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How do businesses cope with the ever-expanding gap between rich and poor?
In today's New York Times, Nelson Schwartz writes that companies are finding more success catering either to the upper or lower ends of the market -- in what he calls a stark contrast to national debate on the subject.
"I feel like whenever the topic of inequality comes up, it's so heated politically and ideologically between left and right," he says. "But when you talk to business people, they're not really interested in the politics. They're interested in making money and growing their business... and they see close up what a lot of the politicians and pundits are still arguing about."
As an example, he points to Darden, a Florida company that owns several well-known restaurant chains. Some are on the cheaper end, like Olive Garden and Red Lobster. On the swanky side, Darden owns Capitol Grille, where people spend on average five times as much as they do at Olive Garden. In other industries -- hotels, gambling, you name it -- he found the same thing: The Dollar Trees of the world are doing great; the JC Penneys, on the other hand, are not.
Why is this the case? Schwartz explains that since the recovery began, the growth in spending has been concentrated in the wealthiest 20 percent of the country -- especially the top 5 percent overall.
"So let's say you're a business, and you want to gain new customers," he says. "You're gonna appeal to the people who are spending more. I mean, it's as simple as that."
Schwartz says that spells short-term gains for those companies -- but long-term it's a bad formula for the economy as a whole. Lower- and middle-class consumers tend to spend much more of their income.
"It's not even a question of fairness or left or right. Put that aside. We want the economy to grow."
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I get coffee pretty much every morning on the way to work. This morning ritual costs around $4.
The price of coffee is near record lows right now, less than half of what it cost two years ago. Two years ago when my latte cost… about $4.
This got me wondering. It seems like when a commodity like coffee or chocolate or bread gets more expensive, the price at the store goes up (like when Starbucks jacked prices up a couple years ago) but when commodities get cheaper, the retail price never seems to go down. It feels a little like Murphy’s law of economics.
"I’m not sure that it’s necessarily Murphy’s law," counters Andrew Burns, economist at the World Bank. "In a country like the U.S., when you go to the store and you buy a loaf of bread, the cost of the wheat in that bread is relatively small."
Burns says that's because workers get paid a lot here (relatively), and rent is expensive. Burns says in countries where labor and rent are cheaper, the price of the commodity makes up a much bigger percentage of the price at the store.
"In developing countries, when commodity prices are fluctuating, it’s felt much more directly in the pocket book of individuals," Burns says.
Here in the U.S., the coffee beans in a latte, for example, only account for about 10 percent of the price--40 cents of the $4--the rest of what I’m paying for is rent and labor.
Still, 10 percent of a company’s cost isn’t nothing, so shouldn’t I see at least a little savings?
Turns out, that depends on which kind of coffee we’re talking about
"This is Wall Street Dark Roast. One of our favorites."
At his office in Midtown Manhattan, HiLine Coffee CEO Gene Kakaulin samples one of his roasts. HiLine makes single serve coffee pods and the beans he uses are high quality beans.
"The interesting thing about the coffee market is that the commodity coffee market and the specialty coffee market have a significant disparity in price," says Kakaulin. "What you see on the exchange, the commodity price, is significantly lower than what we pay for coffee."
The beans Kakaulin uses and the beans in my latte are specialty beans. The beans sold by the ton on commodities exchanges are used to make the coffee you might get at diner or at the grocery store. Prices have gone down a little there.
But it turns out, in the specialty coffee market, there is something of a Murphy's law situation going on.
Matt Banbury is a roaster and manager for Joe Coffee—a chain of cafes.
"The level of quality that we’re buying... floats in its own sort of category. Though, if the commodity price rises too high and there’s a scarcity in commodity coffee, they will dip into specialty coffee. Which makes things more expensive."
In other words, when commodity grade beans get cheaper, the price of specialty beans won’t necessarily drop, but when commodity beans get more expensive, all beans get more expensive...
And my latte gets more expensive.
Or maybe not. Cafes can’t crank up the cost of a latte every week, even if bean prices are rising. Consumers are very sensitive to price hikes.
Especially before they’ve had their coffee.
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