Rising milk costs may lead Starbucks Corp., the world's largest coffee shop chain, to consider its first systemwide price increase in nearly four years, its chief executive said on Tuesday.
"If it stayed at these levels or went higher for any long period of time, we might have to think about it," Orin Smith told Reuters on the sidelines of the Milken Institute's Global Conference in Los Angeles.
But Smith said the cost of milk, while high, could still be absorbed in the short term without a rise in drink prices.
Starbucks, which has about 4,000 stores in North America, has not had a systemwide price increase since August 2000. It raised prices on its drip coffee, espresso and blended beverages by about 7 cents a cup at the time, citing rising operational costs including rents and wages.
In reporting quarterly results last week, Seattle-based Starbucks identified rising dairy prices as the primary negative factor facing its business amid its strongest sales growth in over a decade.
The company said then it would spend about $10 million to $15 million more on dairy goods in the second half of 2004 than it would in a typical year and said those costs could not be effectively hedged like coffee or other commodities.
Smith also told Reuters that the early anecdotal evidence pointed to a strong start for the company's premium Black Apron coffee, a high-priced product with relatively limited availability.
"[It's] going pretty well," Smith said.
But with the summer months rapidly approaching, the company has turned its thoughts to cooler drinks, such as its line of frappuccino drinks.
Smith said the company's hit product for the summer season would be its strawberries and cream frappuccino drink, which he said was already a hit in Britain and which he predicted would be a major success in the United States.
Starbucks customers are also increasingly drawn to the company's music compilations, produced for the company by Hear Music, which it acquired in 1999, he said.
"It's a nice little sideline," Smith said.
But at the same time, he acknowledged that with the company's widespread retail presence and the ease of digital distribution as opposed to traditional music sales, there was a larger potential for the company's music ventures.
"The technology enables us to create a record store in thousands of retail stores," Smith said. "We have some enormous advantages over some other retailers in that segment. We think it's a great business opportunity."