How Inflation Impacts Bubble Tea Shops

Inflation has been in the news recently and it creates a lot of uncertainty around running a business.  Originally the Federal Reserve Chairman, Jerome Powell said that this inflation was going to be transitory, meaning that it will be here for a couple of months and then go away.

Unfortunately, inflation looks like it is going to be around for a longer time than previously predicted.

But what does this inflation mean for your boba business?

First, what is Inflation?

Inflation generally just means that the prices of goods and services are increasing.  This makes it so that your money has less purchasing power, a dollar today will get you less than a dollar 10 years ago.

Is All Inflation Bad?

Believe it or not, inflation is generally thought of as a good thing.  The US has tried to achieve about a 2-3% inflation rate each year.  Most economists agree that a small amount of inflation is healthy.  This is because it creates business growth and encourages investments.

If there wasn’t any inflation many people would be tempted to just hold onto their cash because it isn’t losing any value.  This is the safest thing that people can do in a zero inflation or a deflationary environment.  But if your cash is losing 2-3% a year in purchasing power due to inflation, you will be more likely to invest that money or to start a business, like a bubble tea shop!

Whatever you are doing with your money, you want to make sure that you are at least outpacing inflation.

What is Causing Inflation?

The past two years have been the strangest in most of our lives.  We were first hit with a once-in-a-hundred-year pandemic which shut down all economic activity.  The stock market crashed and people were told to stay at home.  Most governments tried to support their citizens with cash payments, loans, and extended unemployment benefits.  This meant that a lot of people had extra cash to spend which increased the demand for all sorts of products.

Unfortunately, the supply wasn’t ready.  Covid caused lots of factories and ports to slow down so now there is increased demand and a decreased supply which is causing prices to go up.  Many people are also reluctant to go back to work due to safety concerns and increased unemployment benefits; this has caused worker shortages and worker wages to increase.

What Can Your Bubble Tea Shop Do About Inflation?

We are all facing the same challenges with inflation and its effects on industries.  You can expect your prices for your bubble tea supplies to go up, but so are everyone else’s.  Also, most workers’ wages have also gone up which means they will be more willing to accept increased prices.

Should you raise your bubble tea prices?

Most businesses are able to handle a temporary rise in the cost of goods for a few months or even a year.  But if the cost of goods continues to increase, then eventually bubble tea shop owners will need to raise their prices.

Luckily, if your cost of goods has increased by 5%, this does not mean that your profit will decrease by 5%

Let’s say that before your average cost of a cup of bubble tea was $0.75 and you sold it for $3.50 = $2.75 old profit

Now, let’s say the cost of the same cup of bubble tea increased 5%, from $0.75 x 5% = $0.79 (new cost per cup of bubble tea)

If you sell it for the same price then you will get $0.04 less profit, $3.50 – $0.79 = $2.71 new profit

This means that you only need to raise your prices by $.04 or 1.5% to equal a 5% increase in your cost of goods.

New Cost of Goods =  $0.79

Your Increased Price =  $3.55

$3.55-$0.79 = $2.76 Profit

The bottom line is that inflation affects almost every good and service out there, so you may need to raise your prices as a result. But a 5% rise in costs doesn’t mean you need to raise your prices by 5%, however, you want to make sure that you are remaining profitable and still deliver a great product and great customer service.