Starbucks Will Have to Raise Coffee Prices

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Starbucks Corp.’s (NASDAQ: SBUX) plight is getting worse. The arabica beans it uses in most of its coffee have risen 90% in price so far this year. As The Wall Street Journal recently pointed out, while its EPS rose to $0.56 last quarter from $0.51 in the same quarter a year ago, much of that quarter did not include the sharpest point of the rise. Same store sales were up 6%, but a sharp spike could almost force it to increase prices, and undermine that growth.

Starbucks has elected to add more food to its menu. It has also decided to run at the lunch business which is dominated by most of the fast food industry, led my McDonald’s Corp. (NYSE: MCD). However, prices are rising against many of the ingredients in those lunch products as well, which would make a “win” at lunch, only a partial victory.

Coffee prices started spiking in late January, from less than $1.20 a pound to near $2.15 a pound today. Milk and sugar prices are also higher, and eventually this confluence will translate into higher prices for your favorite coffee beverage, whether a single shot of espresso or a vente double latte with extra whipped cream.

There’s no getting around it — Starbucks will have to boost prices to keep up with rising commodity costs, unless by some miracle the recent trends higher for coffee, milk and sugar suddenly reverse themselves. And barring a miracle, Starbucks will be forced to boost prices to help bolster profits. Even the company’s ham, chicken and egg salad sandwiches are probably in line for a price hike.

Coffee futures have risen nearly 80% in three months. Depending on how much coffee Starbucks stockpiles, the costs may not hit retail prices for a few months yet. The U.S. Department of Agriculture (USDA) has forecast that milk prices will remain high for the rest of this year, at record or near-record levels. That will raise prices for cheese, butter and other dairy products as well.

The March data on dairy prices from the USDA is not available yet, but in February, dairy prices rose 5.1% month-over-month and 27% year-over-year. Prices are rising partly due to higher demand for exports. The drought in California is forcing dairy farmers to import hay to feed the herds and that raises costs. Herds were also culled a few years ago when dairy prices fell and the herds have not been built back up yet.

Sugar prices now top $0.174 a pound, up $0.02 since the end of January, or about 13%. In addition to its use as a coffee sweetener, Starbucks’ bakery items, ice cream and sweets all use sugar and all will cost more to make.

Drought in Brazil is pushing up coffee prices and is likely having an impact as well on sugar prices. Sugar production in the country’s (and the world’s) largest sugar-growing region is forecast to drop by 5.2% as a result of the drought. And although demand for sugar as a sweetener is down, demand for sugar cane to make ethanol is growing helping keep prices high.

Starbucks’ sandwich menu with its ham, cheese, chicken and egg components will also come under pressure as pork and poultry prices rise too. Pork prices have risen as a result of an epidemic that has killed millions of piglets, and chicken and turkey prices are rising as demand rises for poultry to replace the higher-priced pork.

Starbucks has virtually no choice but to increase prices, but it is likely to do so a little at a time in order not to drive customers away. And once those prices rise, they are very unlikely to come down again.

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