November 7th, 2022

Elasticity Of Demand And Starbucks

I may I hope everyone had a great weekend and is ready for the trading week ahead.  Before we get into the reports you need to know about, let’s first look at a concept called, the elasticity of demand.  That refers to the degree to which demand responds to a change in an economic factor.  Price is the most common factor used.  However, income level and substitute availability are other factors you can use.

Elasticity measures how demand shifts when economic factors change.  For example, if the price of an Android phone increases by 10%, this could move the demand from Android to iPhones.  On the other hand, if the price increases and demand doesn’t go down, the total revenue increases.  Price inelasticity shows that customers are more tolerant of price changes.

Let’s look at Starbucks (SBUX) for example.  They sell coffee drinks and despite several other local substitutes for coffee drinks (Biggby Coffee, Dunkin’ Donuts, McDonald’s) and despite elevated pricing actions taken throughout the year by Starbucks (they raised prices), daily store traffic in the U.S. just reached approximately 95% of pre-pandemic levels! That shows just how strong the demand for the Starbucks brand can be.  

Think about that for a second.  

How many people do you know have returned to commuting to work every day?  Yet Starbucks’ daily store traffic has almost fully returned.  Global same-store sales increased by 7%!  That’s with China being under lockdown and presenting other hurdles that should eventually clear next year.

The U.S. saw same-store sales increase by 11%.  Yes, part of the increase in sales is coming from the increase in prices, but consumers have largely shrugged off the higher prices and continue to remain loyal to the brand.  

Starbucks is projecting additional revenue growth of 10-12% for 2023.

Let’s get into the trade idea and the news of the week.

Starbucks (SBUX) popped up after beating earnings and is trading around $91.86.  It’s sitting at resistance, but any continued move from here could send the stock to challenge the $100 level.

The 16 DEC 22 $90 long call is going for about $5.05 per contract.

Ok, now what stories are likely to impact the markets this week?

Tuesday – Election day in the U.S. – I expect choppy trading Monday and Tuesday and the potential for a big move on Wednesday once the results of the elections become clear. We could see rotational shifts in sectors depending on the results.

Wednesday – Petroleum Status – Crude inventories are expected to drop week-over-week, showing that demand isn’t fading away.

Thursday – CPI – Core prices have been elevated and have been on the rise over the last couple of months. It’s expected to increase month-over-month to 0.7%, but year-over-year is expected to decrease from 8.2% to 8.0%. The news doesn’t get much better even if you remove food and energy from the equation. Even after excluding those two areas, the CPI is expected to remain at 6.6%. The question is how the market will respond given we already know what the Fed said last week – more rate hikes are coming.

Thursday – Jobless Claims – The market is expecting to see an increase from 217k last week to 221k this week.

Friday – Consumer Sentiment – Ok, I don’t think this will have a huge impact on the markets after all of the other items on this list, but it should be interesting to see. Forecasts are showing a slight decline from last month, going from 59.9 to 59.6.

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Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing Lab