Starbucks' Milk Move: Its About Cost Cutting, Not Customer Health

Early this month I posted about Starbucks (SBUX) and how milk costs were going to effect the bottom line.

Starbucks (SBUX) said Thursday it plans to switch its dairy standard to reduced fat, or 2%, milk from whole milk for all espresso-based drinks in its stores in the United States and Canada. The change will be complete by the end of 2007. The Seattle-based coffee chain also said it is assessing options for a conversion to a lower fat dairy standard in the 39 markets it operates in outside of North America.

Said Denny Post, senior vice president of global food and beverage in a statement, "The move to reduced fat milk as our core dairy offering comes directly from our customers' requests, and while they will still have the option to customize their drinks, our standard beverages will now come with fewer calories and less fat." Do not believe him. Why?

This is all about price and Starbucks doing anything it can to reduce rising costs in the face of stagnant store traffic. According the USDA, 2% milk averages 8 cents a gallon less than whole milk and when you buy almost 300 million gallons a year, 8 cents a gallon adds up real quick. Starbucks can try to gloss over this by saying they are "listening to our customers" but the cold hard reality is they have been making drinks this way for almost two decades now and no one has complained.

If they really were listening, they would have eliminated all milk with growth hormones from the stores, but that would be expensive and negatively effect profits. The tell tale sign here is that they are cutting costs, not raising prices like they have in the past. This is perhaps the most public recognition that even they feel they are at the top of the price range and going higher here will cause even more defections to McDonald's (MCD) than they have already suffered.

I am not against a company saving investors money, but let's not play games and call it what it is when you do it. Of course, for Starbucks to say that now, it would scare folks into thinking there was an earnings miss coming and with your stock at an almost 2 year low, that is the last thing they need.

Disclosure: Author has no position in SBUX

SBUX 2-yr chart:

Comments

[Jim Farrell]

Lower fat milk froths better than whole milk, which is something Starbucks has known for some time. (I learned this there in 1999). It is also less fattening. I'm surprised they didn't make the move earlier.