Starbucks Coffee Gets Expensive - Analyst Blog

Starbucks Corp. (SBUX) replicated many coffee retailers by increasing the price of packaged coffee to combat the record 125 per cent steep climb in Arabica coffee prices. Starbucks recently raised its prices and announced a 17 per cent hike in the price of its packaged coffee.

Analysts feel that among several factors that led to this abnormal hike in Arabica coffee futures the most important was a rush from coffee roasters such as Starbucks to hedge as much of its price exposure as possible. With the prospect of higher coffee prices on the horizon, Starbucks typically hedged two to three months ahead of its needs, according to traders.

By January, Starbucks had fully hedged through the end of September which implied eight months ahead. In April, the company said it had piled coffee stock until almost the end of the calendar year.

Additionally, increases in farming costs, like more expensive fertilizer, coupled with storms in Columbia last year that damaged flowering also contributed to the cost pull inflation in high quality Arabica coffee.

Other coffee retailers are also passing the increased cost to the consumers in the form of higher prices.  Smuckers, maker of Folgers and Dunkin Donuts coffee, announced on May 24 that they will raise prices close to 11 percent on U.S. coffee products.

Sara Lee Corp. (SLE), owning Maison du Cafe, L'Or and Cafe Pilao, raised its coffee prices owing to rising green coffee costs. Peet's Coffee and Tea Inc. (PEET) has doubled its retail prices in response to raw material costs.

Starbucks’ coffee lovers were taken aback when the Starbucks, world’s largest coffee chain announced its hike in prices as the company had announced earlier this month that it had already contracted its coffee purchases for the remainder of the fiscal year.

Currently, we maintain a Neutral rating on the stock on a long-term basis. Further, Starbucks holds a Zacks #3 Rank, which translates into a short-term Hold rating. 

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