Starbucks Gossip: Is another price increase in the works at Starbucks?
One of the random blogs in my blog reader is Starbucks Gossip. I'm a regular customer (grande drip, no room) and I like getting some insights into how the stores work (and what employees complain about). The post I've linked to has much hand wringing about a potential price increase and the discussion focused on “is that fair?” and “well, did our costs go up?”
From the cost side, someone posted this:
According to Starbucks standardized procedures, the total amount of labor required (including prep and COGS) for a Grande Syrup Coffee Frappuccino is 1.5 minutes labor and $0.41COGS. A minute and a half of labor. That's about $0.20. Plus COGS. Wow. A whopping 61 cents.
Venti Raspberry Mocha Frappuccino: $4.60
Actual Cost: $0.61Where's that other $3.99 going?
Somebody else came back with:
what about the labor of making said mixes, someone has to do that, then put said mix into the sure shot, label it, etc. Get your prices staright. [sic]
There are a lot of costs — materials (COGS), direct labor (to make the drink), indirect labor (prep, other work), store overhead, corporate overhead…. but is any of that relevant to the price they can charge? A lot of that $3.99 is probably going to pay for employee health care that Starbucks funds.
Starbucks pays more for health care than for raw materials, but that's a different topic for a Lean Healthcare post.
I posted:
Prices companies charge are basic economics — they charge what the market will bear. Why does Starbucks charge $4 for a venti drink? Because customers are paying it.
It has nothing to do with what your costs are. It has nothing to do with “what's fair.”
If prices are too high, customers will go away. That's how business works.
Whenever you ask, “why does company X charge $$ for product Y?”, the answer in your head should be “because they can.”
We should all be so fortunate as to choose a business with low materials costs, where the customer is willing to pay a price that gives us a good strong margin! This ties back to the Toyota equation, Profit = Price – Cost. Starbucks probably isn't taking their costs and adding on a profit margin (Price = Cost + Profit). That would be outdated thinking.
I'm sure Starbucks is generally charging what the market will bear. Starbucks prices seem pretty consistent nationwide (at actual Starbucks locations). I'm sure they could charge more in some cities, but probably want customers to know what the price will be regardless of where they are? Does Starbucks have a consistent pricing policy, I wonder?
Remember this WSJ article (and my blog post) from a few years back about Starbucks and their efficiency efforts?
What do you think? Please scroll down (or click) to post a comment. Or please share the post with your thoughts on LinkedIn – and follow me or connect with me there.
Did you like this post? Make sure you don't miss a post or podcast — Subscribe to get notified about posts via email daily or weekly.
Check out my latest book, The Mistakes That Make Us: Cultivating a Culture of Learning and Innovation:
SBUX is retail company and one driver of their stock price is comparable store sales year over year. How do you increase sales at an existing store? You introduce new products (breakfast foods…) and/or increase the price of the product. When 70 plus percent of your revenue is from existing stores, Wall Street values the company on this metric.
Yet another company that lost its soul due to Wall St and their demands for growth growth growth.
Not sure if they have sold their sole but part of their mission statement states –
“Recognize that profitability is essential to our future success.”
Also the stock is down over the past year (from $40 to about $28).
Hi Mark,
One of the many things I learned from reading Taiichi Ohno’s Workplace Management was that I was a bit mistaken on the whole “lean profit” formulas.
Ohno likens the formula most people associate with lean “Profit = Price – Cost” to a company that produces luxury goods since they cannot reduce costs. He says most people mix this formula up with the best formula (explained next).
He goes onto explain that the true Toyota formula is actually “Price – Cost = Profit.” He says that this formula is all about reducing costs.
Like many things in the book I struggled and grappled with this since I have been wrong and taught people wrong for many years. But I now understand what Ohno was teaching and have moved towards teaching the lean formula to actually be: Price – Cost = Profit.
Some may say this is all semantics (like I did initially). But the more I thought about it the more I saw Ohno’s point.
This is covered in great detail in chapter 6 of Workplace Management which all should read in my opinion.
Ron — first off, I agree Ohno’s book is great reading (and I appreciate Jon Miller getting it on the market, I need to write a full review soon).
