Starbucks, Dunkin', Other Coffee Shops See Boost on Falling Costs

   By Annie Gasparro 
 

Coffee shops, such as Starbucks Corp. (SBUX) and Dunkin' Brands Inc. (DNKN), are looking at some relief next year as arabica prices are trending downward, taking some of the pressure off companies' profit margins.

Coffee futures traded on IntercontinentalExchange, or ICE, have tumbled 15% over the last month, easing up the inflation that coffee providers faced the past couple of years. On Monday, arabica futures hit a fresh two-year low, as the market continues to retreat in anticipation of a record harvest from the top producer, Brazil.

Shares of Starbucks rose 3.1% to $54.18 Monday, while shares of Dunkin' received a 3.4% boost, Green Mountain Coffee Roasters Inc. (GMCR) was up 4.4%, Peet's Coffee & Tea (PEET) rose 3.2% and Caribou Coffee (CBOU) rose 2.6%.

"The past couple of years, high coffee prices have killed the coffee companies, because they didn't really raise prices to pass on those costs to consumers, so it hit their margins," said Investment Technology Group restaurant analyst Steve West. "Now they are contracting their coffee for next year as prices are coming down, so next year it will be a big tailwind for those guys."

Coffee shops that don't franchise and own their locations instead--such as Starbucks and Peet's--have felt the burden of the higher coffee prices more, since the costs go directly to the company, Mr. West added. Dunkin' Brands, on the other hand, is almost entirely franchised, which insulates it from the volatility of the commodities market.

The final size of this year's Brazilian arabica crop, which just began being harvested, remains unknown, but investors are betting on a glut of supply from Brazil. In the week ended June 12, speculative investors in arabica added 770 short positions, or bets that prices would fall, according to the Commodity Futures Trading Commission's Commitment of Traders Report.

"Everyone knows coffee prices are coming down, but they won't really know to what degree until management of these companies come out with their guidance," Mr. West said. "The one to watch is Starbucks, because they are usually a precurser to the rest."

Starbucks' Chief Financial Officer Troy Alstead has said the company expects its commodities costs to be at least $100 million less in fiscal 2013 than they were this year. In fiscal 2011 and 2012, Starbucks faced $200 million or more of incremental year-over-year commodity cost increases each year.

"It is clear that we have a tailwind coming, certainly, in fiscal '13 [which begins in October] as we have locked most of those prices in for coffee," Mr. Alstead said at a recent investor conference. "And I expect 24 months or longer of a more favorable commodity cost environment," he added. The company has also started buying some of its coffee for fiscal 2014.

Because companies like Starbucks need to contract out their coffee prices ahead of time, their costs usually don't align exactly with the spot market, but market prices are still a good indication of the direction in which they are headed.

--Alexandra Wexler contributed to this article.

Write to Annie Gasparro at [e-mail]