July 8, 2015
Starbucks called out for ‘padding profits’
When people spend as much as they do to buy coffee at Starbucks, you wouldn’t think they would pay much attention when a cup goes up five to 20 cents. But more attention than usual is being paid to the most recent increase in prices at Starbucks because it’s:
a) The chain that has convinced many Americans to regularly spend once unthinkable sums of money to purchase coffee;
b) The company led by Howard Schultz, who some politically conservative people view as an adversary because he doesn’t share their views;
c) Raising prices even though J.M. Smucker just announced a price decrease on brands including Dunkin’ Donuts, Folgers and others because the cost of Arabica beans have fallen.
Starbucks, which is coming off a quarter when profits were up 18 percent, has been accused of padding its profits with the most recent increase in coffee prices.
Photo: Starbucks
Joe Kernen, co-host of Squawk Box on CNBC, according to a report on the conservative NewsBusters website, said on yesterday’s show that while he would "normally defend" a company’s decision to raise prices, he was taking issue with Starbucks doing so because of Mr. Schultz’s views on environmental issues and race relations. Mr. Kernen described the Starbucks CEO as "preachy and sanctimonious and self-righteous."
With the price increase, the cost of a venti (Starbucks for large) coffee in most locations around the U.S. is now $2.45 for a 20-ounce cup, according to Bloomberg. The chain is not raising prices on its popular Frappuccinos or food.
Starbucks spokesperson Lisa Passe said in a statement that the company evaluates pricing on an on-going basis "to balance the need to run our business profitably while continuing to provide value to our loyal customers and to attract new customers."
- Starbucks is hiking prices, again – CNN Money
- Starbucks Plans to Raise Drink Prices as Much as 20 Cents – Bloomberg
- How Starbucks Gets Away With Charging a Fortune For Cheap Beans – Bloomberg
- Starbucks gets price break as you pay up – USA Today
- CNBC Host: Liberal Starbucks CEO ‘Preachy and Sanctimonious and Self-Righteous’ – NewsBusters
Discussion Questions
Do you think Starbucks will suffer a customer backlash as a result of the latest price increase? Have the public stances taken by Starbucks on issues such as race and the environment made its business vulnerable to political attacks?
Poll
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Kevin Graff
President, Graff Retail
Ryan Mathews
Founder, CEO, Black Monk Consulting
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In a nutshell, no. Starbucks customers are paying for the experience, convenience and habit. An extra five to 20 cents won’t make a difference.
Minimal backlash, and Joe Kernen is full of it. Just because the company spouts a very liberal point of view, it doesn’t mean they shouldn’t be making money.
I don’t think it will hurt them one bit. Not everything is purely price sensitive, and they typically earn a premium based on a better experience and product.
Keep in mind most customers don’t read the financial statements of companies or listen to loud and brazen financial talk show hosts.
No. People that choose Starbucks for coffee are evaluating more than price. Starbucks has good products, and they are the master of the third place where customers enjoy hanging out.
Given a host of recent political events, public policy stances could have a long term impact. But at the end of the day, Starbucks has a voice and they will need to decide when to use it and how much it impacts their business.
The bottom line is for both price and politics, consumers hold the only vote that counts — on the bottom line. No matter the product or the politics, CFOs can quickly tell what matters with customers.
I’ve always thought of Starbucks as an “experience” as well — until lately. What “experience” is provided actually? Seems to me it’s mostly cheap office space where you buy a coffee and make it last for a couple of hours while you use their internet and get your work done before you have to leave for your appointment. I’m not sure there is an experience, not really. Marketing is great for creating such myths.
The thing is there is always a minute tipping point that changes things. A feather can change the balance of a scale. So in theory it could be five to 20 cents that changes attitudes about Starbucks. If this increase doesn’t quite do it, I guarantee another increase will be tried as well. The Russian roulette nature of this strategy means that no one is wise enough to know when to stop.
No, because its critics are not its customers and its customers are already comfortable paying too much for a cup of — let’s face it — average coffee. Sure Arabica bean prices have dropped 42 percent, but that isn’t the point.
Starbucks wisely accompanied the price hike announcement with a release discussing the need to pay associates a living wage and provide other benefits. So the company’s overhead costs are rising even if the price of coffee is falling.
And, how many loyal Starbuckistas would baulk at the idea of paying their local Frappuccino pusher more? Not too many.
As to the second question, the answer is a clear yes. But since Starbucks is in the business of selling experience and identity, with coffee as a transfer platform, being attacked by Fox and the great right wing conspiracy is probably good for business. After all, nothing unites a tribe better than being attacked by a common foe.
Starbucks’ political Achilles’ Heel isn’t on its right, it’s on the left. The simplistic, if sincere, failed race campaign is a great case in point. The sentiment may have warmed the hearts of the overly-lattèd Left, but the execution sent many liberals off howling in protest.
In coffee — as in politics — it’s all about playing to the base.
