Starbucks Beats Coffee Bean Prices With Fresh Beverages and Fresh Ideas

Arabica coffee prices have spiked because of bad weather in Brazil. However, Starbucks has many initiatives in place to steer itself around this surge in costs.

May 14, 2014 at 3:00PM

Starbucks (NASDAQ:SBUX) brews much of its coffee with arabica beans, which have risen in price. However, the coffee chain has many initiatives planned that include a variety of new beverages, and this will see the company through this heavy weather.

Brazil's arabica coffee prices continue to surge, and a half-kilogram is presently trading at $2.30 on the New York futures market. Furthermore, coffee for July delivery has spiked more than 8%, or around $0.15 to $2.04 per pound. The price surge has been blamed on a long drought followed by recent flooding that will have a serious effect on the coffee crop.

Starbucks can beat the coffee bean price surge
Analysts are concerned that the surge in bean prices could pressure Starbucks' margins and force the coffeehouse chain to raise prices. However, investors should realize that the company has faced high costs before. In fact, the company constantly buys coffee on either a fixed-price or variable-price basis depending on market conditions, as it notes in its financial reports.

In addition, Howard Schultz, its chairman, president, and CEO, recently discussed a number of exciting initiatives on Starbucks' earnings call last week. The company's plans for 2014 and beyond bode well for future sales and earnings growth.

The company reported fiscal second-quarter and year-to-date numbers for the period ending on March 30, 2014. The report was highlighted by a 6% increase in global comparable-store sales and a 17% rise in earnings per share to $0.56. Moreover, Starbucks opened 335 new stores across the globe, bringing the total number of stores currently operating to 20,000.

Starbucks is ready for teatime
Schultz reiterated on the call that coffee will continue to drive Starbucks as it invests in building its supply chain. In this regard, the company recently purchased its first operating coffee bean farm in Costa Rica. This coincides with the opening of the newest of Starbucks' seven "agronomy and farmer support" centers, this one in Ethiopia.

So the company continues to buy beans across the world, which will alleviate some of the arabica price spike in Brazil. However, Starbucks is not just about coffee anymore; it has launched Teavana tea bars in Seattle and New York. Schultz noted that the company intends to expand the tea concept to Chicago and Los Angeles, with more locations slated to open in New York in the months ahead.

"Tea is the most consumed beverage on earth behind water, and represents a $90 billion global category that we strongly believe is right to innovation and it represents an enormous global opportunity to Starbucks," said Schultz. "And we are seizing that opportunity with Teavana."

Some like it cold
Starbucks also has a lineup of cold beverages waiting in the wings for customers once the warm weather arrives. The company has been test-marketing its new platform of "handcrafted cold carbonated beverages," Fizzio. Starbucks intends to roll out Fizzio in 3,000 stores in the southwest U.S. as well as in Singapore, Korea, and China this summer.

Fizzio comes in three flavors -- Ginger Ale, Spiced Root Beer and Lemon Ale -- and Starbucks will have other Fizzio flavors for its customers to sip as the summer days roll on. The cold soft drinks combine what Schultz calls natural sodas with the "theater of a custom handcrafted beverage."

"I am convinced [the beverage] will be a big hit with consumers and drive traffic and incrementality during the key afternoon daypart, just as it did in the test markets last summer," Schultz said.

Starbucks is also app-savvy
In addition to these new tea and soda concepts, Starbucks also intends to make the shopping experience at its locations hip for today's tech-savvy consumer. In its year-end report for 2013, the company duly noted the shifts in consumer behavior away from brick-and-mortar retailing to the Web and e-commerce.

However, Starbucks has been busy building an e-commerce platform. The company's Starbucks Card program is already up and running in 28 countries. This program also serves as the foundation for an "integrated gift card, loyalty, social and mobile platform."

The coffee chain's head honcho pointed out that gift card transactions account for a third of all transactions in the U.S. and Canada. The company's mobile app has also been readily accepted by more than 10 million coffee-sipping hipsters and counting

Final Foolish coffee talk
Starbucks has obviously positioned itself to handle the surge in arabica bean prices. 

And the price surge is not only a challenge for Starbucks, but other coffee brewers like Keurig Green Mountain (NASDAQ:GMCR) as well.

Keurig Green Mountain also buys coffee continuously, but the renamed beverage seller is not only about coffee, as it plans to enter the make-your-own-soda game in 2015. The company reported last week that second-quarter 2014 sales grew by 10% compared to the same year-ago period.

But the most interesting line item in Keurig's financials was that coffee inventories as of March 29, 2014, had declined by 40% since March 30, 2013. However, it remains to be seen what effect rising coffee prices will have, even though the company's guidance calls for continued sales growth in the "high single digits" compared to 2013.

In the meantime, investors worried about the affect of the arabica price surge on Starbucks should take comfort in the company's new line of fresh beverages coming to the market by way of the Teavana Tea Bars and Fizzio drinks. In other words, Starbucks remains a good choice for investors who have long-term views and a yen for tea for two.

Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Keurig Green Mountain and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers