starbucks marginal cost of making a cappuccino is $1. the total cost, however, is over $10 when you sit for a while in parts of manhattan. i travel a lot for work and i first realized this when i visited honk kong. A local colleague took me to Victoria Peak and mentioned that Hong Kong’s prime real estate price is $4,600 per square foot, slightly below New York’s Fifth Avenue record of $5,500 or $60,500 per square foot. square meter. once he told me that, I asked him for a napkin to do the math.
This semester, I accepted an invitation to teach the Master of Finance for Marketing Decisions class at NYU. The concept of when to use marginal or full cost is critical to m&as, product launches, and private label manufacturing. it also affects how I feel about paying $3.85 plus tax for a cappuccino at starbucks.
Reading: How much does it cost starbucks to make a cup of coffee
starbucks cost is $0.36 for coffee and milk
The retail cost of Starbucks coffee, milk, and sweetener is $0.36. that’s what you’d spend if you made it at home, using the right proportions of coffee in a proper ceramic mug. details about the calculation are at the end of this article.
starbucks cost is 1 dollar including direct labor
The total cost to the barista, cashier, and support staff, including taxes and benefits, is $0.56. add 8 cents for the cost of a paper cup, stir and cover. therefore, the total marginal cost for starbucks to make a cappuccino is $1.00.
starbucks overhead is $0.64 per coffee
in the 2018 annual report, we see that general and administrative expenses at starbucks are 15% of sales or $0.64 per cappuccino. this includes advertising, administration (headquarters), depreciation, amortization, research and development, and all other operating expenses.
Store rental cost: $2.89 per hour, $9 for 3 hours
the nyu midtown campus is in a location where annual rent is $878 per square foot, plus 20% for installation, equipment depreciation, utilities, insurance and other expenses. while the space occupied by a seat is 7 square feet, the general rule of thumb is to double that to account for the entryway, hallways, storage room, and restrooms, if any. therefore, the footprint we used was the national average of 15 square feet, at an annual cost of $15,800 per seat. on 11 e 42nd st. starbucks is open 15 hours a day, so the cost per hour is $2.89. when you stay 3 hours, that adds up to $9 rent.
buying a cup of coffee in manhattan is a real estate transaction
our class lasts 2.5 hours. Imagine that a friend of my student imagines that he would wait for her. She could rent a temporary work space in that part of Manhattan for over $100 for 3 hours (cost is $21-$80 per hour). however, for that amount of money, she only gets a desk. therefore, it is better to have a cappuccino.
limited space at this starbucks location
starbucks loses money when someone sits at a table for more than 55 minutes in this part of manhattan. but that’s not a problem, there are only 6 seats, no outlets, and google maps data shows the average person spends 25 minutes. this also suggests that most consumers spend 5 minutes and some stay there for hours. At the spacious 25 Astor pl location, many people stay there for 85 minutes, Google data shows. I tried the free wi-fi in the city center. it was operating at 38.3 mbps, faster than at work.
using marginal cost
Imagine you are one of my students trying to quantify how to split the cost of a trip from NYU’s downtown campus to Soho during the semester. gasoline, or marginal cost, is $9.48. Total cost including lease payments and insurance is $1,659. Should you charge your classmates a marginal cost, a prorated share based on miles driven, or the full cost? how about being an uber driver for 2 hours a day, after your full time job? When considering your profitability, should you consider the marginal cost of gasoline or the total cost, including lease payments and insurance?
Manufacturers make pricing decisions when bidding for contracts with private labels, Costco, and the government based on these types of cost allocations. Currently, the plants are fully automated with an investment of $100 million each. US capacity utilization is 77%. thus, we could produce a few more units without incurring higher fixed costs. Should we bid on the Costco business using marginal cost of 1, average cost of $4.00, or something else? welcome to the fascinating world of finance.
why is starbucks in high-end, expensive retail locations?
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last week in europe i was as fascinated by the starbucks locations in prague castle as i was once fascinated by the one in the hidden city of beijing. (although the best offer is the €1 cappuccino from mcdonalds on la rambla de barcelona). why would starbucks be in such privileged places? traffic. In their annual report, they note that “Starbucks company-operated stores are typically located in high-traffic, high-visibility locations.” Starbucks operating margin is 16%. they sell a lot of coffee to people on the go, and that’s how they make money. starbucks profitability in europe is one third that of north america. One of the reasons may be that in Europe many transactions, discussions and debates take place in cafes. people tend to stay longer. the price for those who sit at “the bar” instead of at a table, is sometimes lower. many cafes are introducing the concept of a pay-per-minute scheme. I liked cafedu in Prague (pictured), but I wouldn’t pay by the minute, it’s better to pay a flat rate for coffee.
enjoy your $4.09 coffee
Coleagues at Citi World Headquarters, which has an “office-no-office plan,” mentioned that they often go to Starbucks for coffee. I asked them why they would spend 26 minutes walking down 40 floors, across the street, waiting in line, back, waiting for the elevator, and back up again if they have good (free) coffee at the office. They explained that it is a good way to get some fresh air. The next time you sit in a coffee shop, forget about the marginal cost of coffee. Consider the total cost, which is more than what you paid for, and enjoy it.
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details on costing. individual slides can be downloaded here.
size: 8 ounces (short).
coffee: 15 grams at $8.40 a pound. While Starbucks own cost may be lower, we use Costco’s retail price as a proxy for Starbucks intercompany cost.
milk: 4 ounces at $3.05 per gallon.
glass, lid and stirrer: $0.08.
Sweetener: $0.01, based on cost of sugar.
direct labor: $12 per hour. Hourly rate is based on data reported by 250 Starbucks baristas on Glassdoor. to that, we add $4.67 for:
See also: Cake Mix Mug Cake
health care: based on cost data from self-funded companies.
taxes: social security tax, medicare tax, federal unemployment tax (futa tax), state unemployment tax (suta tax), disability tax, workers’ compensation tax.
Benefits: Approximate cost of tuition reimbursement, shares, and other benefits received by Starbucks frontline employees.
we use data from google maps to calculate the approximate number of coffees a barista will prepare per hour, as well as the number of transactions by the cashier and support staff.
General Expenses: General and administrative expenses shown in the 2018 annual report. This includes general administration, depreciation, amortization, restructuring, impairment, and other operating expenses. allocated as a percentage of sales.
Rent: Cost per foot: $878, based on similar properties on 42nd street. Other properties, like the Trump Tower, are likely to be more expensive.
Utilities/Fees: 20% of rental cost. includes installation cost, equipment depreciation, security, all regulatory fees, insurance and utilities.
space used per seat: visual inspection of the site and space used for the entrance, corridors, storage space and, failing that, restrooms. while other properties, like 25 astor place, use more space per seat, 15 square feet is the national average.
total cost per seat: 15 square feet, at $878 each + 20% = $15,804.
# of hours: 365 days at 15 hours per day or 5475 hours per year.
cost per hour: cost per seat ($15,804) divided by the number of hours (5,475). a person staying 1 hour will cost starbucks $2.89, for 3 hours $8.66.
See also: Want to Roast Your Own Green Coffee Beans At Home?
