South-Western EconNews

South-Western College Publishing - Economics

Production efficiency helps those who absolutely, positively, can’t wait more than a few seconds for their double- tall-low-skim-non-fat-espresso-mochalattechino.

Subject

Starbucks focuses on production innovation to reduce wait times.

Topic

Production and costs; profit maximization and the firm.

Key Words

Starbucks, production, wait time, revenues, costs.

News Story

Starbucks can produce a regular cup of coffee in 20 seconds, a grande-vanilla-latte in 30 seconds, and a venti ‘double- chocolate-chip-frappuchino-blended-crème’ in under 90 seconds. Can’t wait that long? According to a recent survey, 64% of Americans choose a restaurant based on how much time they have. Starbucks is working on ways of improving their productivity to reduce costumer wait times.

Starbucks’ engineers created an ice scoop large enough to ensure that baristas only have to dip into the ice bin once for their largest drinks. The result? A reduction of 14 seconds off the average prep time. Starbucks no longer requires a signature on a credit card purchase of less than $25. The result? A reduction of 8 seconds off the cash register wait time. Starbucks has been slowly integrating special espresso machines that automatically grind and brew the accurate number of coffee beans for an espresso “shot.” The result? A reduction of 24 seconds off average prep time.

For people willing to shell out $4 for a coffee-based beverage, seconds matter. These results seem to work as well. Average sales volume has increased by $200,000 to $940,000 in the last five years, Starbucks indicates. As their productivity has risen, though, Starbucks’ order-accuracy rate is still stable at 99.4%.

Questions

1.	Do innovations like these help Starbucks lower short-run costs or long-run costs? How?
2.	What is the opportunity cost of Starbucks trying to reduce wait times for their customers? Is there a chance that such a strategy might backfire? Why?
3.	What does the survey indicate about the elasticity of demand for a Starbucks beverage with respect to time? Is the focus on Starbucks’ attempt to reduce wait time an intuitive one? Why or why not? Cite evidence to support your answer.

Source

Steven Gray. “Coffee on the Double.” The Wall Street Journal. 12 April 2005. B1.