Coffee pricing at Chalukya

The pricing of coffee at the Samrat restaurant (part of Hotel Chalukya on Race Course Road) is interesting. This is a popular old restaurant, and being in an area full of government offices, is perennially crowded (despite its large size). It is a sit-down kind of restaurant, though you might have to share a table with strangers if you’ve gone in a group of less than four.

As I was thulping my poori and coffee there last Friday, I had a quick look at the prices on the menu card and quickly compared it to the Adigas restaurants that I frequent. For the uninitiated, the Adigas restaurants are fast food south indian restaurants. They follow a “self service” model and there is no seating space – though there are tables on which you can keep your plates while you eat. Food is generally good, and due to the frugal operations, extremely cheap.

Coming back, coffee at Chalukya is priced at a premium of almost 100% compared to that at the Adigas. The same is the case for tea. Going through the list of food stuffs, of course, the premium is much lower, of the order of say around 50%. Intrigued me for a while but I thought about two explanations for the same.

The simpler one is one of elasticity of demand. That the demand for coffee is more inelastic than that for food. You would want to have a quick coffee for which you won’t want to travel far, and hence the the people in offices close by are captive for Chalukya. Another thing is that it is customary to finish a meal or a round of snacks with coffee, and you wouldn’t go somewhere else for the coffee because the coffee here is priced too high. Thus, the restaurant can price its coffee at Rs. 11 a cup and get away with it.

The other funda is regarding efficient use of table time. Given its central location, and the general nature of the restaurant industry, my hunch is that the most valuable resource for the restaurant is table time. And in order to maximize profits they need to ensure that tables need to be used efficiently.

Now, the thing with coffee is that people tend to linger longer over it. And the restaurant needs to charge a premium high enough that it is not losing out by having its tables occupied by coffee-and-conversation. Putting it in another way, the “space premium” charged for each dish should be proportional to the average amount of time taken to consume it. And that people take longer over a cup of coffee as compared to other similarly-priced items, and hence one needs to charge a premium.

I thought of the second reason first – while I was sipping my coffee on Friday. Now I wonder if the first reason explains the thing better. Or actually you need a combination of both to explain the prices appropriately. That the first is the underlying concept and the second is the way it is implemented. Anyways let me know your views on this.

And by the way (preempting a comment), note that time of day variations in price aren’t possible due to logistic and reputation reasons, and anyways, if you take out a spike during lunch hours, demand is constant and high throughout the day.

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