The Coffee Company Will Raise Drink Prices in October, Even as Other Chains Crow

Question

The Coffee Company Will Raise Drink Prices in October, Even as Other Chains Crowd the Market with Similar (and Cheaper) Products

Starting on October 3, the prices on lattes, cappuccinos, drip coffee, and other drinks will go up 5 cents at company-operated stores in North America. Starbucks is also jacking up the price of its coffee beans by roughly 50 cents per pound, or an average of 3.9 percent. . . .    

The timing is certainly odd. For a while now, Starbucks has been struggling with labor disputes. Rivals McDonalds, Dunkin Donuts, and Canadian restaurant chain Tim Hortons are steaming into its turf. . . .

A Confident Company  
If Starbucks were really worried about any of these issues, the last thing its senior execs would consider is a price hike. In fact, Starbucks dominant market position gives it unique pricing flexibility. Every week, the company succeeds in persuading nearly 40 million people to buy pricey espresso drinks.

The company is selling a product that has become part of our daily lives, said Kristine Koerber, an analyst at JMP Securities. Raising prices by a nickel is not going to meet any resistance.

Company officials say the higher prices are intended to offset higher labor and fuel costs. And while the price increases are small, they underscore just how confident Starbucks remains about its growth prospects and its ability to fend off new competitive threats. Koerber and many other analysts seem to support this optimism. Youre not going to raise prices if you have the competitive or macroeconomic environment going against you, she says.

(a) By how much could unit sales of coffee beans at Starbucks decline after the 2006 price increase while keeping total revenue constant?

(b) If the price elasticity of demand for Starbucks is 0.35, by how much would coffee bean unit sales have fallen?

Explanation / Answer

Starbucks Corporation

Starbucks Corporation, doing business as Starbucks Coffee, is an American global coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 23,187 stores in 64 countries, including 12,973 in the United States, 1,897 in China, 1,550 in Canada, 1,088 in Japan and 927 in the United Kingdom.

Starbucks locations serve hot and cold beverages, whole-bean coffee, microground instant coffee, full-leaf teas, pastries, and snacks. Most stores also sell pre-packaged food items, hot and cold sandwiches, and items such as mugs and tumblers. Starbucks Evenings locations also offer a variety of beers, wines, and appetizers after 4pm.Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores.

a) By how much could unit sales of coffee beans at Starbucks decline after the 2006 price increase while keeping total revenue constant?

Solution Starbucks' subsidiary Ritea only paid

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