Here's the Reason Starbucks Is Raising Prices (and Why It's the Right Move)

Starbucks is increasing prices simply because it can. Customers know Starbucks is high-priced, which is how it's successfully passed on price increases before.

Jun 24, 2014 at 9:00AM

Specialty coffee retailer Starbucks (NASDAQ:SBUX) is about to raise prices in response to soaring agricultural commodity prices over the past several months. In fact, the price of arabica beans is up more than 50% year to date. Because of this, Starbucks made the decision to pass on the rising input costs to its customers. While management may have had some reservation in doing so, it's the right move.

Starbucks is a premium brand that has always been known for its above-average prices. And it raised prices just a year ago, so another modest increase shouldn't really be a surprise to anyone. Plus, Starbucks will be able to protect its high margins. It's not the only one reacting to high commodity prices. Lower-end coffee retailers, such as Dunkin' Brands (NASDAQ:DNKN), are following suit.

Starbucks is still registering impressive growth, even after raising prices last year. And rather than erode margins and compress profitability by absorbing increasing costs, it's making the right decision by passing on price increases to its customers.

Why is Starbucks raising prices? Because it can
Starting Tuesday, June 24, Starbucks plans to raise prices on some of its in-store beverages by $0.05-$0.20, according to The Wall Street Journal. The retail price of packaged Starbucks coffee bags sold in grocery stores will go up by about $1. The increase won't affect K-Cup single-serve packs, Seattle's Best coffee, or packaged coffee sold in Starbucks stores.

This move shouldn't result in sticker-shock. Starbucks is universally known as a premium brand. High prices have never dissuaded customers before. In fact, establishing itself as a high-end name allows Starbucks to maintain high prices and fat margins.

You may recall that Starbucks last summer raised prices in its cafes by a similar percentage. Starbucks upped its prices by about 1% last June, and that certainly didn't have a negative effect on the company's financial performance. There's enough precedent for management to know that customers won't be too upset.

High prices didn't stop the company from racking up 12% sales growth last year. Comparable sales, which measure sales at locations open at least one year, rose 7%, thanks to a 5% increase in traffic.

This year, Starbucks is doing equally well. Global comparable sales grew 6% last quarter. Its operating margin expanded by 130 basis points and reached a company record.

The simple reason why Starbucks is ratcheting up its prices is because it knows it can. It's obviously confident enough that its customers will still flock to its stores. Starbucks enthusiasts can afford its already lofty prices, so it stands to reason they can afford to fork over a few more dimes per cup. To illustrate, Starbucks states its average ticket will rise by less than 1% as a result of the price increase.

In fact, it's the lower-end retailers that may have more trouble passing on price increases. This is why Dunkin' Brands would only go as far as to say it would "modestly" increase its prices in response to soaring commodity prices. One of the major reasons customers go to Dunkin' in the first place is its lower prices. Dunkin' runs a much higher risk of upsetting its customer base than Starbucks does its customers, who presumably don't pay too much attention to prices.

A few final Foolish thoughts
Starbucks is about to raise prices slightly on many of its packaged and in-store products. It shouldn't come as a surprise, though, given that there are many good reasons for this decision. It makes financial sense since agricultural prices have skyrocketed in just the past few months. This has significantly increased input costs, which Starbucks should pass on to customers to protect its margins.

From a strategic perspective, it's unlikely anyone will even notice the price bump. Starbucks has always been and will always be known as a premium retailer. Its customers are well-accustomed to paying above-average prices. Starbucks did the same thing a year ago, and it's still racking up impressive profit growth, thanks in large part to expanding margins. When you take it all into consideration, it's clear that Starbucks is making the right move by raising prices.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers