Starbucks says customers aren't changing their spending habits despite inflation

• Starbucks customers are still buying higher-priced drinks despite inflation.
• Other chains are reporting customers making swaps for cheaper options.

Inflation and rapidly growing grocery bills aren't keeping Starbucks customers from their lattes and shaken espressos, the company said.

Despite the state of the economy, it's "critically important," interim CEO Howard Schultz told investors in a third-quarter earnings call, "that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down."

Demand has remained strong despite price increases of about 5% over the last year, he said.

Schultz says he's aware that circumstances could change.

"We're not taking our success and current engagement with our customers in any way as an entitlement," he told investors in the August 2 call. If there is a more significant economic downturn and the company increased prices further, Starbucks would focus on providing discounts and value to rewards members.

Starbucks is unusual compared to other quick service chains in customers not downgrading to less expensive products. Peer companies are "shocked," and "stunned," Schultz said, that Starbucks customers aren't turning to other chains or trading down to cheaper options. He attributes this staying power to Starbucks' popularity with Gen Z customers, and the chain's "significant competitive advantage" in customizing drinks, specifically cold beverages.

Other companies are reporting changes to customer behavior in response to inflation. McDonald's customers are paring down their orders, the company said in a second-quarter investor call.

The fast food giant said "we're seeing customers, particularly lower-income customers, trade down to value offerings and fewer combo meals," according to CFO Kevin Ozan.

Low-income consumers have also decreased purchase frequency at Chipotle, though they don't make up the majority of Chipotle customers, CEO Brian Niccol said in July.

Inflation is changing consumer buying habits beyond fast food and grocery stores, too. Walmart said that inflation was hurting sales in non-food areas of the stores as customers slowed down spending to cope with grocery price increases. Prices in the food away from home category, which includes restaurants, are up 7.7% over last year according to the Consumer Price Index, and food overall is up 10.4%, meaning dining out is becoming relatively less expensive compared to cooking at home.

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