Something to buy on the way to work.
Coffee in China is still a trend more than a habit, people drink it to feel good, but not out of need.
Coffee culture is beginning to be accepted and appeals to the adventurous, open-minded, young, affluent, urban consumers in cities like Shanghai, Beijing, and Guangzhou.
In China, coffee culture represents a young, emerging middle class and their growing purchasing power.
Costa have been faced with inflationary pressures in both the UK and China.
What is likely to happen to Costa Coffee sales if they decide to increase prices?
Much will depend on the price elasticity of demand for barista style coffee in both the UK and China.
For some products a price change will result in a large change in demand and for others a smaller change.
The responsiveness of demand to changes in price is measured by price elasticity of demand (ped).
Calculating price elasticity of demand:
Percentage change in quantity demanded
Percentage change in price
Price inelastic demand:
When the result of the calculation is less than one. (We will ignore the minus sign from the calculation).
The percentage change in demand is less than the percentage change in price.
Price elastic demand:
When the result of the calculation is more than one.
The percentage change in demand is more than the percentage change in price.
Unitary price elasticity:
When the result of the calculation is exactly one.
The percentage change in demand is exactly the same as the percentage change in price.
Price elasticity and Costa Coffee
Ped =% change in quantity demanded
% change in price
UK: Because of cost increases (wages, business rates and the cost of imported coffee) Costa Coffee is considering increasing prices by 10% in commuter locations such as railway stations.
Costa has estimated that the price elasticity of demand in such locations is -0.2.
Assume the average cost of a Costa Coffee is £2.50
Sales in a typical month at these locations are 60,000 units
Calculate the probable impact on the revenue for Costa Coffee of this decision to raise prices.
Revenue before the price rise:
___________ x __________ =
After the price rise:
% change in quantity demanded (Unknown) = 0.2
% change in price (10%)
By what % has demand fallen?
What is the new quantity demanded?
Revenue after the price rise:
___________ x __________ =
Was this a good business decision?
China: Costa Coffee has been faced with similar cost pressures, particularly a recent government decision to increase the minimum wage to 2300 CNY/Month.
Costa operates mainly in shopping and leisure locations in China and faces intense competition from other brands such as Starbucks.
Costa is considering increasing prices by 20%.
Sales in a typical month in China are 200,000 units
Costa has estimated that the price elasticity of demand in China is -3.
Assume the average cost of a Costa Coffee is 200 CNY.
Calculate the probable impact on the revenue for Costa Coffee China of this decision to raise prices.
Revenue before the price rise:
___________ x __________ =
After the price rise:
% change in quantity demanded (Unknown) = 3
% change in price (20%)
By what % has demand fallen?
What is the new quantity demanded?
Revenue after the price rise:
___________ x __________ =
Was this a good business decision?
