April 24, 2015

The “Starbucks Effect”: Correlation vs. Causation

Headshot 3.13 cropcompressBy Karen Sternheimer

Earlier this year, several news organizations reported on a study that found that homes near a Starbucks increased in value at a rate higher than others during a fifteen year period. Did Starbucks cause this larger rise in home values?

The headlines seemed to suggest it had: “What Starbucks Has Done to American Home Values,” “Living Near a Starbucks Might Double Your Home’s Value” and “Starbucks Increases Neighborhood, Home Values”—all imply that the presence of Starbucks led to the increase in home value.

This story caught my eye for a number of reasons. While I’m not a coffee drinker, a new Starbucks just opened down the street (okay, about two miles down the street, so not that close) but if its presence further increased our home values that would be a plus. But more to the point, it drew my attention as a sociologist. The headlines seem to confuse causation with correlation, assuming that one variable had a direct impact on the other, rather than coinciding with a number of other factors that come along with the decision to open a new Starbucks.

So how do we determine if Starbucks is the main mechanism driving the greater increase in value, or if instead the added increase in value is part of a larger chain of events—some unrelated to coffee—that contribute to an increase in demand for housing?

To know for certain if Starbucks were the cause, we would have to conduct a randomized experiment: find communities where Starbucks would normally choose to place stores, and then randomly select which location gets a store, and which ones would not.

We would have to control for a host of other factors as well, including things that make a neighborhood more desirable such as the quality of local schools, proximity to other amenities like shops, parks, waterways, public transportation, and neighborhood safety.

We would then measure the value of the homes after the stores were placed in the randomly selected locations. But during its period of rapid expansion, Starbucks opened stores wherever they thought they would be most profitable, and would likely not withhold a new store for the purpose of research. After all, they are in business to make money, not to raise real estate values.

We would also have to consider historical shifts and cohort effects. The same time period measured in the housing study has been a time of growth for Starbucks, which grew from about 2,000 stores in 1998 to about 17,000 in 2011. As the company expanded, it sought to place new stores in areas where they would be most profitable. Apparently they did this rather well. According to a story in the business news site qz.com:

The Starbucks team explained that while they have 20 or so analytics experts around the world poring over maps and geographic information systems data—assessing factors like an area’s traffic patterns and businesses—the company also empowers dozens of regional teams to come to their own conclusions about location, store design, and a host of other issues.

Would the home value disparities continue once Starbucks was no longer as new?

As for cohort effect, since the so-called “millennial generation” has come of age in the past decade—and the time of Starbuck’s massive growth— they have gravitated towards housing in urban centers or walkable communities that are also places where Starbucks are likely to open stores. Starbucks stores also encourage and enable people to spend time just hanging out, either visiting or working, well beyond the time that it takes to consume a cup of coffee or a snack, which may appeal to people who have the leisure time to do these things. These spaces may appeal to younger affluent consumers who are part of the new tech economy and might be accustomed to working in non-traditional spaces. They may also be drawn to the store’s WiFi and comfortable seating.

The cohort effect might also explain some of the rise in housing prices as well. The increase in young adults means an increase in demand for housing. If you take a look at the population pyramid of the United States below, you can see that the bars for ages 20-34 are wider than those 35-49. What this means is that there are more young adults now than there were in the mid-1990s, when there was a smaller youth cohort—and when the study of housing and Starbucks began.

  United-states-population-pyramid-2014

Source: http://www.indexmundi.com/united_states/age_structure.html

It’s not that there isn’t a relationship between housing prices and Starbucks. But it’s too simple to suggest that a Starbucks alone has raised property rates; while its experts might do a terrific job finding places where their stores will thrive, and thriving neighborhoods often see a rise in property values, it is important to look at the broader neighborhood, historical, and demographic context to understand the so-called “Starbucks Effect.”

Comments

I just handed in an essay on this last week, referencing the QZ article, for an introduction to anthropology course! I explored the commodity chain. I started with how Starbucks' fair trade policy isn't really enough to give the Colombian coffee farmers a decent standard of living. In the end I finished with how while Starbucks promotes themselves as the "fair choice" they sell luxury goods and open up coffee shops in expensive areas -they've become trendy, and their brand is even a "status symbol" in some ways. Obviously their suppliers and customers are from very different social groups.

Thank you for pointing out what is happening and for your excellent analysis from the perspective of Correlation vs. Causation. However I would like to point out that by thinking only in terms of correlation and causation could be a cognitive trap, especially that we are so highly tuned for picking which is which as we are very aware that many people can make this kind of mistake.

I know it is easier for us to look at a phenomenon in terms of cause and effect, but I want to offer an alternative way of looking at what is happening which I would call “the Intertwining of Cause and Effect”, and I’ll do it by first narrating one of Mulla Nasrudin’s Sufi stories;

“What is fate?” Mulla Nasrudin was asked by a scholar. “An endless succession of intertwined events, each influencing the other.” Answered Nasrudin. "That is hardly a satisfactory answer. I believe in cause and effect." Said the scholar. "Very well," said the Mulla, "look at that." He pointed to a procession passing in the street. "That man is being taken to be hanged. Is that because someone gave him a silver piece and enabled him to buy the knife with which he committed the murder; or because somebody saw him do it; or because nobody stopped him?"

So can we remove the presence of Starbucks from the intertwined events that led to the increase in value of houses after Starbucks made its appearance in the neighbourhood?

The next thing is I want to consider the perennial problem of “who comes first the egg or the chicken?” This problem could only be solved by abandoning the linear chain of cause and effect and by looking at the egg and the chicken from the perspective of the larger intertwined universe of the evolution of species.

This brings us to who comes first, the teams of Starbucks experts who choose a location whose houses will grow in value anyway or the presence of Starbucks has led to younger and more relatively well-to-do to flow into the neighbourhood which raised the value of those houses? The two causes or effects can feed each other in a dynamic way, can’t they?

it’s too simple to suggest that a Starbucks alone has raised property rates - great suggestion. I remember reading through articles that you have mentioned in the beginning of the post and was going like - oh dear, are they serious? I think this was a brilliant marketing idea! This just adds weight to Starbucks really and not to property that is located close to it. I link your post to a blog here http://writersperhour.com if you don't mind!

It is a pleasure to read such interesting and useful articles.

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