Starbucks: Are Fu-Fu Prices too High?

Wednesday, August 1, 2007
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Starbucks just raised prices this past winter. And now again?

I have wondered if the new stores Starbucks has been opening will be overkill. This article confirms my suspicions somewhat. With everybody now making “specialized coffees,” Starbucks, it seems, will shrink instead of grow in the future. I can’t see these high prices being sustained. McDonald’s and Tim Horton’s and Dunkin’ Donuts – among others – are all competing with Starbucks and drawing away its customers. The $4 – 5 coffee, mostly sustained by whipping out the credit card, will wilt away as housing prices erode equity and as necessities start to bear inflationary prices. I love Starbucks (as well as similar, independent java shops), but I believe they are all growing at an unsustainable pace.

I also don’t believe this to be true:

Second, new Starbucks customers – who provide a significant amount of sales growth – are increasingly less affluent and less educated than its current customer base. That makes them more sensitive to price increases in the future. According to a Oct. 5, 2006, presentation to analysts, customers who shopped Starbucks for the first time in the last year had an average income of $80,000 a year, vs. the $92,000 a year average for those who first visited five years ago. Some 30% of the new customers had finished college, vs 45% in the past.

How can that be? How is it possible that the average Starbucks customer is in such a high income percentile? $92k (and even $80k) is in the top tier of income earners. I do not see these people as the “average” among Starbucks customers. They seem to me to be the exception. I see, on average, kids and seniors and house moms and working people who are likely in the $30k – 60k range. In fact, middle-income, blue-collar males are becoming a huge customer base.

As to the elasticity of fu-fu coffee prices, I find that I am very elastic to price changes. The alternative for me is that I bought a $400 Starbuck’s Barista coffeemaker on sale at half-price one Christmas, and I buy my own beans and grind them at home. On a workday, it takes me an extra five minutes to make a cup of coffee, throw it in my tumbler, and head out the door. My cost per cup? I estimate about 25 – 50 cents, and that’s with the best beans, whip cream, organic, fat-free milk, and possibly a shot of syrup. What a bargain. Today, I bought a 20 oz. cold latte, with an extra shot, at the independent shop in my downtown office building. The cost was $4.98. I won’t do that again anytime soon. Great coffee, but too high of a price.

Sure, Starbucks offers convenience away from home, quality and consistency, and a great atmosphere for hanging out with friends or a computer. That’s why I remain a customer, though less often as prices rise. I fear Starbuck’s business model may soon suffer along with the credit and inflation crunch. I marvel at a marketplace that has been able to bring formerly luxury items to the masses, however, fu-fu coffee is not exactly brought to the consumer at “Always Low Prices,” thus I am apprehensive about the enduring nature of this otherwise wonderful product.

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