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Coffee competition heats up
It's the kind of news that keeps people talking.
"Did you hear? Starbucks is going to raise prices." No matter where you went or whom you talked to, it probably came up in the conversation.
Sure, it's not much, but when a company like Starbucks (Nasdaq: SBUX) bumps up prices -- which they haven't done for more than two years -- it gets people's attention.
The coffee giant says it will increase the cost of its brewed beverages by 5 cents a cup starting Oct. 5.
And the price of coffee beans will be going up by 50 cents a pound.
"While the price increases will inevitably raise questions as to whether Starbucks is seeking to jumpstart sales growth given modest slowing in recent months, we note that costs for coffee, utilities, fuel surcharges and health care have all increased, thereby offering justification for the price action," said Glen Petraglia, an analyst with Smith Barney. He carries a Buy recommendation on shares of Starbucks.
It's hard to imagine a nickel keeping coffee drinkers away from Starbucks. The company continues to open new stores at a breakneck pace and the social popularity of coffee isn't showing any signs of cooling.
"Record third-quarter store openings help drive robust revenue growth and our strong year-to-date results position us well to achieve our fiscal 2006 goals," said CEO Jim Donald. The company recently reported record quarterly revenues of more than $2 billion.
Starbucks -- which is celebrating its 35-year anniversary -- now operates more than 12,000 shops globally. But that's just a start. Founder Howard Schultz recently said the plan is to increase that number to 30,000, with most of the expansion coming from international expansion.
But not everybody loves Starbucks. A visit to the Web site IhateStarbucks.com finds lots of disgruntled customers. One of them is Courtney.
"I live in San Diego and I love iced and blended coffee drinks. Where else can I go besides the 'bucks? I'd rather not support them, but so far I can't find a replacement. I tried Diedrich's in Hillcrest but it really didn't float my boat," wrote Courtney.
Ed was even more aggressive: "They represent all that is fake and bland. If you are bland as a person, and love burnt-tasting 'coffee,' then get in line, you mindless lemming."
More and more companies want to give Courtney, Ed and millions of other customers an option to Starbucks. The Specialty Coffee Association says that each and every day Americans drink more than 300 million cups of coffee.
While three-quarters of that is brewed at home, that still leaves a lot of opportunity for retail coffee businesses.
And those cups of coffee add up quickly. The association reports that total coffee sales in 2005 rose to $11.05 billion, up from $9.62 billion in 2004.
One option for coffee drinkers has been Diedrich Coffee. The Irvine-based company operates 47 shops including two in San Diego County. However, Diedrich has prided itself as a roaster and decided two weeks ago to get out of the retail business.
"The changes that we are announcing allow us to utilize our core strength as the primier roaster of specialty coffee and to fulfill our promise to sell great coffee to the widest possible market," said CEO Steve Coffey. Honest, that's really his last name.
However, the jolting part of the Diedrich announcement was not that it was selling its retail outlets, but who it was selling them to: Starbucks. The two companies say the deal provides employees with the smoothest possible transition.
Coffee is also becoming a menu staple at food companies like McDonald's (NYSE: MCD) and Dunkin Donuts, which actually claims the coffee title, serving more than 2.7 million cups of coffee a day. Einstein Brothers, better known for its bagels, is increasing its line of specialty coffees with the Global Village Blend, its first certified organic and Fair Trade Certified coffee.
"With this launch, Einstein Brothers shows it truly understands that it takes the entire 'global village' to empower coffee farmers and ensure quality supplies for years to come," said TransFair USA founder Paul Price.
Also joining into the socially responsible cause is Peet's Coffee and Tea (Nasdaq: PEET), which is celebrating its 40-year anniversary. The company -- with three outlets in San Diego County -- recently introduced Las Hermanas, a roasted blend of coffee grown and processed by women in Nicaragua.
Coffee drinkers are a growing segment of the population -- 60 percent of the U.S. adult population enjoys coffee daily or on a regular basis. The competition for the business isn't likely to stop anytime soon.
www.sddt.com
Starbucks to Raise Coffee Prices
Increase could be beneficial to convenience store owners.
It's been said that convenience store owners benefited from the higher coffee prices offered by Starbucks because they could raise their prices and still be considered a comparative bargain. If that's the case, Starbucks is doing the industry another favor when it raises its prices of lattes, cappuccinos, drip coffee and other drinks by 5 cents, or an average of 1.9%.
The increase, which goes into effect Oct. 3 at all company-operated stores in the U.S. and Canada, will mark the first time the company has boosted drink prices in two years.
Starbucks also is increasing the price of its coffee beans by about 50 cents per pound, or an average of 3.9%. That's the first price increase for whole beans in nine years, spokeswoman Valerie O'Neil told the Associated Press. But the coffee company will not raise prices on the prepared drinks it sells in refrigerated cases.
The company decided to charge more because costs, including fuel and energy, are going up. "It's not one specific thing. It's part of our ongoing evaluation of business costs," O'Neil said.
Starbucks' pricing varies based on the market, but the 5-cent price increase will be across the board, regardless of drink or part of the country. Currently, a tall, or 12-ounce, cup of Starbucks coffee costs between $1.40 and $1.65. Twelve-ounce lattes cost between $2.40 and $3.10, depending on the market, and a tall mocha costs between $2.70 and $3.40.
Seattle-based Starbucks operates approximately 8,700 stores in the U.S.
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