Studies suggest that an average coffee drinkers consumption of coffee

Prompt:

Studies suggest that an average coffee drinker’s consumption of coffee increases with age, from age 10 through age 60. Even after age 60, coffee consumption remains high. The average cola drinker’s consumption of cola, however, declines with increasing age. Both of these trends have remained stable for the past 40 years. Given that the number of older adults will significantly increase as the population ages over the next 20 years, it follows that the demand for coffee will increase and the demand for cola will decrease during this period. We should, therefore, consider
transferring our investments from Cola Loca to Early Bird Coffee

Essay:

The argument states that as people get older they also drink larger amounts of coffee but drink less amount of Cola. Because the population is getting older the investors should consider switching their investments from Cola Loca to Early Bird Coffee. Unfortunately, this argument does not take into consideration three alternative viewpoints which could offer additional insight into the investment decision. The possibility that a large population of coffee drinkers may be entering the later stages life, the total market share of each company, and the overall profitability of each product, should be considered.

First, the argument does not take into consideration that the there may be more coffee drinkers today, but as the population shifts from one generation to another, the overall age of the country can decrease. Although morbid, the reality is that Baby boomers are starting to enter the age equal to America’s average life expectancy (assuming this is in America). Over the coming two decades there is a possibility that birth rates will increase, and in 10 years more children will be present than ever. Likewise there may be less adults aged 60 + then ever. If the decision to switch investments is being made now, it is likely the cola company is not doing terribly worse than the coffee company. The prospects of improved performance for the Cola company does remain high, if the average demographic starts getting younger.

Second, and the more important factor of the three, is the fact that the choice to switch investments from Cola loca to Early Bird Coffee may not depend of the demographic of drinkers, but rather the market competition, and product margin. While not defined in the argument, there may be 100s, or even 1000s of Coffee competitors all fighting for a small piece of the total market. On the other hand, Cola Loca is potentially one of only a few competitors sharing a large customer base. Even if the total market size is less for Cola, Cola Loca can still maintain a larger proportion of consumers.

In addition to the previous point, Cola Loca may be less expensive to produce than Early Bird Coffee. Cola is likely just water and sugar with some mix of artificial flavoring. As such, while less cola may be sold, higher profits can be obtained which makes the investment worthwhile. Potentially coffee beans are expensive and require significant processing (growing, picking, roasting, crushing, filtering, pouring, etc.). The result is that on a per customer basis, Early Bird Coffee makes significantly less than Cola Loca.

In conclusion, this argument, while strong and appropriate, does not fully take into account all factors which could influence the decisions to switch investments. If the population is shifting differently than the investors are expecting, the proportional marketshare of Cola Loca is larger, and if the profit margins are better for Cola Loca, then a good investment decision would be to keep Investments in Cola Loca.