Starbucks (SBUX) Lowers Prices, Or At Least Some Of Them

Starbucks (SBUX) has come up with a plan to lower prices on many of its drinks and raise prices on others. The process is almost certainly not random, but the company’s thinking will  not be passed on to customers.

The cost of small coffees and lattes will drop as much as $.10 in many markets. Starbucks is probably admitting that the lower end of its customer base, people with the least money, are unwilling to part with more than a couple of dollars at a time. The pricing for drinks might be called recession specials.

Starbucks has almost certainly become more clever and methodical about what it charges consumers. The prices on the most expensive drinks that it sells will go up as much as $.25.  People who pay $3 or $4 for a beverage are probably less likely to be bothered by the increase. Starbucks’ most elaborate beverages, which contain a number of ingredients, are probably more expensive to make.

The extraordinary part of the news is not that a firm which sells premium products is testing the upper limits of price. Much more surprising is that Starbucks continues to make concessions because of the recession. It closed a number of stores. It laid off 12,000 people. It has renegotiated store leases. It has introduced its own version of instant coffee.

Starbucks’ earnings improved in the last quarter, but its same-store sales were still not healthy. Customers are not returning to its shops fast enough to move the firm back to a period of rapid sales. Consumers may have made a permanent decision that expensive drinks are a luxury. As the recovery takes place, that theory will be tested.

Starbucks is clearly not willing to gamble that spending on discretionary items like premium coffee will turn higher any time soon. If its lower prices don’t work, it may have to start a “cash for coffee” program that will allow people to bring in old grinds and get a new drink in return.

Douglas A. McIntyre