Starbucks needs to address pricing issue

Starbucks (SBUX) stock remained on the positive track till June 19, but everything changed when the coffee giant provided a weak sales outlook and made a step forward to close unprofitable stores by 2019. From June 19, the shares have dropped 12.7% on concerns about its growth outlook. Despite having too many stores, market analysts believe that the coffee giant is charging more and pricing remained the key issue that Starbucks needs to address.

Research firm Quo Vadis Capital believes that the coffee maker’s price hike of about 3.5% each year could be a troubling sign, according to a Reuters report. In comparison, for the last two years, McDonald’s (MCD) has kept prices of its drinks mostly flat and Dunkin’ Donuts (DNKN) has lifted prices by roughly 1% per year.

Related: Starbucks shares plunge on weak sales outlook and store closure

Bernstein stated that the company’s domestic misery was caused by surplus unit growth after Starbucks reaching a more mature growth stage. However, the real battle is happening between Starbucks and McDonald’s in the number of stores they have. As of December 2017, Starbucks had 14,163 stores while McDonald’s lags behind with 14,036 stores.

Apart from these other independent cafes, fast-food chains and convenience stores already have their presence in the coffee market as sellers of coffee beans, powder or drinks. Now, consumers have a large variety of options. This might pressure Starbucks and the company is trying to persuade more consumers to visit their store regularly.

The higher demand for coffee has led to a drop in the inventory levels of coffee beans. This happened to be the reason behind the jump in the prices of the commodity. But other sellers were able to manage their costs properly and thus the pricing remained flat.

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The margins of Starbucks could be negatively impacted by the rise in the coffee bean prices, coupled with a supply shortage. But the company had taken measures by passing on the increase to its customers. Starbucks believes that despite a rise in prices, it could retain customers due to the sticky nature of the demand for its products.

Meanwhile, market analysts remain bearish on the stock as the outlook doesn’t look bright. Investors are hoping for a miracle to happen when the company reports earnings later this month. And the earnings call could highlight more on the pricing of its products and stores expansion.