Don't Get Burned by the Hot Coffee, Starbucks

Who says there's no inflation? Coffee prices are still going through the roof. That affects purveyors of the almighty bean in its many forms, and Starbucks (Nasdaq: SBUX  ) is the latest to hike the prices on some of its coffee products.

Coffee prices have surged near 13-year highs, and companies such as J.M Smucker (NYSE: SJM  ) and Kraft Foods (NYSE: KFT  ) have already reacted. Smucker boosted prices on its offerings by an average of about 9%. Green Mountain Coffee Roasters (Nasdaq: GMCR  ) is planning a 10%-15% increase in its own coffee products. Starbucks had originally said it could absorb the added costs, but now it's caving to the commodity price spike.

These are tough times for the coffee crowd, since raising prices on a beloved product is a dangerous endeavor when so many consumers aren't feeling too flush.

Although Starbucks may lower the price of its 12-ounce brews, it will hike prices for large, labor-intensive drinks, and it's mulling an increase in the price of the packaged coffees it sells through grocers. Its packaged-foods division is a disproportionately profitable segment of the company.

McDonald's (NYSE: MCD  ) , which has been offering plenty of coffee drinks to try to steal away caffeinated market share from Starbucks, said it will hold strong on its own bargain beverage pricing. That might hurt coffee players, including Starbucks.

It would have been nice if Starbucks hadn't had to increase the price of its caffeinated wares. If consumers got sticker-shock over what might feel like premium prices for not-so-premium coffees such as Maxwell House, Folgers, and so forth, then Starbucks might come out looking like more of a value. It could have been an opportunity for Starbucks to woo some customers to its side of the coffee aisle.

Still, it's not a surprising turn of events, and the rise in the price of green coffee will likely force other rivals such as Caribou (Nasdaq: CBOU  ) and Peet's (Nasdaq: PEET  ) to similarly upwardly adjust their prices.

Do you think Starbucks customers will react badly to the price increases, or do you think they've heard coffee prices are spiking and understand that such costs often get passed to consumers? Will Americans give up their coffee if it just gets too blasted expensive? Discuss the situation in the comment boxes below.

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers pick. Starbucks is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.  


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 24, 2010, at 12:15 AM, lowmaple wrote:

    I'm cheap and buy beans which will be going up in price. However since I believe the quality much better than Mccup there is no way I'll switch and I presume most other customers are there for the quality.

  • Report this Comment On September 24, 2010, at 10:42 AM, RoadRunner91910 wrote:

    Somehow, the whole $3+ price for a cup of coffee, whether the purveyor is Micky D's or Starbust, has never made much sense to me. In my own, "Rules To Live By," this would be on the top of my list of things you can eliminate as frivolous expenses.

  • Report this Comment On September 24, 2010, at 12:06 PM, radthanael wrote:

    I have never paid $3 for a cup of coffee, and to my knowledge, Starbucks doesn't charge $3 for coffee, either. They charge that much for drinks comprised primarily of milk, yes, but coffee at any size (even 20oz) can still be enjoyed for less than $2 anywhere - even Starbucks.

  • Report this Comment On September 25, 2010, at 4:51 AM, swagv wrote:

    Anybody who thinks that the $3 is primarily profit and ingredients rather than labor is Fool City.

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