This post is part of the On the Margin blog.
On Monday, Starbucks Corporation announced in a letter from its founder, Howard Schultz, that it would give all its workers a 5 percent raise.
The next day, the company said it would raise prices by 10 to 30 cents per drink.
Raising drink prices in July is something of an annual tradition for the Seattle-based coffee giant. It has raised its beverage prices each of the past two years, at least. And as far as we know, neither of those followed a vow to increase worker pay across the board.
It also illustrates the challenges restaurants face in the current environment as they raise prices to match higher labor costs.
Starbucks is an amazingly successful company. It has doubled in size over the past six years to become the second largest restaurant chain in the nation by systemwide sales, according to Nation’s Restaurant News Top 100 data. I’ve already speculated that it has the ability to overtake McDonald’s Corp. as the country’s largest restaurant chain in less than a decade.
A single price increase on its own is hardly going to kill the company.
But make no mistake: Higher prices are hurting the industry right now. There is a direct correlation between weakening industry same-store sales and a widening gap in prices between restaurants and grocers. Food at home prices were down 0.7 percent year over year in May, according to federal data. By contrast, restaurant prices are up 2.6 percent.
While there are other potential factors at play — notably, a shift in spending toward smaller chains and independents — it bears to reason that consumers are limiting restaurant visits because they’re finding reasonable prices at their local grocer.
Lower food costs have enabled grocers to ease prices. But restaurants, because of their heavy service model, have kept raising prices to match higher wages. Pay in the leisure and hospitality industries are up 4.3 percent year over year.
The industry has been on a hiring binge in recent years. That has put a lot more pressure on restaurant operators to increase pay to attract a higher quality of employee. Restaurants added 21,900 jobs last month, according to federal data, and more than 300,000 jobs over the past year. Numerous operators have suggested they are having a tougher time finding quality workers.
Starbucks has faced some criticism from workers over hours and other issues. Reuters noted last month that Starbucks employees accused the chain of slashing work hours and of cutting costs.
The goal of the increase in wages, which also includes total compensation increases of up to 15 percent as well as other benefits, is to “ensure Starbucks remains a retail employer of choice,” CEO Howard Schultz said in a letter to employees. That letter also included a relaxed dress code.
The price hike that came just one day later was not a surprise, especially because Starbucks had to broadcast it earlier this month after the hike had been inadvertently entered into the point-of-sale system too early. The company has indicated that increasing costs is the reason for the higher prices. The biggest cost increase for Starbucks and other chains right now is labor.