Approval of a company’s decision to raise or lower prices should not be based upon the company’s or its owners’ political views. Patronage of the company can certainly be withheld if one does not agree with the political views but those views have nothing to do with whether or not the company should make a higher profit.
If consumers are truly loyal to Starbucks the price increase will probably have no impact. If those loyal consumers are upset they will make their views known to Starbucks in person and/or through social media comments. People who have not been purchasing coffee from Starbucks will probably not start. Loyal consumers will probably continue to purchase from Starbucks.
Just like Whole Foods, Starbucks will see a customer backlash in the near future. The majority of their customers are not rich. For them a Starbucks coffee is a treat. They are not interested in race or any other issue, just a good cup of coffee. Any time a retailer thinks they are better than their dumb customers is when the house of cards falls.
Last October Starbucks said they would raise the pay of crew leaders and baristas by early 2015. These increases cost Starbucks money. They raised prices to offset the increases. Pretty basic business here. It will be interesting to see the reaction to higher prices in exchange for higher wages by the consumer.
Starbucks doesn’t sell coffee. If it did its sizes would be small, medium and large. It sells a halo image, aura, brand appeal, etc. Raising its prices will have no effect on customer traffic.
Tempest in a coffee urn. Starbucks users are loyal to the brand and the experience. Happily, I don’t like Starbucks coffee, so I save a bit of money that way. But I make it up for by liking Glenfiddich 12.
I may not be the typical Starbucks customer, but I think the biggest loser here is their baristas.
Why? For buyers like me that purchases a ‘Large’ (a.k.a. Venti) daily, the coins received in change go into the barista’s cup. The cup went from $2.49 to $2.60 so, that amount just got reduced by 11 cents in my case. At the pace I purchase, my favorite baristas lose $77 dollars annually. I’m just one customer!
Unintended consequence? Some may laugh at this small equation, but I think it’s more significant than thought of and its impact won’t show up for a while.
At some point, no matter how strong your brand, the price/value relationship reaches a tipping point. (No pun intended.) I don’t think they are there yet, but it’s not impossible even for Starbucks.
This reminds me of the timeworn statement: price is only an issue in the absence of value. If Starbucks’ customers perceive value, then a 5 to 20 cent increase in price will not materially change their habits. It appears that Starbucks has attempted to tell a story that justifies the price increase, which customers may choose to factor in to their decision-making.
As with most price changes there will likely be some customers who decide that the new price point is too much for them but there are a lot of Starbucks customers who are not very price sensitive so the increase will likely have a small impact. I would hope that Starbucks has analyzed their past sales data to determine the price sensitivity of their products before making such a decision but, even if they haven’t, they already know that price is not the main purchase decision criteria for customers of Starbucks.
I don’t even think the Starbucks customers will realize they got a price increase. I didn’t. If I want to save money on coffee, I know where to go.
And, by the way, shouldn’t a company charge the most they can for their product? Pricing is never a function of absolute amount. It is a function of perceived value.
Starbucks has to cover the healthcare and wage increases that have already started to hit them. Of course, liberals will complain if something goes up, and they fail to realize the higher costs to do business will increase prices, which is simple math. I myself applaud Starbucks for doing what they need to do to move forward, but I can get a coffee anywhere, since I’m not one of their groupies.
Look, no one is dragging you there to buy coffee, and prices will continue to rise in many other food establishments. Nothing is free, as had been said here a million times before, and businesses need to turn a profit, plain and simple.
McDonald’s is still $1 at the drive thru, and would love to have your business.
Minor. People who stand in line at Starbucks are doing so for convenience, brand loyalty, flavor, caffeine addiction, etc. An extra 20 cents on the top end wouldn’t mean anything to that segment. Joe Kernen’s comment is out of line, from a financial point of view.
No backlash, because people are buying the perceived value not the paper cup. However if the price of coffee beans went down, I’d be irked that that price wasn’t reflected in my coffee. The CNBC commentator linking Starbucks’ stance on race and environment to business is specious—a bridge too far—more a knee-jerk reaction of the commentator’s feelings trying to tie it to an appropriate connection.
Starbucks’s customers have been paying too much since day one. Until now, the customers were convinced the quality and experience was one of life’s just rewards. I am sure there will be a justification the base will use to override the price gouge to pay for more profit with slower sales. Something like “one should expect to pay more for the best!” or maybe” it’s only a quarter or something!” The good news for the company that the designer coffee market is reclining. leaving little hope for a direct competitor to come in and sweep the customers off of their feet.
Prices of everything are going up. Mostly this is to pay increased wage expenses. Most people know this and don’t begrudge their barista, or anyone else serving them for it. I’ve been advising clients to prepare to be investing $2 per hour more over the next year for wages and wage benefits. This can come from increased prices or from savings in other areas, and it will come from both if there is any room. The only way to know is to go forward. The only way to go forward is to increase prices.
On the stance on social and political issues, we’ve already known this about Howard Schultz and we either decided long ago to accept his stance even if we disagree, or we penalized Starbucks. Same for Chick-fil-A.