Why is Starbucks cutting coffee prices?

Sergio Hernandez
The Week
The new discount kicks in May 10.

Your barista-brewed beverage will still be pricey. But that package of Starbucks coffee at the grocery store is getting a big discount

The ubiquitous coffee chain is slashing prices on its packaged coffee by 10 percent — from $9.99 for 12 ounces to $8.99 a bag. 

Starbucks raked in $380 million from non-café sales last quarter — with a profit of about $2.55 per bag, says Kyle Stock at Bloomberg Businessweek. "Take away $1 per, and Starbucks would have to sell 65 percent more bags to book the same amount of profit."

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That doesn't sound easy. So what's behind the drastic price cut?

"The firm could be betting on widening income inequality," Stock said. "The theory is: major retail growth has been — and will continue to be — at the low and the high ends of the socioeconomic scale. Starbucks already has plenty of $6 barista-brewed drinks to capture the top of that market, but a bag of $10 coffee is very much in the middle."

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Plus, "Starbucks has been working hard to grab grocery store shoppers' dollars by expanding the array of products it has available in those stores," said Mary Beth Quirk at Consumerist. "Times must be relatively tough on the company, as it previously raised the price of its packaged coffees back in March 2011. Other companies like Dunkin' Donuts have been lowering their prices, so the pressure is on Starbucks to do the same."

Indeed, last month Starbucks announced it would expand its loyalty program to include grocery stores, allowing customers to rack up rewards points for buying Starbucks packaged coffee outside its own cafes.

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The discounts, which will kick in May 10, also cover the company's less expensive Seattle's Best brand. And remember: The list price is technically just a suggestion, so retailers are free to set their own prices, meaning some customers won't see a change at all.

A spokesman for Starbucks said the new prices "will allow us to both enhance the value that we're providing our existing packaged coffee customers, and hopefully increase the frequency which they purchase Starbucks and Seattle's Best coffee, as well as attract new customers."

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