Consumers face jolt from coffee prices

A 12-year high in bean prices means some coffee companies are passing on increased costs to caffeine junkies.

By InvestorPlace Aug 23, 2010 11:12AM

By Burke Speaker, InvestorPlace.com

 

Coffee prices surged to a 12-year high Monday, pushed by last year's poor Central and South American harvests and upcoming heavy storms in other coffee-producing regions that are adding to an already tight period for availability.

 

Now consumers could be taking a hit, with Dunkin' Donuts, Folgers and Maxwell House brands all feeling the heat.

The reason for possible increases is clear. Arabica coffee, the high-quality variety used in espressos and other premier coffee blends, jumped 1.9% to $1.8865 a pound for December delivery -- the highest since September 1997. And analysts say there could be higher prices to come. The lower-quality Robusta coffee variety used for instant coffee has also risen in price. December Robusta coffe gained 2.6% on the Liffe exchange to a peak of $1,838 a ton Monday morning, slightly shy of a two-year high.

Suppliers have already passed along previous increases to retailers. Earlier this month, JM Smucker (SJM), distributor for coffee to Dunkin' Donuts, Millstone and Folgers brands, announced that a 9% retail price increase would be needed because of then already historic highs. Kraft Foods (KFT) followed suit with an increase on select Maxwell House and Yuban ground and instant coffees.  

 

At the same time, Starbucks (SBUX) pledged last week that it would not increase prices, despite how the wholesale increases may guarantee a weakened profit margin, though perhaps not in 2011. Starbucks has a storied and healthy long-term relationship with coffee farmers, traders and co-ops, and it has bought the majority of its coffee for this upcoming fiscal year, according to a company spokeswoman.

 

With a troubled economy and unemployment at 9.5%, coffee lovers may avoid their store-bought daily brews with any additional price bump from stores. That means retailers walk a fine line with prospective price increases, between propping up margins and depressing sales.

There has already been a boom for at-home instant coffee brews in the past year or two, which has caused a fundamental shift in the industry. Starbucks launched its Via Ready Brew series to fight flagging retail sales. The line was a wild success -- hitting the $100 million mark in only its first 10 months of sales. The company is leaning on the new product -- a premium, instant, at-home coffee that doesn't require special equipment -- as an additional source of revenue.

But a big reason for Via's strong sales was almost certainly the sweet savings consumers get, paying less than $1 a serving, compared with about twice that for a large cup of fresh-brewed coffee at SBUX stores. Coffee stocks could see a serious complication if profit margins are squeezed too thin or if they have to hike prices to make up for the pricier beans. 


Lately, coffee stocks have been on a solid streak, with Starbucks up 22%, Green Mountain Coffee Roasters (GMCR) up 66% and Peet’s Coffee and Tea (PEET) up 30% in the past year. But that growth amid high coffee bean costs may be at an end.

Then again, this could just be a short-term trend that has little impact. Starbucks is maintaining its profit outlook, with an earnings expectation for $1.36 to $1.41 a share in its 2011 fiscal year, beginning in October.


Starbucks has said it will be able to absorb the price spikes, through "managing the dynamic" internally, which will likely amount to closing some international locations. Analysts also say that prices may ease later this year as the new Arabica crop arrives from Central and South America in October, but further weather issues may just tighten the market in years to come. Storms were the main reason for the price jump.  

 

Whatever the case, you can bet consumers will be keeping a close eye on their coffee expenses. While some may view that daily cup of java as a necessity, there's certainly a point where coffee drinkers shift their behavior by cutting back or changing brands. That means that coffee stocks could be in for a shakeup if bean prices don't stabilize.

 

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