Starbucks Cuts Grocery Store Prices By 10 Percent, Competitors Should Worry

The coffee aisle in grocery stores just got a little more tense. Starbucks announced price reductions on its packaged Starbucks and Seattle's Best coffee brands following recent price cuts by competitors. 

From May 10, a 12 oz bag of Starbucks brand packaged coffee will be 10% cheaper at $8.99 from $9.99, and a 12 oz of Seattle's Best will be $6.99 from $7.99. Starbucks profit margin on packaged coffee is $2.55, so by removing $1 in their profit Starbucks would have to sell 65% more bags to even out. This is an important move by Starbucks as they continue to vie for the low-end of the socioeconomic demographic, competing aggressively with Folgers, Dunkin Donuts, Maxwell House and Yuban coffee brands.

Starbucks already has a strong grip on the high-end coffee market, especially with demand in China and India fueling sales, which is why they are not reducing prices in cafes after they price hikes in major markets earlier this year. Coffee prices across the board are at record lows, and even instant coffee makers that usually use the cheaper elements of the coffee bean are now using higher quality Arabica beans.

Starbucks' strength in supply-chain efficiency especially through hedging the costs of dairy, fuel, and coffee will allow it to handle the dip in revenue as it continues to expand its product offerings in convenience stores and warehouse clubs. Other companies would have a hard time executing a similar strategy but Starbucks' flexibility from other revenue streams and efficient economies of scale should start worrying its competitors. Starbucks could have used coupons or sales to compete with brands, but by establishing a lower price they are clearly establishing their mark.

Starbucks (SBUX) rose 0.9% to $59.09 at the close in New York. The shares have gained 10 percent this year, while the Standard & Poor’s 500 Index has climbed 11 percent.