Starbucks coffee has a legion of admirers. I love coffee, but I am not a fan. Why?
1. I hate that they add some stupid syrup to all their coffees. I am sure most customers like it, but I can’t stand sugar in any form in coffee.
2. The price is outrageous. I can’t pay Rs 300 ($3.56) for a Latte in Gurgaon.
Why is Starbucks coffee so exorbitant in India when other global brands are not?
You might have heard about the Big Mac Index. The Economist invented the Big Mac Index in 1986 as a fun way to see if global currencies are trading at their fair value or not. Its roots lie in the PPP (Purchasing Power Parity) concept in economics.
The current exchange rate between USD ($) and INR (₹) is around 82 ($1 = ₹82).
But this is the nominal exchange rate between 2 currencies. Most things that cost $1 in the USA don’t cost ₹82 in India. The absolute prices (rent, electricity, clothes, food, groceries, labour, taxi, plumber, other services, etc.) are lower in India.
A person with a $100,000 (₹82 Lakhs) paycheque in India can buy a lot more goods and services than someone earning $100K in the USA. In layman’s terms, the value for money is more in India since everything is cheaper here. Once you divide the nominal exchange rate by the prices between two countries, you get the real exchange rate. PPP uses this concept of the real exchange rate.
The Economist used the example of a McDonald’s burger because all ingredients of a burger are produced within the country. A burger uses local labour, locally sourced grains and vegetables, rent, electricity, etc. Hence, a burger is a good proxy (indicator) for a basket of goods and services that we use to measure PPP.
As per the Big Mac Index, a Big Mac Burger costs ₹207 in India and $5.36 in the USA in January 2023. Thus, the implied or real exchange rate is 38.62 (207 / 5.36).
This is much lower than the nominal currency exchange rate of 82. So, we can say that the Indian rupee is 52% undervalued against the USD if we compare the prices.
Thus, what should be the price of a Starbucks Latte in India if it costs $3.26 in the USA?
The fair price of a Starbucks Latte in India should be ₹126 (3.26 x 38.62). How much does it cost in India?
A whopping ₹292 (2.5x more). A Starbucks Latte is more expensive in India than even in the USA. Strange, but true. Why?
Starbucks is an aspirational brand in India. I remember people queueing up in Bombay for hours to buy overpriced cappuccinos when Starbucks first came to this country. Indians are fine paying a big premium to drink a coffee that doesn’t taste great because it makes them look cool.
Starbucks is not just a coffee in India. It’s a status symbol for the masses who can’t afford a BMW car or Chanel bag. It makes us look cool :). And ₹292 is a small price to pay to look cool.
Power law says most of the output (result) in any field comes from a small number of inputs. It’s observed in most areas in life.
Take writing for example. If you write for 20 hours, you’ll maybe have top quality content for one hour. But you’ll have to write for 20 hours to get that one good essay.
Most of your results will still come from a small number of inputs. That’s power law. But you’ll have to spend a lot of time to get this small quantity of great input. If you want to write world class stuff, you can’t write 30 mins every day and expect to become the best. You need a much bigger volume of work. All successful authors know this. Hence, they write a lot. We all have it. It is very unique to all of us! There’s absolutely no way of getting rid of it.
It also needed because we’re always judging. If we don’t do that, we won’t be able to take any decisions. However, the key aspect of smart leadership is how you use your bias during decision making. If you factor them well, you take better calls. Your progress does not need to be visible to anyone but you. Keep taking small steps.