I *do* think it is semantics honestly. I didn’t touch on it in the Starbucks example, but reducing costs to hit your profit margin is the key (or using Target Pricing to determine what your cost needs to be to hit a desired margin).
If Starbucks can both increase price (because the market will pay it) *and* reduce costs, then even better.
I don’t agree with the idea that luxury goods companies can’t reduce cost.
To me, it’s semantically the same to have profit on the left or right side of the equals sign. It’s how you explain it that’s key. The price is set by the market (even if you have some pricing power) and you can always have more control over reducing your costs).
Hi Mark,
I am curioous on your thoughts as to why Ohno specifically states the difference between the two formulas? Do you think he is wrong? Just curious.
Ohno was human and put his pants on like you and me so I am not saying that just because he said it we must believe it.
Personally I see validity in Ohno’s point… but that is just me.
Ron
Yeah, I guess I think he was being overly specific. The key insights are, I think, quoting from the book:
1) “The first formula [the one you and Ohno like, Ron, with profit to the right] says that the sales price is already set. So the producer must recuce cost, no matter what.”
2) “Costs do not exist to be calculated, costs exist to be reduced.”
I’ll give credit to Jamie Flinchbaugh for teaching me, in regards to point 1, that producers CAN influence price by adding more value into a product or service. Or, you might have pricing power (say when Intel had such a huge lock on the CPU market)
I think if you understand point #2 and that you can’t arbitrarily set price as cost + profit margin, then that’s the key. The side that “profit” is on… I don’t buy Ohno’s argument that there is a difference.
The reason Ohno didn’t like formula #2 (with profit on the left, Profit = Price – Cost) is that an economist would misinterpret it as “it is more profitable to sell a smaller number of a higher priced products rather than a large volume of lower priced products.”
That’s the part I don’t get, what that argument has to do with anything or why Profit should be on the right side of the equation.
Ohno also said “… you can use the same formula to come up with all kinds of ideas.” Apparently.
Hi,
as just coming back from a two week trip to Boston where I sat at Starbucks every other day I would like to comment on that posting as well:
Starbucks has no real competition.
Other than in European countries there are not as many and diverse cafés in American cities. This makes it easy for Starbucks to tighten the price srew;-(
This will work as long as there is nothing comparable on the market where the customer can feel at home or competitors (even small and cosy ones) will emerge.
That’s kind of System Dynamics, where the change in the price hight can result in totally unintended effects (some people would call that side-effects, but John Sterman, MIT Sloan Management School would say, “There are no side-effects, just effects!”.
One of these effects could be a sudden drop of customers due to a coffee price that just skipped the “tipping point”.
So long
Ralf
At the time when Ohno wrote the book, economists in Japan were saying that Toyota should build fewer cars, but build high-end cars for higher profit per car. Ohno likened this to putting gold lining on a product to increase sales price. Basically Toyota did this with the Lexus, a Toyota Crown “dipped in gold,” if you will.
Since Starbucks can get away with dipping their coffee in gold and selling it for a lot more than the competition, they should. However, having some familiarity with their processes (manufacturing as well as retail), there is evidence that this has resulted a lack of focus on cost, and therefore on waste reduction.
Ohno was saying “costs exist to be reduced” and not to be calculated or ignored just because you can profit by dipping everyday products and services in gold and selling them at a high price.
Today it was announced in the Seattle newspapers that the price is increasing.
Link
Yes, Starbucks did announce and every story or analysis talks about how costs are rising as a justification:
dairy
labor
leases
expansion costs
etc.
etc.
etc.
If Starbucks can raise prices, then they will. Otherwise, they’d better work on reducing costs to make up for the costs that are increasing.
And I’m not suggesting they take it out on their employees by cutting pay or benefits. Find efficiencies and true improvement, that’s my advice.
The news is asking “Will customers revolt?” It’s a 3% increase, for pete’s sake. If you can afford $4.00, you can afford $4.12 right? If not, it’s time to question shelling out big bucks for Starbucks anyway. It’s amazing how the news makes such a big deal of this… slow news day, I guess.