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Here is what's really behind Starbucks' price hike


It's a dark day for some coffee drinkers. Yes, today is the day the price hikes announced by Starbucks (SBUX) last week go into effect. Drink prices will rise by a nickel to 20 cents in stores on some drinks. Next month packaged coffee prices sold to grocery stores will rise by $1 to $9.99 per bag.

In the last month JM Smuckers (SJM) and Folgers have also raised coffee prices, in their cases citing rising commodity prices. The knee-jerk reaction is to point to these hikes as another sign of inflation. From there we could launch into an angry screed about the perils of low interest rates, the victimization of American consumers and are plunging quality of life. But let's dig a little deeper.

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While coffee prices in the commodities pits are up dramatically over the last year they're still down nearly 50% from where they stood in 2009. In fact, since April when it became apparent that a drought in South America wasn't hitting crops as hard as feared raw commodity coffee costs have actually dropped by 20%.

As a coffee drinker myself I feel the collective pain on this but it's important to understand there are two kinds of consumer inflation. The first is caused by producers being forced to raise prices in order to stay in business. That's baseline corporate subsistence inflation. The other kind of inflation is what happens when corporations sense they can increase margins by raising prices simply because their customers are willing to pay more. We can call that a collective prosperity tax. That's also called capitalism.

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Starbucks isn't raising prices because they have to. If that were the case the hikes would be coming across the board. Only about 10% of Starbucks operating costs come from coffee and the company mostly grows its own supply. Further, the hikes are specific to certain serving sizes will only impact about 1/5th of its customers. Starbucks isn't raising prices because it has to. It's raising prices because it can.

In highly competitive K-Cups and food, which Starbucks still can't figure out how to sell, the Seattle-based chain is leaving prices unchanged. For that matter the company is only raising prices to where they were in April of 2013.

Companies charge what the market will bear and Starbucks is betting its most loyal coffee junkies, specifically those ordering Venti-sized vats of liquid speed, are willing to pay more. It's not pleasant but it's the price of prosperity. When you can't find cheap coffee anywhere it'll be inflation. For now think of this as a luxury tax. Cheers!

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