Starbucks recently announced a revamped pricing structure. Prices for many of its popular (read: lower-end) products such as brewed coffees and lattes are headed downwards. A spokesperson claims that this is the first time in Starbucks’ history that prices have been reduced. According to an article written by Claire Cain Miller in the New York Times, the coffee purveyor is also redesigning its menu to feature lower priced brewed coffees, as well as offering promotions on iced drinks. This strategy makes sense: the struggling economy dictates discounts and McDonald’s brewed coffees and lattes are stealing price sensitive customers.
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Thus, for the most part, customers who continued to patronize Starbucks spent the same amount on each visit.
So why raise prices right now when demand is waning? Some speculate that Starbucks is trying to make the most profit from its devoted customers who are hooked on its products. In other words, its specialty drinks are in the cash cow phase of the Boston Consulting Group’s Growth Share Matrix. For products in this cash cow phase, the general recommendation is to reduce investments and simply harvest profits from current demand. All successful products have their heyday of strong growth and then eventually reach a point where demand remains constant or decreases. After all, remember when CB radios and radar detectors were the rage? When a product reaches the cash cow stage of its lifecycle, the general strategy is to take the money and run. What are the chances that macchiatos will experience a growth surge in the future?
With rivals (including McDonald’s and Dunkin Donuts) stealing share from Starbucks’ lower-end products and concerns about the growth of its highly differentiated premium coffee drinks, what’s the growth driver that justifies Starbucks’ current price to earnings ratio of 59? This high p/e ratio indicates that investors feel the company has higher potential growth opportunities than the average company (in contrast, GE’s p/e ratio is 10.5 and Wal-Mart’s is 15).