Starbucks in 2004 announced that it will increase prices at its stores before the end of year. Analysts expect prices to rise by 4% to 5%. Prices are going up to adjust for increases in dairy products and rents. The firm is seen as the clear leader in the retail coffee market but opinion is split on whether consumers will continue to pay more for their caffeine. Some surveys indicate that people already think they already pay too much for their coffee while others suggest that Starbucks is actually less expensive than many of its competitors.

1) From the case in 2004, explain the logic for a price increase from Starbuck's perspective.

(2) Can you discuss the effect of operating leverage to why Starbucks had to close about 600 stores in 2008 and why they are being outcompeted by