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 first-timer 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 norm, at all, among Starbucks customers. They seem to me to be the exception. I see 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 Mises.org 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.
{ 19 comments }
Well in a couple of months we shall see who knows the coffe business better. The management team at Starbucks or the writer of the article.
I do not like opinions of experts who do not have money invested in the business. And in this case the management of Starbucks definitely has money in the business.
So I bet that Starbucks does just fine despite the increases in prices.
“I see,…,who are likely in the $30-60K range.”
What do these people look like? as opposed to say, people who look like they make $80-100K?
Plus, the statistic refers to first time buyers rather than the ‘average’ Starbucks customer.
I roast my own beans at home, and have done quite a bit of research into starting various kinds of coffee companies. Also, I used to be with Morgan Stanley, and followed S’bucks for some clients.
They really are very good at what they do. I’ve always been most impressed with their ability to locate stores. I don’t follow them as I used to, but last I checked, they only had one store close on them in their history for lack of business. And that was when they were new, and just branching out into a few major cities.
A good indication of how they’re really doing might be to check into their current record of store closings.
I have noticed more stores in low-rent neighborhoods, and one in particular that is smack in the barrio, and pulls the barrio crowd. Avg salary of this crowd is no where near $80K, but here’s the kicker, they’re still doing a lot of business.
The upside to that is more business; the possible backfire is that it could degrade their perceived brand ID.
I did see on an employee bulletin board in one store a few months ago that S’bucks was no longer the leader in whole bean sales. Don’t know who the #1 is, but it wasn’t S’bucks.
One other thing, minorities tend to spend proportionately more on certain items that are perceived to be upscale or high-end. Designer clothes, etc. S’bucks just might prove to be the bling in inner-city beverages.
priscieve,
When you have money, it shows.
kevin b, I think it’s class that shows, not money. I have clients who dress like bums but could buy and sell everything within a 10 mile radius of my kid’s dance teacher, but when she walks (glides?) around in her lovely outfits or rolls down the tinted window in her upscale car, you’d think she has the dough.
A very long time ago, before my arrival on earth, class and income correlated well. Not any more.
The genuine millionaires that I know personally do not come across as wealthy, but they do carry themselves well, even in Wranglers, and western lacer boots.
Likewise, the typical 30-something guy with a home-cut fade, new clothes from the mall and late model Honda still carries himself like a $12 an hour peon.
But I still don’t believe the data that S’bucks had an avg first time customer salary of $80+K. . .
kevin, enlighten me. how should i tell the difference between a man who makes $50K and a man who makes $90K?
This might be interesting.
http://www.teaandcoffee.net/0607/special.htm
Industry rag, article is about S’bucks moving into small town America.
happylee,
Both show, and those super-rich bum-dressing clients are the exception, not the rule.
“When you have money, it shows” is a generality.
priscieve,
Start paying attention to others’ property. Look for signs of wealth. You’ll get the hang of it after a while.
Before I get any more arguments, I will note that it isn’t just about clothes.
It is difficult to hide wealth. Most don’t bother trying. Once you learn how to spot someone who is trying to look wealthier than they are, then it will be easy to spot someone who really has it.
Pedantic note: Tim Hortons, which makes the best coffee in the world, is spelled without an apostrophe.
Yeah, funny that a hockey player would know anything about coffee.
“Two minutes for brewing such a good cup.”
I enjoy Starbucks coffee as well, but try to avoid them for political reasons (which means I only go there once or twice a week).
btw, I live in Vancouver, which has almost as many Starbucks-per-capita as Seattle. I think Vancouver was their first major retail foray outside WA.
When you are faced with a potential outlay of $5 for a small luxury, you might not stop to compute the annual cost. If you have the scratch in your pocket and the craving for the coffee in your gut, the aromas snags you and you buy. The need is filled. The market speaks.
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