Claire's monologue

Starbucks raises prices again

By Melissa Allison

Seattle Times business reporter

Next week, caffeine addicts will pay an average 9 cents more for a cup of coffee at Starbucks, partly because of the rising price of the milk and whipped cream.

The increase was unexpected, given how infrequently the Seattle chain has raised prices. The last increase, which averaged a nickel, came less than 10 months ago.

Before that, Starbucks hadn't raised prices since an 11-cent increase in 2004.

The company cited rising prices "inside the supply chain," including higher dairy, fuel and energy expenses.

Dairy costs, in particular, have hurt several of the nation's largest food companies in recent months.

Starbucks said last month it would have trouble reaching the high end of an 87- to 89-cent-per share profit range for fiscal 2007, largely because of rising milk costs.

Chocolate giant Hershey and milk processor and distributor Dean Foods have lowered their earnings guidance because of rocketing milk prices.

Starbucks' price increase goes into effect next Tuesday. While some customers shrugged at it, others bristled.

"If they raise it, I'm not going to go there, even if it's only 9 cents," said Mindy Albert of Wallingford.

It's not the money so much as the idea of two price increases in a row, she said. With Starbucks' buying power, "you'd think they'd be able to keep costs down."

The price increases will vary by region and drink. They apply only to brewed coffee and other beverages that baristas make behind the counter, and not to drinks sold in bottles.

Starbucks coffee continues to be cheaper than that of many independent coffee chains. A 12-ounce latte at Seattle's Espresso Vivace costs $2.95, compared with $2.45 at a downtown Seattle Starbucks.

Vivace hasn't raised its latte prices in a couple years, said manager Brian Fairbrother.

But the dairy situation is serious, he said.

"We will be watching our numbers closely, because it is real, it is up and it's a big part of our expense."

Starbucks doesn't disclose how much milk it buys for the lattes, Frappuccinos and other milk-heavy drinks it serves.

Dairy farmers received a minimum of $1.79 a gallon for drinkable milk in July, up 68 percent from December based on minimum prices set by the U.S. Department of Agriculture.

Experts cite the higher price of feed and higher demand for milk.

Consumers have seen the impact at the grocery-store level. Whole milk cost about $3.80 a gallon in July, up 25 cents from June and 60 cents from December, according to a survey by an Agriculture Department agency.

Dairy farmers don't see most of the increase, said Amanda St. Pierre, a Vermont dairy farmer and member of Dairy Farmers Working Together, a nonprofit that wants dairy-price stability.

Eight years ago, dairy farmers received about 50 percent of the retail price of milk. Now they get less than 30 percent, St. Pierre said.

Retailers, including Starbucks, don't need to raise prices for short-term fluctuations in their dairy costs, she said. "When we get less for our milk, your prices don't go down," St. Pierre said.

This summer, Starbucks began switching the standard milk it uses in all its U.S. and Canadian stores from whole to reduced fat.

Because 2 percent milk costs less — about 10 cents a gallon less at retail — the switch could save Starbucks a lot of money. Officials will not say how much.

Starbucks shares rose 47 cents to $28.17 Monday. The price increase was announced after the stock market closed; shares fell a penny in after-hours trading.

Shares have traded between $25.22 and $40.01 over the past year. They are down 20 percent this year, clobbered partly by investors' worries about profit margins and Starbucks' warning that it might not reach the upper end of its annual profit target.

Nicole Miller Regan, an analyst at Piper Jaffray, which makes a market in Starbucks stock, called the price increase "a defensive measure."

"This is offsetting dairy, which is sky high."