September 22, 2006

Starbucks: Is A Five Cent Increase Necessary?

Based on the reaction of the blogosphere (216 unique posts about Starbucks in the past twelve hours according to Google Blog Search), many folks find the decision to increase the price of drinks by five cents to be conversation-worthy.

Whether you think that price hikes are silly for a company that has already earned $705,000,000 pre-tax profit in the first thirty-nine weeks of the year, or you think that rising energy costs and employee benefits are the reason that this increase occurred, it is interesting to convert the price increase into something we can all relate to.

Based on nine months of results, it looks like Starbucks will sell about $6,500,000,000 of coffee-related products that will have the five cent increase. Based on stats in their annual statement, the price change represents a 1.9% increase. On an annual basis, this should drive $123,500,000 of additional revenue.

Approximately fifty-nine percent of sales are converted to gross margin, yielding $72,865,000 profit.

Starbucks has about 115,000 employees. If we assume this money is earmarked to offset rising energy expenses and employee benefits, then the average employee will benefit to the tune of $633.61 of pre-tax salary per year, or $1.74 per day.

As you make your pilgrimage to Starbucks on Monday morning, look the employee who serves your beverage in they eye, and decide for yourself if the price increase is worth $1.74 to the person you are receiving your beverage from??

1 comment:

  1. I know a lot has been written on this already... 5 cents doesn't seem like a lot per drink, but apparently it adds up. If your calcs are right, spreading that 5c across the volume of drinks they serve has a pretty big leverage effect. $633 extra per year for 115k emps is what they passing through to customers. In addition, I'd fully expect the company to be kicking in more above and beyond this for their raises.

    http://www.simplifythis.com

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