price increase; elasticity; Starbucks

For the first time in 4 years, Starbucks is raising its prices across its menu by 4-5%. The good thing is - for Starbucks - most people won't care about the additional 10-15 cents that their treats will cost.

Citing increased costs for dairy products and other financial obligations, Starbucks' price increase will amount to about $0.10 on a $2.00 cup of java. Increases in the company's health insurance premiums on all 80,000 employees worldwide also played a role in the price increase.

Given consumers' willingness to shell out $3.50 to $4.00 for a coffee drink, it's not clear that consumers will respond much to this price increase. Economists typically consider products from gourmet coffee sellers like Starbucks and Gloria Jean Coffee to be relatively price inelastic. Conversely, store-bought coffees such as Folgers, Chase & Sanborn and Maxwell House tend to be very price elastic.

Other firms in the industry are waiting to see what happens to Starbucks as a result of the looming price increase. Gloria Jean's coffee stores are probably going to follow Starbuck's lead and raise prices, but Caribou Coffee stores have no plans to raise prices.

(Updated October, 2004)