According to Reuters, Starbucks is raising its prices by about 1% in the Northeast and Sunbelt regions, which include major urban hubs such as Atlanta, Boston, Dallas, NYC, and Motiv’s home base of Wash., DC.
The past year has not been kind to the companies that have tried to raise consumer costs in attempts to improve corporate profit margins. Some well-documented examples from the past year include Netflix (which we blogged about), Bank of America, and Verizon. It’s simple: people don’t like paying more money to get the same thing.
The PR blunders caused by those companies’ decisions to raise prices led to powerful public outcry, and their market values dropped significantly. Unfortunately for these firms, they’ve continued to suffer from bad publicity despite retracting the unpopular fee increases. (My main question to these firms: why didn’t they learn from each others’ mistakes?)
But I think Starbucks is positioned such that it won’t incur the same public outrage, for 3 main reasons:
1. Whereas Bank of America and Verizon are both teetering on the brink of being number one in their respective industries, Starbucks is the undisputed market leader in upscale coffee and can command higher prices because of it. Starbucks’s coffee is widely perceived as a small luxury, and people understand that they are paying a premium for it.
2. To that end, Starbucks caters to a higher-income consumer population who is better situated to absorb the extra costs. Customers probably won’t even notice a $0.10 increase if they are paying $5 for a triple grande soy mocha cappuccino to begin with.
This is at odds with Netflix, which was initially attractive to customers because it provided a lower-cost alternative to the local video store. Raising its prices 60% and then halving the value of a Netflix registration (since the other half of the business split was to be Qwikster, essentially a separate company) stripped away Netflix’s main attraction to value-conscious customers. This drastic change to its business model confused and upset its core consumer base.
3. Starbucks is an experienced player. It has raised prices many times before, to relatively little pushback from its customers. The company isn’t suddenly adding a fee where there was none before, as did BoA and Verizon; it has gradually adjusted prices over time, allowing customers to get used to the changes and also explaining why in clear, readily graspable terms. People are better able to empathize with excuses that pertain to rising prices of coffee, dairy, and fuel than BoA CEO Brian Moynihan’s economically ill-timed remark, “[Customers] will understand what we’re doing—understand we have a right to make a profit.” BoA’s rapid stock decline is a classic example of what can happen when you don’t understand your customer base.
Despite its market competitiveness, Starbucks’s competitors are beginning to catch up, and its growth is slowing in comparison with other high-end coffee retailers. Starbucks should look to 2012 as a year to adopt some of Jeneanne’s innovation resolutions in order to continue and to ramp up its domination of the upscale coffee market.