A Gullible American

The Caffé Nero outlet in London I visited recently has different prices for take-out and in-store cups of coffee — £1.65 for take-out, £1.75 for in-store.

Given the costs of space for tables to sit at, and the need to own and wash cups and saucers, the price difference must be way too small to make this cost-based price discrimination. But it can’t be demand-based price discrimination either — I don’t see why the demand elasticity should be lower for in-store than for take-out. My guess is that it is cost-based in part, but that the difficulty in separating the two markets leads to the small price difference. The woman sitting at the next table is drinking coffee out of a take-away cup, having clearly paid the lower price, but enjoying the in-store ambience (and free Wifi). I think it just doesn’t pay for the baristas to police table usage, so that knowledgeable customers pay the lower price — whereas a gullible American like me pays the higher price!


Tim Robinson

A few places in the UK do this; Pret a Manger is the same.

My understanding is that they have to charge value-added tax when you eat in, but not if you take your coffee away. (I've never seen this enforced, though; nobody has told me to take my paper cup and leave.)

Des

There are complicated tax rules that may apply here, there may be VAT on the sit in coffee but not the take away.

Dave

Could it have something to do with tax-included pricing?

I know in my state that food "to go" is taxed differently than food for "dining in" (to go food is considered "pre-prepared" and is taxed higher).

Mike

You're gullible just going into Caffe Nero. to buy its scalding coffee substitute.

David Chowes, New York City

It's not that simple. One variable would be the demand for and the number of tables and internet availability.

The woman whp paid the "out" price and sat down -- well, she was cheating -- to be expected to some degree in any endeavor.

If coffee shop just opened. it would be to the advantage to create a "full" ambiance -- to attract more customers.

So, it depends... In some instances, it would be a rational strategy.

scott

"...so that knowledgeable customers pay the lower price..."

No, so that dishonest customers pay the lower price.

There seems to be a pervasive attitude throughout Freakonomics postings that if it is advantageous for me to do something, it is good to do.

Time and time again the assumption seems to be that "If you see an angle, you take it". Disheartening, to say the least.

Peter

The price difference is due to VAT. VAT is charged when you "eat in". It's not charged on take-aways.

liedra

You'll find it has to do with VAT, not cup cleaning. (why don't you do some research before you write these pieces?) Nothing to do with being gullible or American.

http://www.ukbusinessforums.co.uk/forums/showthread.php?t=82027

Matt

I was also under the impression this was to do with VAT rules.

C

Or maybe you'll just pay more for a real cup.

Also, the small differential may take into account the cost of paper cups and lids, which is why it's smaller than you seem to think it should be.

John

A girl where I work got taken to lunch at a nearby Pret a Manger. The counter staff twice asked her companion if they were going to eat in or take out. They paid the take out price but then sat down - at which point they were asked to leave. Talking about it back at work, the general consensus was that VAT is paid on food eaten in. Given the price differential, I don't this can be the case so I tried checking on the government website covering such regulations. I gave up as I don't have 2 hours to wade through the the various clauses. But I'll ask next time I'm in Pret and let you know.

Ian Kemmish

I'm impressed that there's an economics professor who remains unaware of the baroque details of VAT. Even an American one..... I should have thought it would be case study #1 in how not to design a tax.

Specifically the UK retains a derogation to charge 0% VAT on most foodstuffs (but not dining out, hence the prices in the photograph: dining out i s a luxury, but "staple" foodstuffs (defined by a legal list) aren't). That derogation does not apply in places like Germany, where you were recently. Charging 0% VAT is, of course, quite different from not charging VAT.

VAT is also the reason that the UK is the only country in the world where the difference between a chocolate covered cake (staple) and a chocolate covered biscuit (luxury) has legal and economic significance.

Chris

If the price without VAT were 1.65, any VAT charged thereon would be 0.33.
If the price inclusive of VAT were 1.75, the amount of VAT therein would be 0.29.
I am sure that H.M Revenue and Customs could be persuaded to support more test purchases, or perhaps even a raid. (Americans should note that firearms are not worn.)
Please note that the data are imprecise. The VAT rate increased to 20% on 4 January 2011.

Meagan

It's not necessarily true that the woman paid the "out" price because she had an out cup. In Ohio, we pay tax on eat-in but not eat-out, so when they ask me "for here or to go," I tell them, "here, but in a to-go cup please." I like having the lid!

Paul

It is the same here in the local coffee shop in San Francisco. If you have your coffee in a real cup in the store then you pay sales tax. If you have it to go (or even if you get it in a to-go cup and then sit down), no tax.

gerry

umm... am i the only one to notice that the price for a small takeout tea is the highest here and that the larger sizes for both takeout and dine-in are lower?

it looks like the pricing structure is flawed as a whole, not just item-by-item as hamermesh identified...

never attribute to malice what can be attributed to stupidity...

David Rovinsky

I don't think the value-added tax is the issue. The U.K. exempts (zero-rates, to be more accurate) basic groceries from VAT. However, all restaurant-supplied prepared food is VATable at 20%, and that applies equally to eat-in and "takeaway."

According to http://customs.hmrc.gov.uk:

"Hot take-away food and drink is always standard-rated (i.e. 20%). Cold take-away food and drink is zero-rated, provided it is not of a type that is always standard-rated (such as crisps, sweets, beverages and bottled water).

"Examples of standard-rated sales when sold hot are:
--cups of tea, coffee, chocolate and other hot drinks

Steve Prodan

I know they do this in California. At Golden Spoon in southern California if you get it to go, they charge you less than if you got it for there. My girlfriend and I just always ask for it to go and then eat there...they don't seem to mind.

pjt

Ian Kemmish:
>VAT is also the reason that the UK is the only country in the
>world where the difference between a chocolate covered cake
>(staple) and a chocolate covered biscuit (luxury) has legal and
>economic significance.

I don't think UK is the only country in this respect. At least in Finland the recently returned "sweets tax" is charged on biscuits but not on cakes.

What's even funnier is that even plain mineral water is charged with "sweets tax", which was introduced with the purpose of making unhealthy, sweetened luxury products more expensive...

Simon

I had assumed it was a VAT issue, but having followed up on David's link, it is not the case. Yet a vast number of people in the UK would assume that it was and I am sure that c 20 years ago it was.

I know the VAT rate is relevant on almost everything that Pret (or any other sandwich retailer) sells (as it's nearly all cold) so maybe to make things easier they have different prices for in/away on all products, not just those that require it, and Nero is forced to price match?