Many have questioned Starbucks’ recent decision to raise its prices for most of its drinks (including its coveted Venti Lattes) because coffee futures have dropped and overall prices are down 42 percent from late last year.
Clearly motivated by its desire to increase revenue, this hike in prices, regardless of its motive, speaks volumes about the profound transformation the food industry is about to experience at its core.
From a marketing point of view, Starbucks is not risking anything significant in changing its pricing, because the corporation really doesn’t sell coffee; it sells an experience consumers are willing to pay a premium for. This is the beauty of price elasticity.
Most consumers barely notice the difference in pricing when paying for their favourite cup of java. This is why input costs – the cost of direct material, direct labor, and other overhead items – are largely irrelevant from a branding point of view. Commodity prices do affect the ability of company to manage costs, but the correlation between input costs and retail prices is not clear.
Recent pork pricing is a good example of this; hog futures are down, and retail prices are up. In food retailing, and hospitality in particular, price is a function of perceived value, and, sometimes, of relative value. Companies will charge based on an array of market-based variables, including brand equity and competition. Commodity prices are not the be all and end all, but they are a small piece of a much larger, complex puzzle.
Make no mistake, however: Starbuck’s price hike will raise revenues, but not necessarily profits. In fact, the increase is simply too little to help its bottom line, and shareholders know it. While Starbuck’s stock price has been on a tear of late, it barely shifted in either direction following the announcement. The financial viability of the sector, including Starbucks, may be severely compromised by social headwinds few saw coming even a few years ago.
Starbucks’s overhead costs jumped more than 10 percent in the past year alone due to higher overhead costs and, of course, labour. “McJobs” are no longer just for young students seeking extra cash. An increasing number of employees in this sector are well educated, some of them with PhD’s, or retired. This new wave of workers have come in with new and different expectations, and many have been successful at drawing attention to their concerns.
Rallies in the U.S. in support of raising the minimum wage to $15/hour are drawing a sympathetic audience. As an example, San Francisco recently increased its hourly minimum wage by almost 15 percent, and a few weeks ago in New York state a special panel recommended raising the sector’s minimum wage to $15/hour. In light of severe economic inequalities, and as CEOs continue to earn millions despite the economic downturn, more and more employees are calling for wage democracy.
In response, some governments are opting to raise wages themselves, instead of waiting for industry to make its move. These changes are starting to test the limits of the hospitality industry’s profit margin and, despite the brand loyalty of its consumers, even Starbucks is starting to feel the pressure.
The success of price hikes at Starbucks is supported by marketing research, and companies which are raising prices are simply shielding themselves from a social movement that is riding a tidal wave of support. Call it socio-economic hedging if you will, but it would not be surprising to see Starbucks – which appears to understand that raising prices too quickly may alienate its base and that taking an incremental approach ensures long term success – raise prices again in the near future.
Pressure is mounting on food chains to pay employees decent wages, as well as to give them proper training. While this is the right thing to do, we will all have to accept that wage democracy comes at a cost. Food prices will rise, and that includes, inevitably and lamentably, a scrumptious Grande mocha.
Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.