Your Complicated Coffee Orders Are Doing Big Business for Starbucks
The COVID-19 pandemic is far from over, but as businesses confront the reality ahead, pandemic fears have given way to an economic side-effect of COVID-19: inflation. But while increased prices at places like the grocery store have been a hot topic of conversation, Starbucks hopes some of the strategies they already have in place will help them weather the storm.
As has been the case with most companies recently, inflation was a hot topic during Starbucks earnings call last week — getting mentioned about 20 times. But outside of analysts or big-time investors, most people only care about one thing: Will I be paying more for my daily caffeinated drink?
Starbucks didn't explicitly say they were going to jack up the price of joe — instead taking a steady tone. "Our pricing strategy hasn't fundamentally changed," Rachel Ruggeri, Starbucks' chief financial officer, said on the call. "We've always been very thoughtful and measured in the pricing actions we take, so that we don't inhibit growth."
The brand also said they are continuing to focus more on a strategy they've used for some time: nudging people towards more profitable drinks — specifically cold and customized beverages. "The investments we have made over the past few years innovating and expanding our coffee-forward cold beverage platform continue to boost sales and draw new customers to Starbucks," CEO Kevin Johnson explained. "The cold category represented 74 percent of beverage sales [over the past quarter], growing 10 percentage points over the past two years."
And so though baristas may complain about some of the crazy customizations ordered online — like a Caramel Crunch Frappuccino with 13 modifications — those kinds of drinks are actually fueling Starbucks' bottom line. "We will continue to drive customization with our customers, continue to drive our customers to our cold beverage offerings where we have a more premium nature," Ruggeri added.
Plus, behind the scenes, Starbucks has another inflation-fighting trick up their sleeves. As one of the largest coffee brands in the world, Starbucks is locked in on their coffee bean costs for the next year and then some — a huge advantage, especially as worries over Brazil's coffee supply have driven up prices.
"Over the years, we've created a very thoughtful approach to how we source, warehouse and use hedging techniques to ensure we always have supply of premium Arabica green coffee at an attractive cost basis," Johnson stated. "In fact, we purchase green coffee 12 to 18 months in advance and we never stopped buying green coffee through the pandemic. So as a result, we currently have over 14 months of price forward coverage, which means we have price locked on our coverage for the next 14 months… And I think we may be the only large buyer of green coffee that uses this approach and that will serve us well, as it gives us a significant advantage relative to our competitors."
None of this means that Starbucks prices couldn't creep up. "We do have pricing power," Ruggeri emphasized. But overall, we probably won't see blanket increases across the board. "We're very surgical in nature."