In pricing, Starbucks sets its own course

Co raises retail prices just when coffee prices have collapsed

In pricing, Starbucks sets its own course

Starbucks isn’t the place to go for cheap coffee. It is selling an experience, not a commodity.

That approach has been immensely successful, drawing in millions of customers and propelling Starbucks stock to stellar returns. But the company’s strategy has created an odd situation this summer: It has raised retail prices for much of the coffee brewed in its stores just as coffee prices on world markets have fallen.

Consider that once, long ago, coffeehouses were the trading centres of world financial markets. If you wanted to know the price of any commodity, you could find it while sipping coffee in London. But this year, if your only information about commodity prices came from coffee sold at Starbucks stores, you might have to conclude that a bull market was underway. The opposite is true, however. Coffee has been caught in a commodities downdraft that intensified briefly last week as China, a big commodities consumer, devalued its currency. The currencies of commodity producers like Malaysia, Indonesia, Russia, Colombia and Brazil have fallen for months now, along with oil, iron and steel. Coffee has taken one of the deepest dives.

Yet on July 6, Starbucks said that its costs were rising and that it was raising the price of much of its brewed coffee by 5 to 20 cents a cup.

Price change brews

The price changes in the global coffee market have been breathtaking. The futures price for standard Arabica, the benchmark for premium coffee, peaked in October and fell 44 per cent in world markets by July 6, the day of the Starbucks announcement. Some companies responded by lowering prices. J M Smucker announced in late June that it was cutting supermarket prices of its Folgers and Dunkin’ Donuts brands by an average 6 per cent. Starbucks left its packaged coffee unchanged but decided to extract more revenue in its stores.

The company’s ability to raise prices has delighted the stock market. Starbucks shares have returned 5.4 per cent since July 6, compared with a 1.3 per cent return for the Standard & Poor’s 500-stock index.


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