Why Starbucks Corporation Raised Prices Again — The Motley Fool

Yesterday evening I walked to the local coffee shop (Temple) to find enlightenment. Well, okay, they have a drink called “enlightenment” which is green tea, steamed soy milk, and honey. The beverage cost $5.00, plus $0.75 for tip bringing the total to $5.75. There was only one visible employee at the time. I observed her make the drink, handle the cash register, and check tables outside.

Later that evening I had a conversation with a friend about Starbucks price increases. He mentioned that after raising prices three times he went out and bought his own coffee machine. I am not sure if he meant three times this year alone. At a minimum, Starbucks raises prices every year from what I gather from Google searches. On one hand I hear the argument that SBUX (and businesses in general) must raise prices to cover wage, rent, and other cost increases. On the other hand, wasn’t there more than one person working at Temple before?

The price of coffee is down nearly 50% over the past year. True, coffee is probably a small percentage of a vente caramel latte. Nevertheless, I encourage consumers to establish the right view of price increases. If you are told price increases are necessary to cover costs, feel free to ask which costs: labor preparing your product, executive bonuses, both, or neither? Didn’t the business sign a 5 or 10 year lease?

I haven’t even scratched the surface on executive compensation or the executive to laborer pay ratio over time. Everyone should have a pretty good sense that the ratio of executive pay to average worker has done nothing but increase the past several decades. Nevertheless, in line with my recommendation to “minimize high margin exposure” in my Cadence of Finance presentation, I am going on a stroll this morning. I’m going to stop by Temple, Peets, McDonald’s, and Insight[1] to see the price of a plain cup of coffee and a cappuccino. I’ll repeat periodically when I am bored and report back to you.

Meanwhile, I am drinking my own green tea (Gen Ma chai actually) at home now. It cost me $0.17 plus hot water and “labor.”

http://www.fool.com/investing/general/2015/07/20/why-starbucks-corporation-raised-prices-again.aspx

[1] Oddly enough, I can’t think of a Starbuck’s in my immediate walking area. This is surprising. Perhaps I just missed it due to ubiquity.

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3 thoughts on “Why Starbucks Corporation Raised Prices Again — The Motley Fool

  1. Here’s what I found from my morning tour:
    Average of cost for all available sizes for Plain / Cappuccino / Mocha

    Temple: 2.58, 3.48, [a]
    Peets: 2.23, 3.75, [a]
    McDonald’s: 1, n/a, 3.06
    Insight: 2.50, 3.50, 4.75

    [a] = forgot to check, n/a = not available.

    A note: Temple’s price list (menu) is well away from the register. Why don’t they have the prices front and center where you are buying the drink? Also, they had four employees this morning (around 8:30AM) as opposed to the one I saw last night (around 8:30PM). Peets and Insight had two employees.

    Rankings (lowest to highest price):
    Coffee: McDonald’s, Peets, Insight, Temple
    Cappuccino: Temple, Peets, Insight

    I’ll need to collect more data. Better yet, I’ll make it an assignment for class this semester! 🙂

    • I would add a behavioral analysis aspect to the ranking of coffee. I make coffee at home for $0.64 a cup. But honestly coffee at Chocolate Fish (my favorite coffee shop) is simply more enjoyable. Last week I bought 3 cups of coffee ($2.50 for a small) at Chocolate Fish. For that price I could have made about 12 cups at home. So, I would rank coffee by weight by adding some measure of psychological benefits as a factor as well as price and taste.
      However, this doesn’t address Starbucks raising prices. I think the article said it well, “fat margins”. I guess just buy some SBUX and enjoy the dividends. Hopefully, that’s where this extra money is going and not just to Howard Schultz’s bonus.

      • Thank you for the comment. You make an excellent point about what us academics call “utility.” We can’t measure how much one enjoys a cup of coffee (a direct measure of utility). What can be measured is how much one spends for a given cup of coffee (a measure of indirect utility).

        Even as a loaner by practice and heredity, I can appreciate some human interaction afforded by coffee shops. However, I derive utility out of my own french-press and stovetop espresso creations in the solitude of my patio also. Unfortunately, I broke my glass french press Friday. That’s okay, I ordered a solid stainless steel one from Amazon (arrives Monday) to fix the clumsiness problem.

        At any rate, there is a place for coffee shops as you suggest. At the same time money doesn’t grow on trees. May everyone find their “middle way” between home brew and coffee-shops!

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