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.

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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.

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