Starbucks Seeks More Spare Change

Last year, Starbucks (Nasdaq: SBUX  ) extracted an extra nickel per drink from consumers. Less than a year later, it's closer to a dime.

That's right, Starbucks is raising the prices on its drinks by nine cents, and it's wasting no time -- the price hike goes into effect next week. Talk about nickel and diming us to death! Will Starbucks' fans care?

Starbucks' history of raising the prices on its drinks is an interesting one. In 2004, as I recall (and here's a Take from the time), Wall Street flipped when Starbucks raised its prices by $0.11. However, consumers weren't too concerned. Two years later, it seemed pretty certain that Starbucks customers would shrug off an additional nickel increase. However, it's hard to feel overly enamored with yet another price increase less than 12 months since the last time the coffee giant asked for more of our spare change.

It has been well known that Starbucks has been grappling with the high price of dairy -- although the company also pointed to high energy and fuel costs. Meanwhile, I wonder whether its decision earlier this year to phase out milk with artificial growth hormone might further increase its costs. I'd imagine Starbucks grappled with whether it would be smarter to pass the extra costs to consumers, or take the chance that it might push its customers over the edge by demanding an extra nickel and four pennies per drink -- strategically, it's worth losing at least a little sleep over, since nobody wants an angry customer. (I think nickels and pennies are the most annoying currency ever from a change-purse perspective, but that doesn't necessarily mean I'm overly appreciative of companies that volunteer to take extra ones off my hands.)

I recently covered a Wall Street conference that featured Starbucks, and CFO Michael Casey admitted that it wouldn't be easy to make the high end of this year's guidance, given rising dairy prices and soft transaction growth here in the U.S. And of course, this has been a year when Starbucks' stock price has been on a rest from its historically torrid growth -- I'd say some investors lost confidence in it here lately.

And if they're nervous, no wonder. There's always Howard Schultz's warning about Starbucks' endangered soul hanging over things, and in another brief piece of news this week, Starbucks is postponing its entry into India, one of its largest potential markets.

Some of us are likely to look at the glass as half-full -- Starbucks still has its long-term growth plans intact. Isn't this a great time to snap up a stock that has usually commanded a premium price? (As long as it can still provide investors the returns they expect, of course!) After all, its price-to-earnings ratio may sound high at 35 times trailing earnings, but if you ponder history, it's generally been much higher -- right now it's at its five-year low P/E. Its five-year high P/E was a whopping 71.

I don't think Starbucks is going to find its loyal customers charging to McDonald's (NYSE: MCD  ) , Caribou Coffee (Nasdaq: CBOU  ) , or Dunkin' Donuts to get their daily caffeine fix because of an extra $0.09. But I'd like to hope Starbucks is going to be prudent with how frequently it chooses to jack up its beverage prices -- to many of us, less than a year feels like just yesterday, after all. At some point, that really could irritate even the most loyal customers.

Starbucks is a Motley Fool Stock Advisor recommendation. To find out what stocks David and Tom Gardner have recommended to subscribers since April 2002, click here for a 30-day free trial.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


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Related Tickers

11/26/2014 3:59 PM
SBUX $79.70 Down -0.51 -0.64%
Starbucks CAPS Rating: ****
CBOU.DL $0.00 Down +0.00 +0.00%
Caribou Coffee Com… CAPS Rating: ***
MCD $96.22 Up +0.07 +0.07%
McDonald's CAPS Rating: ***

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