Starbucks Hikes Prices, Customers Take a Hike?

In the midst of a nasty recession, will customers want to pay more for their daily cuppa joe? Starbucks (Nasdaq: SBUX) may soon find out.

In some markets, the java giant is adjusting prices on what it calls "more complex" beverages. Some venti-sized fancy drinks will cost as much as a quarter more than they used to, but other drinks will decline in price by an average of $0.05 to $0.15.

Starbucks heralded these price changes back in April, and it's hardly clueless about the possible impact. In a memo to baristas, the company warned that its employees should "expect customers to be sensitive to pricing changes in this economic climate." In response, the chain apparently encourages baristas tell customers that the coffee giant is looking for ways to provide value. I'm not sure customers who are paying a quarter more will buy that line of thinking, but those paying a bit less just might.

Hiking prices could make sense if Starbucks wants to reestablish its credibility as a premium coffee purveyor. I could hardly complain about that, given my previous concerns that some of the company's "value" initiatives might tarnish its brand. Still, miffed customers could turn to many alternatives, including Peet's (Nasdaq: PEET), Caribou, and Green Mountain Coffee Roasters (Nasdaq: GMCR). And nobody underestimates the power of lower-end competition like McDonald's (NYSE: MCD) or Dunkin' Donuts, either.

Nor should we forget Starbucks' diminished traffic. Companies like Chipotle (NYSE: CMG) (NYSE: CMG-B) and Panera Bread (Nasdaq: PNRA) have successfully raised menu prices to offset flagging customer visits, but that's a dangerous game to play. Given its current precarious position, I have to wonder whether Starbucks should have left well enough alone.