Starbucks Ups Menu Prices, Reins in Spending

High labor and food costs are pummeling the restaurant industry, though operators remain cautiously optimistic for 2022.

February 03, 2022

Starbucks Barista

ALEXANDRIA, Va.—Starbucks announced it will raise menu prices this year and lowered its profit guidance, reports Reuters. The coffee chain cited labor and goods cost increases, as the company missed its quarterly profits and comparable sales estimates.

Starbucks announced last year that it will increase its wages at least twice this year, which would bring its starting pay to $15 an hour by this summer and its average pay to $17. The company said it would give baristas who have been with Starbucks for at least two years a 5% raise in late January. Employees who have been with Starbucks for five years or more will receive a raise of up to 10%. The second pay increase will be in the summer, which will bring the chain’s average wage up to $17 an hour.

The company said it has also paid more to train new employees and for them to isolate after exposure to COVID-19.

The U.S. employment-cost index rose 4% last year, as costs for employers continue to rise at the highest rate in two decades, and inflation was at 4.9% in December 2021. The increase in labor costs is not keeping up with inflation, with hourly wages rising 4.7% in December compared to December 2020.

Starbucks already increased menu prices in October and January, and it plans to cut back on spending and marketing in 2022, according to Chief Executive Officer Kevin Johnson.

“When the Omicron surge began, inflationary costs and staffing shortages were amplified, well in excess of our expectations,” Johnson said during a call with investors.

High costs of food and labor are forcing fast-food chains to lift their prices on value deals and move to digital promotions only. According to Technomic Ignite data, the cost of breakfast value meals rose 19.6%, and snack value meals increased 11.5% in the third quarter of 2021. McDonald’s raised its menu prices an estimated 6% last year, and labor costs at the fast-food company were up over 10% in the U.S.

In a move to handle the labor shortage and cost increase, Domino’s will pay its customers a $3 “tip” if they chose to pick up their pizza. Now through May 22, the pizza chain will give customers a $3 coupon code to redeem the following week on a carryout order of $5 or more before tax and gratuity.

“It takes skill to get pizza from a Domino's store to your door," said Art D'Elia, Domino's executive president – chief marketing officer, in a news release. "As a reward, Domino's is giving a $3 tip to online carryout customers who take the time and energy out of their day to act as their own delivery drivers. After all, we think they deserve it."

CNBC reports that increased labor and food costs are affecting the restaurant industry’s bottom lines and impacting its recovery from the pandemic. The National Restaurant Association says that it will take a year or more before conditions return to normal.

“2022 for the restaurant industry will remain another year of transition, and the year is off to a pretty sober start,” Hudson Riehle, senior vice president of the association’s research and knowledge group, told CNBC. “When you survey restaurant operators, 76% across the country now say that business currently is worse than it was three months ago. It remains a fairly volatile and uncertain environment.”

However, a survey from the association found that restaurant operators are cautiously optimistic about 2022 sales, as they expect sales will either maintain or grow this year.