Starbucks: Fewer Stores and More Expensive Coffee

Last Updated Aug 20, 2007 5:18 PM EDT

Considering we're a country that runs on overpriced fuel, its not shocking to learn that Starbucks is making it even more costly to fill up on caffeine, raising prices again for the seventh time in the last decade. You may be surprised, however, to hear they're stalling new-store growth, counterintuitive to conventional retail wisdom that more stores means more business. For a chain whose locations almost outnumbers street signs, this is a dramatic change.

According to CFO Michael Casey, who predicted last month at a conference in Chicago that the company would come in on the low end of its previous earnings range ($.87-$.89 a share), the price raise can be attributed to increased dairy prices and "soft transaction costs."

The decision to open fewer stores signifies an attempt at reestablishing the company's brand, a necessity Chairman Robert Schultz highlighted in a leaked internal memo. Earlier this year, a Brand Keyes study found Dunkin Donuts customers more loyal than Starbucks. Keyes founder Robert Passikoff surmised Starbucks "took their eye off the brand to become more efficient, walking away from what gave them their differentiation."

Nearly all Starbucks' competitors offer lower prices, but they don't all offer plush armchairs, WiFi or as rich an "experience." The question remains how much are customers willing to spend for mood music and ambience, and how unique is it really if you can get it virtually anywhere?