New York (CNN Business)Coffee prices are surging. But that won’t make a difference in how much you spend on a cup of joe at Starbucks.
Higher input costs have been prompting companies across industries to charge their customers more. Household furnishings are more expensive. Cereal boxes are shrinking while prices stay the same or grow. And restaurants from Chipotle (CMG) to McDonald’s (MCD) have been increasing menu prices. Coffee is the latest item to become more expensive due to supply shortages, recently caused by bad weather in Brazil. This week, Arabica coffee futures reached their highest price since 2014.
“The volatility in the coffee market does not impact retail pricing plans, and our pricing strategy remains unchanged,” a Starbucks spokesperson told CNN Business.
Starbucks (SBUX) is able to avoid raising prices for customers because of its purchasing strategy, CEO Kevin Johnson explained during a Tuesday analyst call discussing earnings. Read MoreStarbucks has employed a number of tactics to make sure it can buy coffee beans at an “attractive cost,” Johnson said. Those include buying coffee ahead of time and locking in prices, Johnson said. “Usually coffee chains are hedged well ahead, but the length of coverage” varies from company to company, said Carlos Mera, who heads up Rabobank’s agri commodities markets team and is an expert on coffee prices.
Coffee prices have been surging.For Starbucks, short-term volatility could end up offering an advantage, Johnson said. “It gives us a significant advantage relative to our competitors who, if they don’t buy this far in advance, will certainly not have that cost structure that we put in place,” he explained. Some competitors are less certain that rising input prices won’t affect what consumers pay. JDE Peet’s, which has a broad coffee portfolio that includes Peet’s Coffee, Stumptown and Intelligentsia, said in a statement that “over the last 12 months we have seen a sharp rise in ingredient, freight and other costs, which will require us to take appropriate measures,” adding that “historically, significant fluctuations in green coffee prices have been reflected in the market and we expect that precedent to continue.” Green coffee refers to raw, unroasted coffee beans. The company said that “our top priority remains as always to offer our consumers consistently high quality coffee products through our brands.”
What’s going on in the coffee market
Recently, a devastating frost in Brazil has harmed the country’s coffee trees and could seriously reduce its supply. “This was the worst frost in 27 years,” Rabobank’s Mera said. The event could mean the loss of millions of bags of coffee in Brazil, he said. The frost has driven Arabica coffee prices up this week. But coffee prices were rising even before the frost for a number of reasons, Mera added, including dry weather in Brazil, protests in Colombia and the increase in shipping container costs, among others.
“If these prices stay elevated, then they will have to be passed on to consumers,” he said. But big companies have ways to keep prices relatively stable for customers, he added. “Most companies have some sort of risk management in place, so they can weather the crisis for a little bit,” he said, and “may be able to delay any price increase.” Plus, some drinks like cappuccinos, which use little coffee compared to other ingredients, won’t be as heavily impacted by higher coffee prices, he said.
Source: edition.cnn.com
