In the News: What’s Behind Starbucks’ Price Hike?

The Coffee Company Will Raise Drink Prices in October, Even as Other Chains Crowd the Market with Similar (and Cheaper) Products Starting on October 3, the prices on lattes, drip coffee, cappuccinos, and other drinks will go up 5 cents at company-operated stores in North America. Starbucks is also jacking up the price of its coffee beans with roughly 50 cents per pound, or an average of 3.9 percent. . The timing is certainly odd. For a while now, Starbucks has been struggling with labor disputes. Rivals McDonald’s, Dunkin’ Donuts, and Canadian restaurant chain Tim Horton’s are steaming into its turf. . . . A Confident Company If Starbucks were actually worried about any of these issues, the last thing its senior execs would consider is a price hike. In fact, Starbucks’ dominant market position gives it unique pricing flexibility. Every week, the company succeeds in persuading nearly 40 million people to buy pricey espresso drinks. “The company is selling a product that has become part of our daily lives, said Kristine Koerber, an analyst at JMP Securities. “Raising prices with a nickel is not going to meet any resistance.” Company officials say the higher prices are intended to offset higher labor and fuel costs. And while the price increases are small, they underscore just how confident Starbucks remains about its growth prospects and its ability to fend off new competitive threats. Koerber and many other analysts seem to support this optimism. “You’re not going to raise prices if you have the competitive or macroeconomic environment going against you,” she says.

a) By how much could unit sales of coffee beans at Starbucks decline after the 2006 price increase while keeping total revenue constant? Instructions: Enter your responses as a positive percent (do not include a negative (-) sign) rounded to two decimal places. %

b) If the price elasticity of demand for Starbucks is 0.4, by how much would coffee bean unit sales have fallen? %