Starbucks Looks Prepared For Higher Coffee Prices

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Supply constraints and pressure from consumer activist groups could combine to send prices at Starbucks up further. The Wall Street Journal reported that arabica prices spiked upward because of concerns about dry weather. While the coffee shop has negotiated long-term supply contracts, an extended drought could still lead to higher supply costs. Meanwhile, organic milk advocates are pressuring the coffee chain to use organic milk in all of its milk beverages, according to an article at Marketwatch. Could this mean a more expensive latte in the morning?


If so, Starbucks might have to raise prices in a business environment that's been tough for quick-service restaurants. While business has been going well for the coffee chain, some of its peers haven't been as successful. A recent report from the NPD Group explains why. According to the market research firm, traffic for restaurants with an average ticket below $10 dropped at an annual rate of 1 percent over the past three years, while restaurants that charged more for their meals saw their sales rise. For restaurants in the $10-$20 range, sales climbed 5 percent over the period, and more expensive restaurants saw even stronger sales gains. So lower-income customers cut back their restaurant visits while wealthier customers spent more to eat out.


However, the weakness in quick-serve traffic doesn't seem like it's slowed down Starbucks. Comparable-store sales, a metric that strips out the revenue boost provided by opening new locations, climbed 7 percent in the United States and 6 percent for the company as a whole in its third quarter. The company also extended its growth streak on this metric to 18 quarters for its worldwide operation. So Starbucks already appears to be attracting a wealthier customer base that could handle additional price increases, and it looks like it is doing so around the world. The company's also made some moves recently that could help it keep attracting wealthier customers.


Two recent press releases from Starbucks show that the coffee shop chain is still going after the premium coffee market. In Canada, it is bringing Fairtrade coffee to universities and colleges. Like organic ingredients, Fairtrade coffee can allow a coffee shop to position its products as premium offerings. While this doesn't affect every Starbucks store in Canada, it does show that Starbucks can scale up a premium offering when demand is there. In its press release, the company said it tested out the Fairtrade coffee at a university in British Columbia before expanding the offering across Canada.Starbucks also created a Roastery and Tasting Room to show off its premium coffees and announced further expansion of its high-end Starbucks Reserve product line at select stores.


In combination with other moves such as adding alcoholic beverages at select locations and expanding its food assortment through La Boulange, the coffee shop chain looks prepared to make up for any possible losses in visits from low-income customers by expanding its premium offerings. In addition, the organic milk push could even become an opportunity for Starbucks since the company could get a premium for organic milk in select locations. In summary, Starbucks looks prepared for higher coffee prices.


* Photo by Starbucks

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Sources

Wall Street Journal http://online.wsj.com

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