Starbucks Raises Prices as Inflation Eats Into Profits

Visitors wait for their coffee at the Starbucks Reserve Roastery outlet in Shanghai, China, on Dec. 6, 2017. -/AFP via Getty Images

Starbucks said it will continue to raise menu prices because of inflationary pressures and persistent supply chain disruptions that have resulted in manufacturers across industries being unable to receive raw materials on time.

“[We have] already taken pricing actions this fiscal year, one in October 2021 and another in January 2022. And we have additional pricing actions planned through the balance of this year, which play an important role to mitigate cost pressures, including inflation, as we position our business for the future,” CEO Kevin Johnson said on a conference call with investors Tuesday.

“There are many factors that contribute to our thoughtful pricing strategy, including the increasing U.S. inflation rate currently running at 7 percent or perhaps greater, as well as wages, customer demand, and other costs.”

The United States faces a multi-decade-high rise in prices as inflation slashes the buying capacity of citizens while having an adverse impact on everyday products ranging from fuel to food. Combined with supply chain tensions, stores are finding it difficult to stock up on essentials and companies are scrambling to get their hands on much-needed materials to meet the increase in demand as economies bounce back to normalcy.

According to the Starbucks Q1 Fiscal 2022 report (pdf), released Feb. 1, the net revenues for the North American market grew 23 percent from last year to $5.7 billion in the first quarter of 2022. This was mainly due to an 18 percent growth in company-operated comparable stores along with a 12 percent increase in transactions and 6 percent rise in average ticket sales.

Starbucks’s operating income increased 37 percent from $803 million in 2021 to $1.1 billion in Q1 of fiscal year 2022, while operating margins grew by 18.9 percent. The company said that the growth was partially offset by supply chain costs, support services, partner training, and increases in retail store partner wages.

“Although demand was strong, this pandemic has not been linear, and the macro environment remains dynamic as we experienced higher-than-expected inflationary pressures, increased costs due to Omicron, and a tight labor market,” Johnson said in the report.

Starbucks missed quarterly profit estimates because of the restrictions brought about by the Omicron variant, which delayed office openings, and stringent COVID-19 regulations in the company’s fastest growing market, China. The company’s 72 cents a share earnings was below the 80 cents anticipated by FactSet.

However, the coffee giant managed to bring in net revenues of $8.1 billion as it grew 19 percent from 2021. As the international chain pays more for everything from wages and coffee beans to cooking oil, the increase in costs will be passed on to customers.

Starbucks representatives did not immediately reply to a request for comment.