Profits at Starbucks go Skinny Latte

12 11 2008

Starbucks Coffee House

Starbucks Coffee House

Starbucks Share PriceProfits for the coffee chain Starbucks fell by 97% in the fourth quarter to $5.4 million, as compared to $158.5 million this time last year. Although the sales revenue were up 3% to $2.52 billion, like for like sales actually decreased by 8%.

This shouldn’t really come as a surprise then since consumers are cutting back on what they deem “luxuries” and are more cautious about their spending and are literally watching their pennies. Starbucks is perhaps well known for its high prices as much as it is for its coffee. Its share price dropped by 3% after the news broke out and was trading at $9.91. Last year, it would have been worth around $20-$30.Starbucks said that it has seen a decrease in customer traffic, in other words the number of customers visiting its branches, and also, crucially, the value of each transaction per customer. So, it is likely that the increase in sales revenue is likely to be due to the increase in prices.

Although drinking coffee is one of life’s little pleasures, its prices in the cafés are anything but little. A cup of coffee for $4 or £2.50 may seem insignificant on its own, but multiply them up for every working day of the month and you are left with a sizeable figure. Starbucks could lower its prices, but it is seen as a premium brand and would as a result devalue its brand value. Think of Marks & Spencer’s food range competing on its prices with Tesco’s Value range or Sainsbury’s Basic range and you get the picture about devaluing the brand value.

It’s likely that other coffee chains like Café Nero and Costa Coffee would now be worried about their own situation while the likes of McDonald’s will be rubbing their hands with glee at the prospect of attracting coffee drinkers with their cheap prices. McCoffee anyone?



2 responses

12 11 2008

And people wonder why the public hates journalists when bloggers follow the same lazy habits. This is pretty poor rip-and-read journalism. You’ve basically swallowed Starbucks’ “it’s not us, it’s the economy” scapegoat hook, line, and sinker.

For example, you write:
“since consumers are cutting back on what they deem ‘luxuries'”

If you actually shook off a little laziness here, you would have asked why Starbucks’ says the sky is falling, and meanwhile competitors such as Peet’s Coffee & Tea — who originally taught Starbucks’ founders how to start their business — is posting quarter-over-quarter profit growth on the very same “luxuries”:

Starbucks wants us all to believe that their financial problems are entirely macroeconomic and external, when in fact the evidence shows that their troubles are primarily internal.

Dig a little. Just a little. There’s more there than the superficial story.

12 11 2008

Thanks for your comment. Your argument about the post lacking any research is absolutely valid, since I just wanted to write an “as is” article in this case about what I had read, plus some of my own views, and was not meant to include any analysis. Thanks for the link as well, it would make a very good read for other business studies students as well.

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