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The Game Theory Behind Starbucks' Big Coffee Price Cut

The Game Theory Behind Starbucks' Big Coffee Price Cut
Photograph by Dhiraj Singh/Bloomberg

Good news for the caffeinated masses: Starbucks is cutting prices, starting May 10, on its bags of coffee sold in grocery stores. The $1-per-bag discount represents a 10 percent discount on its eponymous beans, a 12.5 percent drop on its cheaper Seattle’s Best brand.

At Starbucks’ scale, this is big. Last quarter the company collected about $380 million from sales outside its cafés at an operating margin of 25.5 percent. At that level, the coffee empire is making a profit of about $2.55 per bag. Take away $1 per, and Starbucks would have to sell 65 percent more bags to book the same amount of profit.