Starbucks Fires First Shot in Coffee War

Classic cappuccino: Bar Italia, above, ‘makes coffee from the heart, rather than from a manual’ Photo: Courtesy of Telegraph

Cappuccino wars have broken out on the high street after one of Britain's largest coffee retailers announced a steep rise in its prices.

Patrick Sawer
Telegraph

November 04, 2007

Starbucks has put up the price of its lattes and cappuccinos by four per cent, more than twice the rate of inflation.Industry experts have warned that rival coffee outlets will inevitably follow suit.The price rise means that Starbucks' smallest cup of latte or cappuccino, the Tall, has breached the £2 barrier for the first time: it now costs £2.05.

Starbucks' largest cappuccino and latte, the Venti, now costs £2.65 - an increase of 10p.

It is the second time that Starbucks has raised prices since April, when a small cappuccino cost £1.89 and the Venti £2.25.

The American chain, which has come to dominate the high-street coffee market since it arrived in the UK in 1998, blamed rising operating and material costs for the increase.

Starbucks said in a statement: "We are continually evaluating our business costs. We've determined that this is an appropriate time for a price increase given the increasing cost environment in which we operate."

Costa Coffee and Caffé Nero both say that they have no immediate plans to raise prices, setting them directly at odds with their main rival. A small cappuccino costs £1.95 at Costa, £1.79 at Pret A Manger and £1.55 at Caffé Nero.

But Jeffrey Young, of industry watcher Allegra Strategies, said it was inevitable that other coffee outlets would follow suit and raise prices.

"Starbucks is the market leader and price setter, so if they have put their prices up the others will feel under pressure to do the same," he said.

Mr Young said a steep rise in the wholesale price of milk was thought to have prompted the Starbucks decision.

And he warned consumers to expect further rises in food and drink prices generally.

"Food sector companies are saying they have not felt such widespread pressure on costs for 20 years, and that will inevitably be translated into a host of price rises, not just in coffee but in all areas of the food and drink market," he said.

The farm gate price of milk has risen up to 40 per cent in the past six months because of a worldwide boom in demand, fuelled by the rapid economic growth of China and India.

Demand for milk in China, especially powdered milk, has shot up 25 per cent, absorbing much of the European Union's milk production. To make matters worse, years of under-investment have left the British dairy industry unable to meet rising demand.

Customers around the country were left bemused by the rise in Starbucks prices. Sarah Davies, 27, a legal secretary from Prestwich, said: "I like the fact they do lots of alternatives to just coffee, but I wouldn't come here all the time. It's too expensive. It's more of a treat for me. Their cakes are good too."

Jon Culshaw, 32, a civil servant from Chorlton, said: "They all seem the same to me, so I wouldn't choose one over the other but I know Costa Coffee is cheaper than places like Starbucks. I think you pay a bit of a premium for the image there."

In Cambridge Paul Aradicz, a 23-year-old student, said: "Coffees are already expensive. I don't see why the prices have to go up even higher, but it hasn't stopped people coming.

Coffee expert Louie Salvoni, managing director of Espresso Service, said: "The price of coffee has become ridiculous. Most of it is due to high rents and now rising material costs. I wouldn't mind if places like Starbucks were selling a good quality coffee but they are not."

In America the price of a Starbucks is considerably cheaper than in Britain, at $3.21 (£1.55) for a small cappuccino, $4.21 (£2.02) for a medium and $4.76 (£2.28) for a large. However this is still higher than other retailers, such as a traditional diner, where a cup of coffee can cost as little as 75 cents.

The wholesale price of coffee beans has remained stable in recent months, although an increase would have little effect on retail prices because it forms a small proportion of the cost of a cup of coffee.

Two billion cups of coffee are drunk every day around the world. Coffee is now the second most widely traded commodity, after oil, with a total estimated value of $140 billion.