4. The Profit Squeeze
The understandable, but unjustifiable, ambivalence or even anger against a system in which farmers appear to get so little while Starbucks makes high profits persists not only due to ignorance, but to the suspicion held against markets by so many: that some agents in the market, even competitive markets, can merely pay or charge whatever prices they want and do so for as long as they wish. This misses a central insight of economics: that competitive markets will erase any attempts to obtain unjustifiable gain.
The coffee (shop, ground, etc.) market in the U.S. is also one of easy entry. Since Starbucks’ success highlighted the opportunities of gourmet coffee shops, many others have entered the business. The temporarily available profits not only alerted others to the opportunity, but also provided compensation to others who moved into this area quickly. Inevitably, however, this entry will raise competition which will force down profits.
How can the newcomers compete? By buying coffee and selling it. If they pay a bit more than Starbucks, they can buy the coffee; if they sell for a bit less, they will get customers. Can Starbucks be underpaying farmers in such competitive markets? No. If they were paying too little to get coffee, one of the new U.S. firms entering the coffee shop market would be more than happy to pay a bit more to get the coffee so Starbucks couldn’t. Competition would bid the price up as firms competed for inputs. And of course it would also force the price per cup at the shop down.
Firms compete for suppliers and for customers, and competition for inputs is as big an issue as competition for customers. Competition at both ends eats into Starbucks’ profits. Thus Starbucks cannot maintain profits by underpaying suppliers and overcharging customers. In an easy entry U.S. coffee market, Starbucks would not be (has not been) able to maintain profits, and the claim that Starbucks makes high profits by paying farmers little is as unjustified as “they make high profits by overcharging customers.” Starbucks made high profits because they were the first into the market with the right idea, not because they paid less for inputs. But they will lose those high profits as others enter. In fact they already have. This past year, Starbucks closed hundreds of locations in the face of such pressures. In the coffee market, prices for coffee will be squeezed down to production costs (plus normal profit) and prices for inputs will be squeezed back to the opportunity cost of supplying coffee. Thus competition will force compensation back down to the efficiency of the local markets. So much for the coffee growers receiving low pay while Starbucks makes high profits.
At that time, the appropriate lesson is not that Starbucks made a profit by squeezing coffee growers, but that profit provides compensation to move resources in and out of markets as needed, and that this is only temporary. Ultimately, Starbucks will end up in the same boat as the cereal companies and bakers: they will obtain a “normal” or average profit. We don’t think of bakers as future Vanderbilts because competition has squeezed their profits down to an average return. That is Starbucks’ fate too.
Without high profits as a scapegoat or distraction, it will be obvious that coffee growers’ income depends upon their productivity and the alternative opportunities in their countries, not what Starbucks pays for inputs. One can only hope that critics will learn the lesson. Alas, more likely is that with the Starbucks’ profits gone, critics will lack something to protest, and move on to other markets for examples of “excessive” profits which appear to prove their position.
