Starbucks Corp. (NASDAQ: SBUX) said on Monday that it plans to raise prices on coffee drinks by 5 to 20 cents bright and early on Tuesday. That’s while coffee futures prices are near their lowest point in a year.
Starbucks raised prices last June when coffee prices averaged around $1.75 a pound. Coffee futures traded at around $1.25 a pound on Monday. The 12-month high was posted in the first half of October 2014, when prices approached $2.40 a pound on fears of drought in Brazil, producer of about a third of the world’s coffee.
What is causing the rise now is not the price of unroasted coffee, but what Starbucks called “the need to run our business profitably while continuing to provide value to our loyal customers and to attract new customers” in an emailed statement to the Associated Press.
In other words, Starbucks is raising its drink prices because it can. Coffee might be a commodity, but the Starbucks brand is not.
The company can’t raise bagged prices, apparently, because competitor The J.M. Smucker Co. (NYSE: SJM) just lowered bagged coffee prices by 6%. Smucker markets Folgers as well as Dunkin’ Donuts-brand bagged coffee which it licenses from Dunkin’ Brands Group Inc.(NASDAQ: DNKN).
Smucker’s profitability from coffee sales is nearly entirely based on the price of green, unroasted coffee, while Starbucks also has to pay rent, employ staff, buy equipment, and market its brand and its drinks. That’s a lot more costly and explains why prices of coffee drinks are going up while green coffee prices are going down. The only surprise is that Starbucks did not think it could raise the price of its bagged coffee.
Starbucks shares traded down about 0.4% Monday afternoon at $54.04 in a 52-week range of $35.39 to $54.75.