Rising Coffee Prices Spook Starbucks Investors

Moneybox
A blog about business and economics.
July 25 2014 11:56 AM

Rising Coffee Prices Spook Starbucks Investors

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Clouds gather over Starbucks.

Photo by Christopher Furlong/Getty Images

Some 16 months ago, Starbucks purchased its first farm, a 600-acre plot in a lush region of Costa Rica. The acquisition was a defensive one. With the help of local farmers and a team of researchers, Starbucks planned to develop new varieties of coffee beans that could better withstand Hemileia vastatrix, a parasitic fungus that is blighting coffee crops around the world. In its third-quarter earnings call on Thursday, chief executive Howard Schultz said that consumers will get a first taste of those agricultural efforts when the fall rolls around.

"In September, we'll be offering an extraordinary micro-lot reserve coffee, the first coffee developed on our own farm in Costa Rica," he said. "Expect to see an expanding and evolving portfolio of proprietary coffees under the 'Reserve' brand from our coffee farm in Costa Rica and around the world in the future."

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From the looks of things this morning, it will take more than the promise of a new bean variety to reassure investors about Starbucks' ability to maintain profits amid rising coffee prices. Shares are down about 2.5 percent after the company said that increased commodity and worker costs could weigh on its long-term earnings growth—bringing it in on the "lower end" of projections—in the following year.

In an effort to offset those increasing costs, Starbucks announced in June that it was hiking the price of ground and whole-bean coffees it sells in grocery stores by roughly 8 percent—an increase that kicked in early this week. The decision followed similar moves by Folgers, Kraft Food Groups, and J.M. Smucker Co., the distributor of Dunkin' Donuts packaged coffee. Starbucks has also hedged its bets on the coffee market and locked in about 60 percent of its coffee purchases for the coming fiscal year, its chief financial officer said on the earnings call.

While coffee might be a source of continued worry, at least Starbucks has a new bright spot. Food options and particularly breakfast sandwiches are an "increasing driver" for midday and afternoon traffic in the chain's stores. That's a big reversal, as food for a long time was "a weakness and a challenge for us," Schultz said. Sales of breakfast sandwiches alone grew 40 percent over the previous year. Hear that, McDonald's? The breakfast wars clearly aren't over yet.

Alison Griswold is a Slate staff writer covering business and economics.

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