Coffee prices rising, Starbucks warns
Last Updated: Thursday, January 27, 2011 | 1:06 PM ET
The world's largest coffee chain warned Thursday that rising prices for the caffeinated bean will eat into its profitability — but the company won't pass those costs onto consumers just yet.A worker roasts coffee beans in Indonesia. Wholesale prices for the beans have hit multi-year highs recently (Sigit Pamungkas/Reuters)
Starbucks Corp. warned analysts that its profits for the year will come in below expectations because the price of coffee has become the latest foodstuff swept up in a wave of runaway inflation.
The benchmark arabica bean contract on the ICE futures exchange hit a 13-year high on Wednesday. It is up by more than 80 per cent since June 2010.
The company has thus far swallowed those costs and will avoid price increases to consumers, in order to maintain market share, the company said in releasing its quarterly results Thursday, but it did not rule out price increases on some items in some markets moving forward.
"So far customers have responded well to that," CFO Troy Alstead told the Wall Street Journal. "We're being careful and systematic in our pricing work."
The chain's first quarter profits were up 44 per cent to $346.6 million US.
Same store sales were up by five per cent internationally for the chain. But if prices for the underlying commodity remain high, the chain will earn less money per cup. Starbucks has already sourced its coffee supply at fixed prices through 2011. But persistent high prices will have an impact.
"In my history of following this for 30 years, coffee has never stayed very long at these kind of levels without some kind of catastrophic event like weather and we don't have that," CEO Howard Shultz told the Wall Street Journal.
Increases can take 18 months
There can often be a lag of up to 18 months between when underlying food commodity prices rise and when that's felt in the consumer market.
Earlier this week, McDonald's Corp said in its earnings report that the company may have to pass on rising food prices to consumers either in the form of higher prices or smaller portions.
Industrial commodities such as metals and oil have been rising for years based largely on increased demand from industrializing Asian powers such as India and China. But in recent months, food commodities such as wheat, beef, dairy products and sugar have soared as concerns over how to feed the world's rising population come to the fore.
The UN has called a meeting of its food body for Friday to examine the issue, and urges members to buck the trend of placing export bans on foodstuffs as a knee-jerk reaction to higher prices and occasional supply problems.
French President Nicolas Sarkozy pledged this week to make global food price hikes a focus of the G20, which he heads up in 2011.
"If we don't do anything we run the risk of food riots in the poorest countries and a very unfavourable effect on global economic growth," he said. "The day there are food riots, what country at the G20 table will say this does not concern them? I don't see a single one."
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