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Anorak | The scandal of Motorway coffee costing more

The scandal of Motorway coffee costing more

by | 8th, May 2018

motorway service station coffee

 

The Daily Mail has noticed that a coffee at a motorway services station costs more from McDonalds, Costa or KFC than it does from the same outlets not at a motorway services station. The explanation for this is really very simple – rent – and it’s the one explanation that we’re not given. Which is a pity because it is a very simple explanation.

Breaking up your journey with a coffee stop at a motorway service station? You may find it breaks the bank too.

An investigation has found that roadside stores charge up to 28 per cent more for a medium latte – costing motorists an extra 74p compared with the high street.

How desperately awful, eh?

Breaking up your journey with a coffee stop at a motorway service station? You may find it breaks the bank too.

An investigation has found that roadside stores charge up to 28 per cent more for a medium latte – costing motorists an extra 74p compared with the high street.

We’re given varied reasons for this, including the station operators claiming that it’s more expensive to operate such stations than general run of the mill services so therefore prices are higher. But it’s why costs are higher than matters and that’s rent.

The basic underlying story here goes all the way back to the very dawn of economics when David Ricardo published his book on rent, in 1817. If you can produce more crop from a piece of land then the rent on it will be higher than land that produces less. We can say the same thing by insisting that the cost of the land will be higher where there’s more money to be made. A third way of saying just that same thing is that the landlord always gets a chunk of whatever can be produced from a piece of land.

This is actually why Starbucks was making no profit – thus paying no tax – a few years back. They had lots of leases on lots of buildings that would be good to sell coffee out of. Because the landlords get a piece of that action places good to sell coffee out of have higher rents. Starbucks wasn’t making a profit selling lots of coffee but the landlords were doing just fine.

But that’s where there are lots of shops around. Starbucks couldn’t raise the price of coffee in those expensive places because if they did then we’d go to the one around the corner. Where prices were lower because they were paying less rent. That landlord’s share was thus coming out of Starbucks profits, not ours, the customers.

Now replay the same game but where there isn’t another shop just around the corner. We all know that lots of money can be made running a services station. Once people have decided to go there they’re a rather captive market though. So rents are high. But instead of those high rents coming out of the profits of the operators, they come out of our pockets in the form of higher prices. Because once we’re there we cannot go to another coffee shop.

There is no solution to this either. Just because there are only so many service stations, and once we stop at one we’re going to be doing our buying there, there’s lots of money to be had from running a service station. That means high rents – and that will, because of the lack of competition, lead to higher prices.

It really is all there in Ricardo’s book from 1817. It’s about time everyone understood it too, isn’t it? Two centuries being long enough?

Image: The Drive of Our Lives – The Heyday of the Motorway Service Station

 



Posted: 8th, May 2018 | In: Key Posts, Money, News, The Consumer Comment | TrackBack | Permalink