Tags: Starbucks | Customers | Unlikely | Balk | Price | Hike

Starbucks Customers Unlikely to Balk at Price Hike

Friday, 22 September 2006 12:00 AM

LOS ANGELES -- U.S. consumers aren't going to balk at paying an extra nickel for their daily cup of Starbucks coffee despite high gas prices and other pressures on their wallets, analysts said Friday.

Starbucks' announcement on Thursday that it will raise prices on drinks such as lattes and brewed coffee by 5 cents a cup came as a pleasant surprise to many on Wall Street, who said the move is sure to boost sales and earnings but unlikely to spook customers who see a trip to the chain as an affordable luxury.

"The price increase will see little if any resistance by the consumer," said JMP Securities analyst Kristine Koerber, who said traffic at the chain held steady two years ago after a more dramatic price increase. "It's gotten to be part of our daily routine."

Koerber has a "market outperform" rating on Starbucks and owns no shares.

Some said the move, which Starbucks said was intended to offset higher costs of fuel and labor, could allay some investor fears that a recent slowdown in sales at stores open at least 13 months was driven by weak consumer confidence.

Starbucks in July posted its weakest monthly same-store sales increase since 2001, prompting fears that even the coffee shop chain's well-heeled consumers were starting to cut back amid higher gas prices.

The company, however, blamed the drop unexpectedly strong demand for Frappuccino blended drinks, which take time to make and created lines that customers were unwilling to wait in.

The company's management has also said that its stores are unlikely to be hard-hit in the event of an economic slowdown.

"I don't see anything that indicates in the near future that Starbucks is going to be susceptible to the economy," chairman Howard Schultz told Reuters on Monday.

For some, the price increase to some extent backs up that refrain from management.

"It may suggest that the depressed (same-store sales) may not have had as much to do with the economy," said McAdams Wright Ragen analyst Dan Geiman, who has a "buy" rating on Starbucks shares and owns none.

Analysts also said the price increase comes at a good time for the company because the average price of gasoline has declined 16 percent in the last month, according to motor club AAA, and is therefore not putting as much of a dent in consumers' discretionary income.

"They've been able to continue to grow sales in the face of what was rising gas prices and very weak consumer confidence," said Morningstar Inc. analyst John Owens. "They are now raising the price at a time when prices at the pump are dropping."

Experts said Starbucks' price hike is no different from moves other restaurant companies have made to preserve profit margins at a time of rising input costs. The difference, however, is that while sit-down chains like Applebee's and Darden Restaurants Inc. unit Red Lobster have seen customer traffic decline, Starbucks has not because a $2 cup of coffee has appeared more reasonable than a $20 dinner.

"It is a different type of company than other restaurant companies," said Don Gher, chief investment officer for Bellevue, Washington-based Coldstream Capital Management, which owns Starbucks shares. "It is its own unique animal."

Starbucks shares were down 22 cents, or 0.65 percent, at $33.79 in afternoon trade Friday on Nasdaq. The stock, which was flat for the year a month ago, has gained 10.5 percent in that time. The drop in gas prices has also lifted restaurant stocks overall, and the Dow Jones U.S. restaurants and bars index is up 7.7 percent in the last month.

(c) Reuters 2006. All rights reserved.

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LOS ANGELES -- U.S. consumers aren't going to balk at paying an extra nickel for their daily cup of Starbucks coffee despite high gas prices and other pressures on their wallets, analysts said Friday. Starbucks' announcement on Thursday that it will raise prices on...
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Friday, 22 September 2006 12:00 AM
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