Thursday, September 02, 2004

Starbucking the system

According to the Wall Street Journal, Starbucks Set To Raise Prices.

This is an interesting strategy. When the company last raised prices, there was a national outrage that the company had raised prices by a single-digit percentage across the board. While that was four years ago, it left an indelible impression on the consumer, and Starbucks is going to need to have a really in-depth crisis communications plan and customer relations outreach program in place when it rolls out the newest price increases, as well as an employee communications plan for managers at the store level, who need to be trained on how to deal with irate customers, and these managers need to train their customer facing staff on how to handle the fall-out (and, indubitably, the less tips).

Say you get an irate New Yorker who demands to know why the cost has gone up. If the "barista" cannot answer the question, and the manager on duty is somewhat inept, you have word-of-mouth brand bashing, where even though it is noble of Starbucks to provide benefits to all employees, the company has managed to piss off a ton of people who are going to say, "well that is none of my business if you can't control your costs."

According to the article:
The bigger price culprits are rising dairy and operating costs. Starbucks said that it has recently experienced double-digit costs increases in its health insurance plan, which offers all of its 80,000 full- and part-time employees world-wide. Costs for dairy and real estate also escalated, but the company declined to say by how much.
Let's be realistic - the average consumer does not care that milk prices have gone up, nor that Starbucks pays for all of its employees healthcare benefits. The average consumer just wants to stroll in to Starbucks and buy their "grande" cup of colored water, and be on their way. If they are feeling charitable, or the "barista" is especially nice / cute, they'll throw in a few coins into the tip jar.

Here are my thoughts on the issue. The customers come first, so how is Starbucks going to keep them happy? It seems somewhat short-sighted to raise prices - will Starbucks drop prices if the cost of milk goes down - instead of looking for other ways to cut costs. Starbucks is already expensive, the independent coffee shops are offering WiFi for free, so beyond the mystique, what's left?

First problem I see is Starbucks growth strategy. Who is managing their growth? Does any city need a Starbucks on every corner, and what is the dying need to have Starbucks locations literally across the street from each other? By shutting down some of the locations in areas that are over-saturated, Starbucks could save some money and pass the savings to its customers by not raising prices.

Second problem (well, not a problem, but something that needs to be brought up) is the benefits. Starbucks is a very generous company, and sees itself as a throw-back to the 60's by looking out for its employees. But, at the end of the day, it comes down to profits. Maybe the offering of health benefits to part-time employees is turning out to be a not that well thought out of a corporate strategy. Yes, it's an evil comment to cut out the benefits for the part-timers, but it's something that should be brought up and another way to cut costs.

Time will see, though, what the lash back will be against Starbucks.

Final thought: drink Peets. It's better coffee anyway.
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