 cups of coffee which means you made $200 in revenue and $160 in profit. Well, not exactly. You pay your barista $11/hour, so now you actually made $49 in profit.

Now imagine you only mark it up 50% (.40c). You sell the same amount over the same shift. You’ve now made $80 in revenue and are already not making a profit because of payroll alone. And this isn’t including rent, utilities, supplies, etc you also have to pay. This is obviously extremely simplified but the point is that you have to make enough from the goods being sold to cover all expenses, not just enough to replace the goods. Coffee shops are not pulling 80% of revenue as profit; in reality, it’s probably more like 3-7% at best

Coffeeshops are a striking example of this, as they have a very long history of functioning as a semi-public gathering space where people spend long periods of time relaxing, talking, working, reading, and so on. The price of a cup of coffee is really more like the price of entrance and the fee to stay there.

Diners use cheaper ingredients, and don't throw any coffee out, while paying their staff much less than minimum wage.

Diners make their money on turnover; more customers across more of the day.

Car dealerships use the same cheaper ingredients as the diners, but yeah, the coffee is subsidized entirely as a perk, not a for-sale-item.

People who have a marketing degree commonly say they have a “business degree” so people assume they’re educated in something smart, like finance or economics, rather than marketing.

This was going to be my answer. It’s all about perception. There’s not likely much difference between a cheap cup of coffee and a high end one, but the perception, at least to the consumer, is the more expensive coffee must be better. It’s possible/likely the more expensive cup tastes slightly better, but to the multiple they charge, unlikely.

The vast majority of what a coffee shop sells isn't actually coffee, it's mostly selling milk. And milk is surprisingly expensive.

With Starbucks they’re over brewing typically because their customers don’t like the taste of coffee so much but coffee flavored cream and sugar. When you’re drinking just black coffee it’s not for you.

Although their nitro is the way to go if you like smooth black coffee.

Iced coffee whipped cream!

>The better model would be to attract a lot of customers with cheaper coffee, but also offer premium options.

So you’re smarter about running a coffee biz than Starbucks? Any advice you want to give to astrophysicists about figuring out that whole big bang thingy?

They do. You can buy the same ingredients and equipment at home and make it yourself.

When you buy coffee from Starbucks or whoever you are also paying for

1. Someone to make it for you.
2. Somewhere for them to work and possibly somewhere warm for you to sit whilst you drink it.
3. Someone to have purchased the equipment that you would otherwise have to buy up front.

Coffee shops also have to be located in high footfall locations where rent is going to be higher than your kitchen. Almost all of the cost to the retailer in providing you with the cup of coffee is the cost of providing the convenience rather than the product. But convenience still costs them money.

>generally there's less money to be made in cheaper products. Compare a Dollar General to an Apple Store, it's pretty obvious which company is more successful.

Ummm...Dollar Gen will open more stores this year than Apple has in total. You used a Really bad example. See Walmart. There's lots of money to be made in high volume low markup sales.

Great point. McDs doesn't sell the most burgers by having the best burger, they do it by having a convenient known item that is reliably standard across the country.

My first job was across the street from a hospital (early 1990s). The cafeteria coffee was 29 cents if you brought your own mug (any size)

I brought a quart mug and stayed buzzed on high test health care worker coffee all day.

Many good reasons why the hospital offered that deal.

Apple has billions and billions in net profit running a ~24% margin on their flagship products. Dollar General nets about $29k per store per year. Apple makes that selling 100 phones.

You moved the goal posts. It was about comparing stores. DG is one of USA's most successful retailers.

Dollar General has a Market Cap of 48.36 Billion, Apple’s is 2.33 Trillion, roughly 48 times more. Safe to say Apple is a bit more successful

What's sad is the effort that goes into each and every one of those coffee beans. They are the seeds of a fruit. The coffee cherry. The process of picking those cherries, taking out the seed, de-pulping/skinning it, drying it, and all the other things that are done to it are arduous and take a lot of time. Most of the coffee that is bought into developed companies comes at a humanitarian price to the countries from which they came. If people thought for a moment about the process of each one of those beans, or had to do that shit themselves, they'd probably pay MUCH more than what they do.

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There are companies which sell cheap coffee, casinos. A lot of casinos will offer unlimited free food and drink if you have a certain membership.

This is already happening in NYC.

There are two chains -- one is called Matto and the other is Blank Street Coffee. They're both undercutting Starbucks on price significantly, and they both suddenly have locations EVERYWHERE.

Matto is especially cheap -- their gimmick is that every drink is $2.50. Doesn't matter if it's an espresso drink or a drip coffee or a flavored latte or whatever -- it's $2.50.

Yeah, "Charbucks" dark roast espressos are good for standing up to lattes and other drinks that are 90% milk. Real espresso aficionados/3rd Wave coffee snobs tend to prefer lighter roasts.

That man's name? Devon Starbucks.

“MOAR ENERGY, PLEASE!”

For me that would be worth getting another car from them lol. Or at least returning there for service.