The ubiquitous coffee shop you love to hate, Starbucks, recently raised their prices on certain coffee drinks in certain regional markets, citing rising costs in commodity and fuel prices as an explanation. The most notable price hike falls on the head of the “Tall”, or small, brewed coffee which will cost 10 cents more than it did before.
Starbucks’ explanation, that commodity prices forced their hand, seems a bit specious.
Slate’s economics writer, Matthew Yglesias, used the example of Starbucks’ price hike as a way of explaining why we need commodities speculators. Starbucks, he explains, thought that coffee prices were going to continue to rise this year, so in October of 2011 they locked in a contract to buy coffee from their suppliers at October 2011’s spot price. What they didn’t anticipate, Yglesias points out, is that commodity prices would actually fall from there, leaving Starbucks paying a premium on coffee due to their agreement. Had they not locked in the October 2011 price, they would be able to buy coffee for a cheaper per pound price. This is why they’re raising their prices.
This raises the question, of course, why did Starbucks not raise their prices this significantly when the cost of coffee nearly doubled between March 2010 and March 2011? The coffee house chain instead only raised prices slightly on labor-intensive drinks. They didn’t touch the small brewed coffee or any of the brewed coffee drinks for that matter.
And getting back to Yglesias’ argument, it would be a foregone conclusion that Starbucks would have to raise their prices by virtue of the agreement they made in October of last year; just because the cash price of coffee went down, it doesn’t mean the company needs to raise their prices because of that. Had coffee prices gone up instead of down, they would still need to raise prices because of their October agreement, if commodity prices are actually the cause.
The unforeseen effects of the Durbin amendment make a more likely culprit. By limiting debit swipe fees to 21 cents a transaction, the rule was supposed to pass savings on to consumers. But payments networks raised their fees on small ticket purchases — those under $10 — to the new maximum, thereby charging exorbitant fees by percentage on these items. Twenty-one cents is one-ninth of the cost of a $1.80 coffee, which is a hard hit for Starbucks to take on one of their more popular items, especially as Americans lean on their debit cards more and more for purchases. In recent years, debit cards surpassed credit cards in swipe volume, but not dollar volume; because people use credit cards to finance larger purchases, debit transactions skew smaller.
Exposed to a large percentage of their customers now unwittingly cutting into their profit margin, is it not likely that Starbucks decided to do something to staunch the bleeding? According to this Star Tribune story on the topic, it’s a bit of a problem, especially for quick service restaurants, which deal with a high volume of sub-$10 transactions and operate on small margins. Redbox, the DVD rental service, already raised their rental fees by exactly 20 cents due to the unintended effects of the Durbin amendment. Is it not somewhat likely that Starbucks is responding to this very same pressure?