By raising prices on some of its most popular concoctions -- venti caramel macchiato with a shot, anyone? -- Starbucks Corp. is placing a big bet that consumers are willing to swallow higher costs even in a battered economy.
The Seattle company confirmed Thursday that it was immediately boosting prices of some beverages as much as 30 cents in some cities. On average, the increase will run between 10 and 15 cents on certain drinks that the Seattle company considers harder to make, Starbucks said. Prices also will be hiked for added flavors or extra shots of espresso.
Prices of other, simpler items -- brewed coffee, cappuccinos and lattes -- will be cut 5 cents to 15 cents, the company said. The reductions are the first in Starbucks' history.
The retailer's sales have 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.
Like many retailers, Starbucks has slashed expenses to cope with falling demand. But investors know that businesses can't cost-cut their way back to earnings growth. So what Wall Street most wants to see from companies in the second half of this year is higher revenue.
Raising prices is an old-fashioned way to boost revenue -- but it obviously is a gamble with so many consumers pinching their pennies.
Starbucks is "fine-tuning our pricing in select markets to better reflect geographic and cost considerations," spokeswoman Valerie O'Neil told Bloomberg News. O'Neil declined to say which cities Starbucks was targeting first and how much prices would vary from region to region, adding that the changes eventually would roll out to the chain's 11,800 stores nationwide.
Sharon Zackfia, who follows Starbucks for investment firm William Blair & Co. in Chicago, said the net effect of the price increases and reductions might 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 Thursday. The stock closed up 10 cents to $19.22. But the shares have recovered sharply from a low of $7.17 last Nov. 20.
A memo to Starbucks baristas, reviewed by the Wall Street Journal, told them to "expect customers to be sensitive to pricing changes in this economic climate." The Journal article said Thursday that the memo directed employees to tell customers the price hikes resulted from the higher cost of doing business and that lower prices on some drinks showed the firm was providing value.