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NEW YORK — It's sweltering hot and
you're exhausted. A piping hot cup of coffee is about as inviting as
a mink coat and a wool hat. So what's the summertime alternative? Iced
coffee is an option, but it costs about one-third more than hot coffee.
Coffee is coffee, no matter the temperature, so why the price difference?
It's not because it's more expensive to make, but because coffee retailers
understand how to profit off customers' desperation for caffeine.
Retailers have been hit by a decline in consumer spending, but the
economic downturn hasn't dented coffee-chain giant Starbucks' (nasdaq:
SBUX - news - people) business. Earlier this month, the company reported
June sales rose 19% from a year ago; and in just one month—from
May to June—net revenue grew to $259
million from $204 million. To be fair, May was only a four-week sales
period while June included a fifth week. Still, to some extent, the
increase in sales has to be attributed to the fact that iced drinks
are priced higher than hot brewed drinks.
Starbucks prices vary from region to region, but in general iced
coffee is much more expensive than hot coffee for absolutely no discernible
reason. In New York, for example, a large Starbucks coffee is $1.90.
A large iced coffee is $2.60. Now, a large Starbucks hot coffee comes
in a 20-ounce cup, while "venti" iced coffee comes in a 24-oz. cup,
but the iced coffee is larger because it contains several ounces of
ice; the small and medium iced coffees and hot coffees are served in
the same size cups—12 oz. and 16 oz.,
respectively.
Iced coffee may actually be cheaper to make than hot coffee, because
it often uses several-hours-old coffee that would otherwise be thrown
down the drain. Coffee has a very short life span where it still tastes
good hot, but when poured over ice it is impossible even for connoisseurs
to tell the difference.
The immediate assumption is that the iced coffee is expensive because
of the ice. In fact, coffee shops almost always use icemakers to produce
their own ice, so the additional cost is for water, which is a marginal
expense and shouldn't impact the price of the coffee. Iced drinks are
also served in plastic cups (rather than paper cups) and typically entail
the use of wrapped straws, as opposed to the wooden stirrers used in
hot drinks. Although Starbucks won't disclose how much it spends on
its cups, lids and straws, one wholesaler charges 66% more for 8-oz.
paper cups than plastic cups. But the quality of the cup plays a big
role in the price.
"A lot of plastic cups crack easily, so a strong plastic cup could
easily cost more than a paper cup, but if anything, that should only
bring prices up by a few cents," says Bruce Milletto, president and
co-founder of coffee research and consulting group Bellissimo Coffee
InfoGroup.
Besides the fact that Starbucks grows profits off every iced drink
sold, the real advantage to keeping these prices inflated is that it
gives the company the option to raise hot drink prices in the fall without
facing backlash from consumers. After all, if people are already accustomed
to paying higher prices for iced coffee during the summer, they may
not notice a rise in prices for hot drinks. Analysts say additional
price hikes are a distinct possibility.
"[Starbucks] will anniversary a 2% to 3% price increase this August
period. We believe that it is likely that the company implements another
price increase in certain markets this fall," wrote WR Hambrecht & Co.
analyst Kristine Koerber.
And don't blame the price of coffee beans. The 2000 price hikes did
not result from rising coffee prices. According to Judy Ganes, an
expert in commodities research
and exchange, coffee prices are at nine-year lows.
"The last time coffee prices were this depressed was back in 1992,
and before that it was 1974 or 1975," Ganes says. "For companies like
Starbucks, coffee is the smallest part of their expenses."
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