A new coffee shop has opened in Eastleigh town centre.
Now, your reaction to this might be “Bill Bryson was right; Eastleigh needs a new coffee shop like a fish needs a bicycle”.
In a previous post Coffee vs Discount in Eastleigh I pondered the reasons for the consumer demand for expensive coffee. But what about the retailers? What would induce anyone to open a new coffee shop in what would already appear to be a saturated market?
The market is not saturated
Well, the obvious answer would be that the market is not saturated. The entrepreneur can see that existing shops are making excess profits* and/or that demand is outstripping supply.
Now it may also be that this new shop has a Unique Selling Point (USP) with which it hopes to take market share from other suppliers, but that’s a marketing argument and I’m talking about economics.
*The definition of profit differs between accountants and economist. To an accountant, profit is what the company owner’s left with after extracting expenditure from income. To an economist, “normal profit” is the amount the owner needs to make in order to make the business worthwhile. Anything above this is “excess profit”.
One important factor about coffee shops that don’t apply to all businesses is that it doesn’t take very long or cost very much to open one. Compare the few weeks it has taken for the new coffee shop to open with the several months it has taken to open the new clothes store in the Swan Centre (albeit that part of the latter involved substantial rebuilding works).
A coffee shop doesn’t need large premises, expensive equipment, or extensive stock. Again, compare the two new stores in these respects. On the other side of the coin, it also doesn’t take very long or cost very much to close a coffee shop should the owner spot a more lucrative opportunity; you’re not irrevocably tied in to the enterprise.
To explain how the “profit motive” works, let’s assume an insatiable demand for coffee, an endless supply of premises suitable for coffee shops, and that a coffee shop owner can make a living by selling coffee for £1 per cup. Some of those assumptions may be easier to believe than others.
Coffee Shop A opens, and because it can, sells coffee for £2 per cup. The owner is making over and above what is needed – excess profits. This money-making opportunity attracts another business to the town.
Coffee Shop B opens, and sells coffee for £1.99 per cup. Because this coffee is cheaper, all of Coffee Shop A’s customers move to Coffee Shop B, until Coffee Shop A reduces prices to £1.99. Both owners are still making shed-loads of money – not as much as before, but still enough to attach a third business.
Coffee Shop C opens, and sets the price to £1.98. Coffee Shops A and B reduce their prices to match, etc. etc.
And so on. So long as the coffee shops are selling coffee for more than £1 a new coffee shop will open and sell coffee for 1 penny less than the existing shops, and the existing shops will reduce prices to match. Eventually there will be 100 coffee shops and coffee will be £1 per cup.
100 coffee shops in Eastleigh Tow Centre?
Customers are buying coffee at the lowest possible price and shop owners are selling coffee at the highest possible price. There are no excess profits, so no new shops open. And, because they can sell as many cups of coffee as they want to, no shops close either. We have market stability.
So are we going to end up with 100 coffee shops in the town centre? Well, probably not. There are a few points I’ve glossed over that would throw a few spanners into the simple example I’ve described above.
First of all, there isn’t insatiable demand for coffee – eventually there will be more cup of coffee being sold than there are people to drink it. Secondly, all customers have to know the prices of coffee in all shops so they can visit the cheapest one. Thirdly, irrespective of prices, people have brand loyalty.
Some people might insist that, irrespective of price, a Starbucks coffee is better than one from Coffee Republic (see what I did there? Carefully showed no bias by carefully selecting two coffee chains that are not represented in Eastleigh).
Here at Chandler’s Ford Today, we are great advocates of independent traders and welcome the new coffee shop to Eastleigh town centre and wish them all the best. I’ll be visiting – to see what their USP is (I might be an economist, but still have an interest in marketing).
Two trivia facts
And I leave you with two coffee-shop related trivia facts.
The Barista who serves your coffee is etymologically related to the Barrister who works in the crown court.
Starbucks is named after a character in Moby Dick.
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