Starbucks Is Now Selling Ice To Eskimos

Aug.12.14 | About: Starbucks Corporation (SBUX)


Starbucks will is now selling Colombians back their own coffee for the first time.

The Starbucks name has become synonymous with overpriced coffee. How does it have a chance?

It may be easier for Starbucks than you think.

My first reaction to the press release from Starbucks (NASDAQ:SBUX) announcing that it plans to open 50 stores in Colombia was one of shock. At first it sounded too ridiculous to me - like putting a Taco Bell in Mexico or worse trying to sell ice to an Eskimo. A closer look at the pricing locally in Colombia and adding some better thought out reasoning and Starbucks on second thought should actually do well. Maybe it's more like selling ice cream to an Eskimo.

On July 17, Starbucks issued the release. The first store in Colombia is now open and is a three-story restaurant. It serves 100% Colombian coffee grown from local farmers and is the first such restaurant anywhere in the world where all of the coffee does come from local farmers.

CEO Howard Schulz stated,

"Our admiration and respect for Colombian coffee farmers dates back to our humble beginnings in Seattle's Pike Place Market in 1971 when we first began purchasing and roasting Colombian coffee. Over the past 43 years, we have proudly shared Colombia's finest coffee with billions of people around the world and today we are honored to bring the Starbucks Experience to Colombia for the first time."

It all sounds fine and dandy but using the Eskimo metaphor it begs the question - how can Starbucks possibly compete and make money selling its expensive concoction to the people of a country where coffee is grown everywhere almost as common as ice surrounding Eskimos?

Well, as it turns out, the average cost of a regular cappuccino in Colombia is $1.83 according to this website. It's about 20% cheaper on average than what we pay in the United States according to this website which means it's still within similar range and perhaps the savings on shipping only accounts for that 20% without affecting profit per cup.

If you do a little more thinking, it makes sense. As with most other commodities such as oil, gold, oranges, there is a global market for coffee, especially Colombian coffee, and consuming coffee locally doesn't mean you can severely beat market rates other than for the shipping costs. The result is that even Colombian restaurant goers need to pay up when ordering Colombian coffee from restaurants.

While I don't expect Starbucks in Colombian to make too huge of a difference for the company as a whole, every little bit counts in the big picture. Starbucks has found what will probably prove to be yet another untapped new market sell spread its chain.

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