'Price Increases' at Starbucks: What This Means

Both the New York Times and the Wall Street Journal noted on August 21 that Starbucks (SBUX) was raising some prices. The effect was up to $.25 on larger, more complex drinks, $.05 on frappuccinos, $.15 on mochas, lattes and shots, and $.25 on macchiatos. But lattes or cappuccinos were decreased $.10, as were tall brewed coffees $.05, in some markets.

This was as noted in SBUX's April 30, 2009 second quarter earnings call, where CFO Alstead described it as neither a price increase not a price decrease, and the result of consumer research.

It’s unknown yet whether SBUX will gain any average check or margin out of this, but likely not much. In most coffee shops the majority of the product mix is the regular, lower priced brewed coffee. SBUX is discounting more, via its reward card and regularly featured price point promotions, such as the recent $3.99 breakfast pairings and the $1.95 iced coffee.

SBUX was working with the following provided same store sales comparables components before the price change. One could argue the traffic trend was too weak for any perceived increases:

Component	Q3 2009	Q2 2009	Q1 2009
Same Store Sales	-5%	-8%	-9%
Customer Traffic	-4%	-5%	-5%
Average Check	-2%	-3%	-4%

It’s interesting to note that the SBUX “retail” hardlines and entertainment items were part of the reported average check above, and movement away from those items is a driving factor to the check decrease. But the profit impact is unknown (these items are thought to experience heavy markdowns).

Also, this reinforces the signal that dairy costs will move higher longer term.

Based on our research in 2007, the average gross profit on a brewed hot drink is approximately $1.52, $1.90 for a blended, espresso type drink, and $2.70 for premium drink and about $1.25 for a pastry item. Starbucks' food and pastry sales mix was 17% per their SEC documents. As beverage product mix varies from brewed to espresso to premium drinks, weighted gross profit per customer will rise.

Starbucks has centralized its marketing funds to be able to promote its value, loyalty and Starbucks values themes via several media channels. So while no incremental expense apparently is involved, it will be a classical “local vs. central” marketing execution story to watch.

When “restaurants” are “hot” and growing, they are proud that they neither do TV or discounting. Clearly, SBUX is beyond that point.

Disclosure: no stock positions.

Comments

[User 477050:]

This is not true. I have order a Venti green iced tea everyday for lunch for the past six years. I do not consider a plain, unsweetened iced tea a very complex drink. Nonetheless, Starbucks raised the price 15 cents on the "complex" iced tea.

I discovered that for $1.19 per bottle, no tax, I can purchase green iced tea at Trader Joes and fill my own cup, hence be more environmentally conscious. I am saving my 15 cents per day plus tax ($40/year) in the increase alone, helping the environment, and SBUX is now losing $559.00 from me, not including the extras like the pastry or the extra drink for friends. I guess it was worth it for them?

Aug 25 07:08 PM