Starbucks Takes Kraft, J.M. Smucker Way, Ups Coffee Prices

Starbucks Corporation (SBUX), reportedly, plans to increase prices of certain coffee drinks as well as packaged coffee products following a similar action by other coffee players — Kraft Foods Group, Inc. (KRFT) and The J. M. Smucker Co. (SJM) earlier this month.

Starting on Tuesday, Starbucks will increase the prices of some beverages at its company-operated stores by between 5 to 20 cents. The price increase will raise the average ticket at Starbucks by less than 1%. Also, the company plans to increase list prices of its packaged coffee products sold through grocery channels by an average of 8% from July, according to media reports.

However, the prices of K-cup single-serve coffee packs, VIA instant coffee and Seattle's Best Coffee have not been increased. The price increase will also not affect packaged coffee sold in its stores.

Earlier this month, Kraft increased the U.S. retail prices for its Maxwell House and Yuban roast and ground coffee brands by approximately 10%. In the same week, J. M. Smucker announced list price increases of its Folgers and Dunkin' Donuts branded coffee products which it licenses from Dunkin’ Brands Group, Inc. (DNKN). J. M. Smucker increased its packaged coffee prices by an average of 9%.

The companies are raising coffee prices in response increasing coffee costs. Coffee prices are at a record high so far this year due to the increasing prices of Arabica coffee since January as a result of drought in Brazil which produces about one-third of the world’s coffee.

At its fiscal first-quarter conference call, Starbucks stated that more than 40% of its coffee needs for fiscal 2015 were locked at favorable prices. Moreover, management argued that since coffee cost is only about 15% to 20% its cost of goods sold and less than 10% of total operating costs, rising coffee prices should be manageable in fiscal 2015. In fiscal 2014, with 100% of its coffee needs being hedged, coffee costs are expected to be lower than 2013. However, with the price hikes by other coffee players, we believe Starbucks is feeling the pressure to raise its coffee prices as well.

Starbucks last raised the prices of some of its coffee beverages in several of its cafes in Jun 2013.

Coffee prices are highly volatile subject to weather changes and pest infestation. Also, political decisions in coffee-producing countries, worldwide supply and demand scenario, relative strength of the U.S. dollar and speculative trading influence coffee prices.

Starbucks carries a Zacks Rank #3 (Hold).

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