Can Starbucks Maintain Buzz While Raising Prices?
Seattle-based coffee chain Starbucks (SBUX) - Get Report surprised investors and analysts yesterday by announcing that it would be handing out wage hikes to its employees. The news sent the company's stock slipping by a paltry 0.3%.
However, today the company announced a development everyone has been expecting: Along with its employees, the company is giving its prices a raise as well. And instead of a negative effect, the announcement has given the stock a record boost.
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This marks the third July in a row that Starbucks has raised its prices. With what the company is calling a "small price adjustment" at its U.S. locations, select menu items (coffee, espresso, and tea lattes) will see a lift of 10 to 30 cents. Starbucks contends that the difference will be barely noticeable to consumers -- about 1% added to every sale -- and continues to emphasize the discounts consumers can receive with its newly revamped loyalty rewards program.
"Pricing is continually evaluated on a product-by-product and market-by-market basis in our stores in order to balance business needs while continuing to provide value to our loyal customers," the company said today.
With yesterday's price-hike announcement, Starbucks is following in the footsteps of Wal-Mart and McDonald's, two high-profile companies that have recently made similar decisions.
But that's not the main reason why Starbucks is lifting its beverage prices. Instead, coffee itself is getting more expensive. According to Bloomberg, Americans are expected to drink 1.5% more coffee in 2016. And the rising middle classes of China and India are also driving demand for more of the caffeinated drink. That means higher prices for the beans themselves. In fact, Arabica-coffee futures saw the biggest monthly gain in more than two years in June, with a rise of 20%. Good news for investors in the commodity, but tricky for the companies that need to purchase beans to keep up with demand.
Coffee-dependent companies such as Starbucks and rival Dunkin' Brands are going to have little choice but to continue to raise prices to cover their costs as the commodity becomes more desirable.
The price increase shouldn't have an effect on how well Starbucks performs going forward. The company's same-store sales have continued to rise despite previous price hikes. Around the world, people are hooked on their daily Starbucks fix, and that's not going to stop anytime soon.
Continue to hold Starbucks, and purchase the stock on any dips -- it should keep buzzing along.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.