Since Brian Niccol took over as the CEO of Starbucks last fall, he has made a slew of moves to start bringing customers back to the company’s stores and reverse slumping sales. He has vowed to reduce wait times for service, and he simplified the shop’s menu, while encouraging in-store customers to linger over ceramic mugs.
But the top reason customers say they’re going to Starbucks less often is its high prices, according to recent research from Deutsche Bank analysts. And controlling prices may have just gotten a lot more difficult for Niccol.
Yesterday, President Donald Trump announced sweeping new tariffs, placing high taxes on imports from dozens of countries and a baseline tariff of 10% on all imports to the U.S. The president hopes his drastic actions will nudge businesses to buy supplies from American producers and make products in the U.S.. For coffee retailers like Starbucks, however, the levies will be impossible to dodge given that less than 1% of coffee consumed in the country is made domestically.
Starbucks imports coffee from more than 30 countries, including Vietnam, which was hit with one of the highest tariffs at 46%.
As such, the coffee company’s share prices fell by over 11% yesterday, dropping to $88 per share.
A price freeze promise
Starbucks did not respond to Coins2Day‘s request for comment. But the company’s former CFO acknowledged in an earnings call earlier this year that higher prices for coffee could impact revenue and profitability for the retail giant and its “already pressured consumer.”
The coffee company has angered customers in recent years by steeply raising prices as inflation rose in the U.S. The chief executive has already assigned himself a challenging task: he plans to invest in stores and employees as part of his turnaround plan, but has also committed to a price freeze through fiscal year 2025. So what now?
“Starbucks is either going to have lower margins and keep the prices where they are, or they’ll be forced to raise prices,” says Peter Cohan, associate professor of management practice at Babson College.
If trade wars lead to steeper prices for a wide range of products, or push the U.S. Into a recession, some Starbucks customers who currently pick up pricey drinks once or twice a week “may decide that they do not need that as much as they need to pay their rent or pay for health insurance,” Cohan adds. He predicts Starbucks will see fewer store visits, meaning lower sales of coffee, food, and non-coffee based drinks.
How Starbucks could weather the storm
Indeed, the fear of a recession is one reason that Starbucks share prices sank yesterday, says Danilo Gargiulo, an equity research analyst for Bernstein. In the 2008 crisis, he explains, Starbucks was one of the brands hardest hit by reduced consumer spending. A daily fancy coffee habit is an easy budget cut to make, Gargiulo says, whether it means switching to making coffee at home or finding a cheaper caffeine fix at a different chain.
“A compression of discretionary spending is quite devastating for the restaurant space,” he says.
The market is also nervous about profit margins at Starbucks, given that coffee beans account for 10% to 15% of the coffee company’s product and distribution costs, and Niccol has made that pledge not to hike prices any further, the analyst notes. A quick reading of the situation says that tough tariffs could derail Niccol’s turnaround plans.
However, Gargiulo sees at least two reasons that Starbucks shareholders do not need to panic.
For one, Starbucks now buys its beans on the spot market and has learned how to leverage that market’s fluctuations. Relatedly, Starbucks has long differentiated itself by making brews largely using arabica beans, which are primarily grown in Latin American countries like Brazil, Costa Rica, and Colombia. Unlike Vietnam, the world’s leading producer of cheaper robusta beans, Latin American nations are facing Trump’s minimal tariff rate.
Secondly, Gargiulo believes that Starbucks will ultimately appeal to customers precisely because it has promised not to raise prices, while its competitors are likely to do just that as tariffs take hold. He doesn’t see Niccol backing out of the price promise, he says. “It’s simply hard to conceive of a world in which [Starbucks] consumers could be absorbing incremental price increases,” he says.
In other words, what looks like a constraint may actually be a silver lining in this situation. “Even though we might be seeing a contraction in the near term, from worse than expected demand overall,” says the analyst, “they could be emerging stronger.”
Correction: A previous version of this story incorrectly attributed a comment from a recent Starbucks earnings call to Brian Niccol.
