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Was Starbucks’ price hike a good idea?

The company is risking more traffic challenges with steep price increases, says RB’s The Bottom Line.
Starbucks

Earlier this week, as my colleague Heather Lalley reported, Starbucks acknowledged it had raised the prices of its coffee by 10 to 20 cents.

That’s not a small increase, especially something many believed to be overpriced in the first place. It wasn’t that long ago, after all, that a $2 cup of coffee was considered shocking.

The increase apparently riled fans of the chain. Consumers just never like a price increase, especially one that’s about 10%.

It illustrates arguably the biggest balancing act in the restaurant industry: When should a chain choose pricing over traffic?

A few times in recent months, we’ve seen chains choose the former. Last year, for instance, Chipotle Mexican Grill opted to raise its prices 5%—despite the chain’s difficult recovery from a series of food safety incidents in 2015.

Earlier this year, meanwhile, McDonald’s acknowledged that its traffic declined in the first quarter despite a 2.9% same-store sales increase and the chain’s new $1 $2 $3 Dollar Menu, which was designed to boost traffic. Instead, it boosted sales.

I’ll admit, part of me can’t understand Starbucks’ decision to raise prices. The chain’s same-store sales grew 2% in the U.S. in the quarter ended April 1, while transaction count was flat and globally it declined by 1%.

The chain’s biggest problem, as executives have acknowledged, has been among afternoon customers. In other words, customers who are less loyal or habitual are less likely to go to Starbucks.

Raising prices when you have a problem with transaction growth among your less loyal consumers seems to be a bad idea, especially when you’re building new stores at a rapid clip, as Starbucks is.

But is it?

In recent years, we’ve seen restaurant chains make stupid decisions in the name of traffic, and at the expense of their unit economics, or at the expense of quality.

Chains have discounted products to generate traffic, training consumers to go only on a deal. Others have been so scared of raising prices that they instead cut quality. And that’s bad, too.

The simple fact is, prices increase. Restaurants have some cost challenges. There are food and paper costs, and then there are labor costs, in addition to things like rent.

As most people reading this know, labor costs are increasing. So are lease costs. Few people expect commodity costs to remain modest for long, too.

Companies have to pay for those increases to maintain profitability. While they can take lower profits, at some point they have to raise prices. It’s inevitable.

But restaurants do need to at least maintain traffic. That’s especially true at frequency-dependent concepts such as Starbucks.

Traffic is the base around which restaurants operate. If you’re attracting fewer customers, it means fewer people are willing to go into your locations.

Starbucks’ price increase on brewed coffee followed a similar large price increase a year ago. It’s hard not to look at those hikes and not wonder whether it’s keeping some of its less loyal customers from going in more frequently.

While Starbucks has to pay for its higher labor costs and its technology investments, the large price increases on a single, popular product for two straight years will only make those traffic challenges more acute.

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