Why Is Starbucks So Expensive? Or Is It? - Retail Dogma

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Starbucks is one of the most successful retailers and a brand that we admire a lot for how it has grown over the years, and for going through an amazing turnaround story and coming out even stronger. There is so much we can learn from this brand, and in this article we will examine why a lot of people perceive Starbucks as being so expensive, and what Starbucks has done about this perception.

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The Real Reasons Why Starbucks is So Expensive

Starbucks Does Not Sell a Cup of Coffee

According to Starbucks’ annual report, Starbucks is in the business of providing its customers with a unique Starbucks Experience. This entails superior service level at clean, well maintained stores, that match the personalities of the communities they operate in.

When Starbucks first started, it didn’t start with the intent of just selling a cup of coffee. Rather it was intended to be a place where people meet over coffee.

So when you go to a Starbucks, you are not only paying for the cup of coffee, you are paying for the entire Starbucks Experience, which includes the food & drink, together with a place to sit and enjoy a chat with a friend, or even a business meeting, for a few hours.

So the locations and the standards of the stores, and the people who operate those stores are all an essential part of this experience.

Which takes us to the next point..

Starbucks Locations Are Expensive

Starbucks doesn’t just open a store at any place. They have an entire property team that picks and chooses the best locations that would fit the brand and provide that unique experience we discussed before.

You will probably not need to go out of your way to reach a Starbucks store, the way you do with a Walmart or a Costco store. Instead, you will find that Starbucks probably has a location that is always “just around the corner“, with more than 31,000 stores open as of 2020.

As any retailer knows, commercial real estate at such strategic locations are very expensive. We will examine below how Starbucks pays for that.

Operating Expenses Add Up

Running a retail location for more than 12 hours, seven days a week, requires manpower working at different shifts to achieve good coverage and provide the required service level.

According to indeed, a Starbucks barista earns 13.9 USD per hour and the job includes benefits such as health insurance, 401K and employee discounts. This is in addition to the costs of training, hiring and maintaining an employee.

Other operating expenses include maintenance, utilities, cleaning and admin expenses.

All of those expenses add up, and have to be covered from the gross margin of the products Starbucks sells. We have calculated a gross margin of about 68% for Starbucks.

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Starbucks Operating Expenses — Source: Starbucks Annual Report

According to Starbucks’ financial reports, store operating expenses are at 48.7% of the revenue generated from those stores, and at 39.6% of the total revenue, leaving it with a 15.4% operating income.

This simply means, that for every 100$ of sales of coffee cups and other products, 48$ go towards paying for the store expenses. After deducting cost of sales and other expenses, Starbucks keep 15.4$ as operating income.

After taxes, this results in around 13.6$ net earnings out of every 100$ sales (as of 2019 report).

We have to admit that such a double digit net profit margin of 13.6% is quite impressive and is much higher than other retailers’ profit margins.

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So Why is Starbucks so Expensive?

According to our analysis, Starbucks does retain higher net profit margins from their sales, compared to retail industry’s benchmarks.

We believe the reason behind this is the high brand equity that Starbucks has built, that made it more of a lifestyle brand, rather than just another cup of coffee. This shows in its annual report and the focus the management continues to put on creating and delivering a “Starbucks Experience“.

This has given Starbucks a high pricing power, that allowed it to hike its prices and still maintain a sales growth.

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