President Obama is calling for a hike in minimum wage. What does that mean for Starbucks, a company with a CEO who has been calling for a higher minimum wage?
Starbucks coffee may be expensive now. But could it be more if the minimum wage is higher?
President Obama has decided to hike the minimum wage to $10.10/hour from $7.25 for federal employees by using an Executive Order. In his State of the Union message to congress Tuesday night, Obama repeated his support for legislation to raise the minimum wage nationwide to that level. Obama said:
"Today, the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here. Tom Harkin and George Miller have a bill to fix that by lifting the minimum wage to $10.10. This will help families. It will give businesses customers with more money to spend. It doesn't involve any new bureaucratic program. So join the rest of the country. Say yes. Give America a raise."
Less than 5% of American workers currently get paid minimum wage or less (such as with jobs that pay tips). In 2012, that was about 3.6 million workers.
Some private sector CEOs agree with the president, most notably Howard Schultz of Starbucks. In an interview with CNBC last year when Obama was backing a $9/hour minimum wage, Schultz said, "On balance, I am a supporter of the minimum wage going up."
However, in that same interview, Schultz also called the minimum wage issue "a double-edge sword", warning, "We've got to be very, very careful and be careful what we wish for because some employers — and there could be a lot of them — will be scared away from hiring new people or creating incremental hours for part-time people as a result of that wage going up."
Yet, Starbucks itself doesn't always pay its employees $10.10/hour. In fact, it sometimes even pays less than $9/hour. According to employment website Glassdoor.com, baristas can expect about $8/hour for their work, which translates to an annual salary of $16,000 per year assuming a 40-hour work week and 50 workweeks. However, unlike many other low-wage jobs, even part-time Starbucks employees receive health care benefits as well as equity in the company.
(Read: The myth of wage stagnation)
CNBC contributor Gina Sanchez, founder of Chantico Global, believes a higher minimum wage would eat away at the company's bottom line significantly.
"I think it would certainly challenge Starbucks," says Sanchez. "If you look at what it would take in terms of what it would take out of their profits, it's anywhere from $300 million to half a billion [dollars]."
Over the last four quarters, Starbucks earned roughly $1.8 billion (excluding the effects of a $2.2 billion payout to Kraft foods over a dispute.
"Starbucks have been benefiting from continued low costs and rising margins," says Sanchez. "So, I do think that a raise to a $10 minimum wage would certainly take a bite out of Starbucks."
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, disagrees that Starbucks would suffer with a higher minimum wage.
"Let's remember Starbucks [is] historically a very employee-friendly firm," says Ross. "That pro-employee stance is really the cornerstone of their success. So, I don't really think those higher wages will impact the stock."
Indeed, in the last five years, Starbucks stock is up 683%. However, since its all-time high in November 2013, the stock is down nearly 10%. According to Ross, the stock is hitting both a support level and its 200-day moving average, making it a buying opportunity.
"That potentially could be a springboard to higher prices," says Ross. "I like the stock here. I would be a buyer on the double-digit pullback to key support."
To see the rest of the discussion on what minimum wage means for Starbucks, watch the video above.
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