Starbucks gambles that price hikes won’t leave customers cold


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Investors know that businesses can’t cost-cut their way back to prosperity and rising earnings. So what Wall Street most wants to see from companies in the second half of this year is revenue growth.

But the old-fashioned way of boosting revenue -- by raising prices -- seems out of the question in this economy.


Yet Starbucks Corp. now is taking that gamble: The coffee company confirmed today that it will be rolling out price increases on some drinks nationwide in the next few months -- along with some price cuts -- after testing the changes in select markets since spring.

From Bloomberg News:

Starbucks Corp., the world’s largest coffee-shop operator, said it will raise prices on some drinks, including frappuccinos and caramel macchiatos, by as much as 30 cents starting today. The increases average about 10 cents to 15 cents per beverage, and will also apply to extra shots of espresso or flavors, Valerie O’Neil, a spokeswoman for the Seattle-based company, said. Prices on lattes, cappuccinos and brewed coffee will decrease 5 cents to 15 cents, the first price cuts the company has made, she said. The company is ‘fine-tuning our pricing in select markets to better reflect geographic and cost considerations,’ O’Neil said.

Starbucks’ revenue has declined year-over-year for the last three quarters as many consumers have hacked spending in the recession. Sales were down 6.6% in the third quarter, to $2.4 billion.

Sharon Zackfia, who follows Starbucks for investment firm William Blair & Co. in Chicago, said the net effect of the price increases and reductions may be neutral for revenue in the near term. But she said the company’s strategy of pricing its drinks market-by-market -- to be more competitive with its main rivals -- could help the chain boost overall traffic.

Although Starbucks still has a high-end image, the company’s ‘price premium’ on most drinks now ‘is the lowest it has ever been,’ Zackfia said.


The company’s shares didn’t show much of a reaction to the pricing leak today. The stock closed up 10 cents to $19.22. But the shares have recovered sharply from their multi-year low of $7.17 reached Nov. 20., 2008.

From the Wall Street Journal:

Starbucks first disclosed in April that it would adjust its prices, but it didn’t give specifics. In recent days, memos went to baristas across the U.S. advising them to ‘expect customers to be sensitive to pricing changes in this economic climate,’ according to one memo reviewed by the Journal. The memo instructs baristas to tell customers that price increases reflect the increased cost of doing business and that price cuts are meant to show that the Seattle-based coffee giant is looking for ways to provide value.

-- Tom Petruno