Is Starbucks' recent price hike enough to lift its stock?

Posted Jul 30th 2007 11:51AM by Melly Alazraki
Filed under: Earnings Reports, Analyst Reports, Starbucks (SBUX)

Starbucks Corp. (NASDAQ: SBUX) announced last week it would increase the price on its coffees. The 9 cents per drink price hike is meant to offset the rising cost of dairy products, energy and fuel. Analysts were split on the effect this price hike would have and today, The Wall Street Journal John Christy and Lauren Silva weighed in on the price increase as well [subscription required].

Most of the analyst comments I've read addressed the question of losing customers due to the price hike. Some analysts see this move as balancing itself out and therefore nothing to get excited about, while others believe Starbucks customers are less concerned about prices than the population at large, a point I tend to agree with.

WSJ, however, is concerned about something else. While the move should raise profit margins, the writers say, investors should proceed with caution as Starbucks shares may need much more than this to recover. Indeed, Starbucks was faced with rising costs the past few years that needed to be addressed (as with a price hike), but this move is predicted to only add a penny to Starbucks's per-share earnings next year. With competitors vying for Starbucks's market share of the premium coffee business, the company's current growth rate doesn't justify the multiples the stock trades at, and this move may not be sufficient to lift the stock out of its recent slump. BloggingStocks Georges Yared disagrees, thinking SBUX is attractive at these levels.

It will be interesting to follow Wednesday's earnings report and see how the company is doing and what it plans going forward. No doubt more expansion overseas is in the pipeline. The recent management shuffle will also be scrutinized, but most of all the company's strategy to boost its growth rate. If it can deliver a convincing plan, the stock may recover, if not, watch out.

Tags: earnings, inthenews, sbux, starbucks

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Reader Comments (Page 1 of 1)

7-31-2007 @ 6:53PM

Sherri said...

Being a former Starbucks partner, I experienced the last price increase. Customers were not lost, they just laughed it off for the most part. Some showed their dissatisfaction with the extra dime or so, but they still visited religiously. As far as the effect on the stock, I honestly doubt it will change too much. It could possibly turn people off but, addiction is addiction. Compare it to the fluctuating prices of cigarettes...Anyway, I'm no professional but I don't forsee a drop in customer loyalty nor do I believe that sales will soar with the added cents. It'll probably just be the same ole overpriced coffee shop that teenagers save their lunch money for and addicts will find their "sanity."

7-30-2007 @ 4:05PM

bfranklin51 said...

I believe the K factor (percent of customer loss due to price increase) will be minimal or zero. Starbucks does not sell coffee; they sell an experience, which places it in a recreational pricing stucture. Fast food places sell food, which is falls under a utility pricing structure. People are always willing to pay more for a recreational experience and always look for the lowest price for a utility item - basic Pricing 101.

7-31-2007 @ 8:58PM

mikki karotkin said...

I agree the price hike is irrelevant. I believe we should be looking at Starbucks' new business ventures instead, i.e., Hear Music and the breakfast foods. It seems to me each time a business ventures into new territories, it goes into the red. It may take another year or so for the stock price to build up. I bought this stock when I heard about the music because I always wanted to own a bit of music but could never afford it. Also, Paul McCartney rarely loses money.

8-04-2007 @ 2:38PM

Mr. Gruen said...

Loosing clients to price and newer technology that is now available for the home.
I went to Starbucks just about everyday until the prices got so high that I ended up buying a Saeco fully automatic coffee system for about $600.00 that produces a perfect latte or cappuccino every time. A small home version of the machines they use at each store. The only thing I buy from SBUX today is a package of coffee which is ground then measures each shot to perfection packed (thumbing action) by the new automatic. The big surprises is how long a single bag lasts and how much SBUX gets out of a single pound of coffee versus the price asked for a single latte or cappuccino. The water is virtually free at home. What a racket! At the end of the day they priced themselves out and I enjoy the same SBUX coffee at home for a fraction of the price! Surely others are walking for the same reasons.