Starbucks prices going up
Starting this past Tuesday, Starbucks has raised the prices of nearly one-third of its drinks by an average of one percent nationwide. The determination for which drinks received a price hike were based off of a variety of factors, including what the most popular drink choices were in particular regions.
Although the price of coffee beans is actually falling and consumers would think that would result in lower drink prices, Starbucks CEO Howard Schultz says Starbucks is in an early period of growth, and the rise in prices will help drive continue that positive trend.
So what does this increase really all shake out to?
In some cities, a tall coffee will increase by 10 cents, but the price of a large Frappuccino may stay the same. Conversely, in New York, lattes and Americanos will cost 10 cents more, but the price of a tall coffee may remain unchanged. The price increases to select items will essentially come down to the market you live in and what the Starbucks go-to drink of choice is for that region.
Mad Money television host Jim Cramer says Starbucks should be able to grow its shares “at a 20 percent annual clip over the next five years.” The company is also working to improve the efficiency of its stores, and will renovate 1,700 of its stores in order to increase customer foot traffic.
Therefore, even though coffee bean prices are on the decline, Starbucks has other facets of the business that it plans to invest in and can use those profits to fund growth initiatives, as well as healthcare costs for employees, labor and marketing.
Profit margins set to improve
Mark Kalinowski, an analyst at Janney Montgomery Scott, says that this year, Starbucks will spend approximately half of what it did on coffee in 2012, equaling out to approximately $1.4 billion spent in 2012, and an estimated $700 million in 2013. That means company profit margins could improve by more than $700 million this year, which will be attractive to investors.
Depending on how much of a Starbucks fan you are, you might balk at the price increase in comparison to falling coffee prices or you may think nothing of it – but Starbucks hopes that the profitability will, in part, improve the customer experience.