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Starbucks cutting prices? Can they compete?

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Starbucks cutting prices? The world’s largest coffee shop operator, Starbucks has announced that it will lower its prices on the Starbucks and Seattle’s best brand packaged coffees by around 10 percent.

The price decrease will see the coffee dropping from $9.99 to $8.99 of a 12 ounce bag of Starbucks coffee. Jim Olson who is a spokesman for the Seattle based company, said in an interview that the Seattle’s best prices could drop by 13 percent to $6.99 from $7.99.

The price drop will actually enhance the value that they already provide to existing customers and at the same time hopefully increase the frequency at which the purchase the Starbucks packaged coffee. The drop should also entice a range of new customers to the chain which announced huge profits in the last quarter.

The price drop actually means that Starbucks will be required to sell up to 65 percent more of the 12 ounce bags of coffee in order to turn over the same amount of profit however the store has a strategy in place.

The store has expanded its current loyalty scheme to include purchases made in domestic grocery stores that support the brand. This means that the customer will be able to get loyalty points and discounts from not only the Starbucks cafes, but also from their local grocery store.

The chain, which also sells Tazo Tea and cold bottled drinks in supermarkets, is also expanding its current line of products that are sold at grocers and supermarkets in order to help boost sales. The chain announced that revenues from the so called channel development unit, which includes products that are sold through warehouse clubs and convenience stores, have soared by up to 50 percent to $1.29 billion in the year end report.

The Starbucks shares have also gained momentum and rose by 0.9 percent to $59.09 at the close of trade in New York. The shares have increased by over 10 percent already this year and the Standard and Poor’s 500 index has climbed by 11 percent.

So why are Starbucks cutting prices?

The recently announced discounts will enable the chain to fall in line with competitors such as the Dunkin Dounughts Company that have also announced recent price reductions. This is great news for the consumers but means that brands such as Starbucks really need to rethink their strategies and it appears that they have done just that.

Although the price reduction will be seen by the customer at the Starbucks cafes, this may not be the case for customers of a wholesaler. The price reduction will not necessarily be passed on to the consumer by the individual retailers. That decision lies solely with the retailer though it is believed that most will follow suit.

This is a brave move by Starbucks to drop the price of its mid end packaged coffee prices however it was required in order to stay competitive. The chain already has a good profit margin on its high end coffees, some of which sell for up to $6 per cup and is now attacking the mid range of the market.

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