Starbucks Corp. (NASDAQ: SBUX) signs long-term contracts for coffee beans and has sources from all over the world. However, it will not be able to dodge the rising price of coffee beans due to Brazil tariffs undertaken by the Trump administration, particularly if they last for long. For now, these tariffs are expected to be 50%. Brazil is the source of 38% of the world’s coffee. No other nation is close. And, second-place producer Vietnam will have 25% traffic on goods it sends to the United States.
No one knows what the exact effect of higher coffee bean prices will be on Starbucks. Barron’s puts the figure at 3.5% on to the cost of goods sold at the coffee chain. This could be a 0.6% “headwind” on Starbucks earnings. Over the longer term, the figure could be higher. Last year, The Wall Street Journal reported that high drink prices had already started to change the buying pattern of Starbucks customers.
Coffee prices cannot be looked at in a vacuum. Starbucks has to overcome competition and problems with customer service. Among the long list of companies that compete with Starbucks, the largest of which are Dunkin’ Donuts and McDonald’s. Then there are tens of thousands of local coffee shops. China rival Luckin Coffee has just entered the United States. Its effects on Starbucks could take years to measure.
Starbucks CEO Brian Niccol thinks he knows what ails Starbucks. He wants the stores to become neighborhood gathering places as they were years ago. He wants to focus on the customer, and he has trimmed the Starbucks menu. For some reason, Niccol thinks baristas wearing new uniforms will change customer habits.
He has challenges he has not addressed, at least in New York. Stores are often dirty, particularly outside the locations. Starbucks stores frequently run out of food inventory, a problem McDonald’s does not seem to have.
Coffee prices are one among several hurdles. Its stock has slightly underperformed the S&P 500 year to date. The company will need to do better across a broad array of categories.
The Six Worst Coffee Brands to Avoid
Top Gaining Stocks
Top Losing Stocks