Starbucks avoids high coffee prices
The company wisely locked in prices for coffee before they hit a 34-year high. But what will happen next year?
The company has already locked in its coffee costs for the year, John Culver, the president of Starbucks Coffee International told Swiss newspaper Tages-Anzeiger. So as other food producers struggle with the rising costs of raw ingredients, Starbucks has kept a lid on costs of its most important material.
Culver said he thinks the cost of coffee will come down. "We think that these prices are not based on facts given there is no supply problem," he told the newspaper, according to Reuters. "Speculators are at work here."
Post continues after this video about the runup in coffee prices:
Starbucks chief executive Howard Schultz has echoed similar sentiment. Coffee futures contracts hit a 34-year-high of $3.0890 a pound on May 3, Reuters reports. The price has dropped since then, and today was down to $2.7270 a pound.
Culver thinks that will continue. "We do believe, however, that prices are going to fall again," he told the newspaper. "For this year, we have locked our coffee costs but we watch the market closely."
But Starbucks hasn't completely escaped the run-up in materials costs. The company disappointed some with its 2011 profit guidance recently, noting a 10.9% increase in its cost of sales in the recent quarter, TheStreet reported.
Starbucks' cost of sales rose to 51.5% of total revenue compared to 49.8% a year earlier, according to TheStreet.
When Starbuck's raised their prices 25 cents some time back, I did a calculation in these comment blocks that showed the cost increase for the actual coffee used in their drinks was about 3 cents per 12 oz. of brewed coffee.
I apologize. I OVERESTIMATED using retail highest whole-bean costs.
It says here that Starbuck's prices are between $3.09 and $2.73/lb. A 3 lb can of Folger's says "makes 380 6 oz. cups." That's 190 12 oz. cups for 3 lbs.
At Starbuck's highest price ($3.09/lb), that means it costs $9.27 to make 190 12 oz. cups. That's 4.88 cents per 12 oz. cup. If prices are up 33% as previously claimed, that means Starbucks extra cost per 12 oz. cup is 1.22 CENTS! That's because 3.66 cents x 33% = 1.22 cents and 3.66 + 1.22 = today's 4.88 cents.
Copyright © 2014 Microsoft. All rights reserved.
The company plans to close stores and lay off employees, and says it needs to make some deeper changes.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.