by InvestorPlace Staff | September 23, 2010 2:51 pm
Better start setting more money aside in your weekly coffee budget if you’re one of the millions of Americans who make a regular Starbucks (NASDAQ: SBUX) run. Yesterday, the Seattle-based coffee brewer said it will raise prices on selected coffee drinks.
As InvestorPlace reported earlier this month, coffee prices are hitting a 13-year high, thanks to back-to-back poor coffee bean harvests. A pound of Arabica coffee rose to $1.8865 for December delivery, a jump of 1.9%. Naturally, with the coffee supply low and demand growing, prices should continue to rise.
Howard Schultz, the CEO of Starbucks, explained the increase in prices in a recent press release. Apparently, Starbucks initially absorbed the price increase itself, but can no longer sustain the revenue hit.
“Over the last six months a highly speculative green coffee market and dramatically increased commodity costs have completely altered the economic and financial picture of many players in the coffee industry,” Schultz said “And while many, if not most, coffee roasters and retailers began raising prices months ago, we have thus far chosen to absorb the price increases ourselves and not pass them on to our customers. But the extreme nature of the cost increases has made it untenable for us to continue to do so and we have been forced to take the steps we announced today.”
The message from Starbucks? Cut us some slack for not raising prices earlier.
Not all Starbucks customers need to worry about the price hikes. While prices on some bigger, costlier drinks go up, Starbucks will maintain if not lower the price of a “tall” brewed coffee. Those looking for a simple $1.50 cup of coffee can breathe easy.
Interestingly, Starbucks maintained its earnings outlook for the fiscal year, despite the mounting price of coffee beans. In August, Starbucks officials expected earnings of $1.36 to $1.41. Shareholders will find out what earnings actually were on Sept. 30, when the fiscal year ends. Experts had forecasted slightly lower earnings, with a price target of $1.23.
Year-to-date, Starbucks stock has fared well with a gain of 11.6%. And since the news that the coffee-brewer would maintain earnings estimates (despite concerns) in late August, the stock has climbed 8.7%. Time will tell if the price increase will end up hurting the stock in the long run.
Other coffee competitors have thrived in 2010 as well, despite the consecutive poor harvests. McDonalds’ (NYSE: MCD) new McCafe line of specialty coffee drinks has been a huge hit and have contributed to the fast-food chain’s 20.2% stock climb year-to-date. Likewise, instant brew lines have grown in popularity with products like the Keurig, causing even Starbucks to create its own line, Via.
Until coffee prices fall back to Earth, customers looking for a trendy Starbucks frappuccino or latte will have to pony up more dough to their local baristas. In the meantime, Starbucks hopes customers looking for a cheaper cup of joe will at least turn to another Starbucks product — smaller “tall” cups, or Via instant servings that wind up costing about $1 a cup.
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