Why Starbucks (NASDAQ:SBUX) Is Worth the Price


November 12, 2014

Known for its iconic premium coffee and higher prices, Starbucks (NASDAQ:SBUX), has successfully attained a huge market share, even though its prices are more than the Dunkin’ Donuts coffee shops of the Dunkin’ Brands Group’s (NASDAQ:DNKN). After increasing its prices in its nationwide stores, it’s done the same in the UK. The effectiveness of this price raising strategy is discussed below.

Starbucks (NASDAQ:SBUX) raised its UK prices by approximately 10 pence ($0.16) , and though it doesn’t seem to be planning another price hike in the US in the near future, it may just do so later on given its trend of raising prices.

It was in June this year that Starbucks (NASDAQ:SBUX) hiked its nationwide prices by $0.05 to $0.20. It also hiked the prices on products like its retail ground coffee packets by 8%.

Since 2009, Starbucks (NASDAQ:SBUX) has continually increased its prices which means consumers would be spending approximately $2.10 which is 17% more for their medium coffee than at the Dunkin’ Donuts where they would pay approximately $1.79.

The truth is that Starbucks (NASDAQ:SBUX) is not competing on the basis of price, but is using revolutionary marketing, design, architecture, customer-oriented technology and location to gain more business and to ensure its customers continue paying the hiked prices.

Sales, price increases and revenue are increasing simultaneously

Despite the increase in prices almost yearly since 2009, Starbucks (NASDAQ:SBUX) continues to increase its customer base, sales and revenue. In the fiscal year of 2014 which concluded on September 30, Starbucks posted profits up by 9% year over year within the US because of a raised spend per customer and greater traffic. Subsequently, Starbucks (NASDAQ:SBUX) posted a 2014 revenue of $3.1 billion (a 25% increase since 2013).

This shows consistent growth over the last five years and the last quarter indicates the 19th quarter in a row with a minimum 5% growth year over year. Starbucks (NASDAQ:SBUX) continues to outperform competitors  by increasing sales quicker than overheads, despite dairy and coffee price hikes. Investors are enjoying stock that has outperformed and is up by over 260% since 2009

Starbucks coffee and stock is worth every penny spent on it

Despite price hikes, Starbucks (NASDAQ:SBUX) believes in giving its customers a lot more than just coffee by building solid brand loyalty through better pricing powers which shows from its price hikes.

This has helped build more traffic in 2014 and greater higher comparable-store sales which has enabled Starbucks (NASDAQ:SBUX) to continue gaining profits despite it having to pay more for some of the ingredients it uses. That is why Starbucks (NASDAQ:SBUX) stock prices are bound to increase more. Its stock price is lower than the 30 times earnings of the Dunkin’ Brands Group’s (NASDAQ:DNKN) and sells at a 28 P/E, as stated by S&P Capital IQ. Through pricing power, Starbucks (NASDAQ:SBUX) can further boost its sales and profits next year, and a 21 P/E predicted by analysts seems more appealing.