Why Is Starbucks Cutting The Price Of Coffee? SBUX Lowers Bagged Coffee Costs By 10%

The Starbucks Corp. (NASDAQ:SBUX) will cut the price of its bagged coffee by 10 percent on May 10, but don’t get too excited just yet: a barista-brewed specialty coffee will still cost just as much then as it does now.

The Seattle-based coffee chain will be slashing the price of its 12-ounce bag of coffee to $8.99 from $9.99, Bloomberg News reported Friday.

Obviously, the price cut is going to help Starbucks fans to more easily afford their favorite brew, but what is motivating this more? The upmarket chain has long been famous for making java junkies dig deep into their pockets to enjoy their cups-of-joe.

The coffee chain will have to sell 65 percent more bagged coffee than it did last year just to make the same amount of money this year on the same product line, Bloomberg Businessweek calculated. Last quarter, the company made a $2.55 profit per bag, but in the future that will drop to $1.55, Businessweek said.

Starbucks is apparently taking the profit hit to remain competitive with Dunkin Brands Group Inc. (NASDAQ:DNKN) and other top bagged-coffee sellers.

"The firm could be betting on widening income inequality," Businessweek's Kyle Stock wrote. "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."

Plus, "Starbucks has been working hard to grab grocery-store shoppers' dollars by expanding the array of products it has available in those stores," wrote 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."

Starbucks announced it would be expanding its loyalty program so members who purchased the brand at grocery stores would still be rewarded with points, Businessweek reported last month.

Jim Olson, a Starbucks representative, told Bloomberg News the price cut "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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