Please ensure Javascript is enabled for purposes of website accessibility

Your Morning Cup of Joe Just Got Cheaper and Better

By Jacob Roche - Apr 16, 2013 at 7:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Coffee prices are dropping even as companies invest in more sustainable production

Over the past two years, the price of coffee has fallen more than 50%, proving me extraordinarily wrong when, in May 2011, I worried about soaring coffee costs. I wasn't alone, however. After the cost of coffee had more than doubled over the previous two years, Kraft Foods (KRFT.DL) and J.M. Smucker (SJM -0.83%) raised prices on their respective Maxwell House and Folgers brands, and Starbucks (SBUX 2.03%) raised prices on both its packaged coffees and some of its in-store beverages. Now, prices are basically where they started, putting coffee companies in an interesting position to either keep the price increases and boost profit margins, or start undercutting each other to take market share.

Just a little off the top
Kraft and J.M Smucker already fired the first shots in February, lowering prices on their coffees by about 6%, enough to be competitive without sacrificing all the benefit of lower costs. Starbucks is now  lowering prices on the bags of coffee it sells in grocery stores by $1 per bag, a 10% drop for its Starbucks brand coffee and a 13% drop for its Seattle's Best brand.

Interestingly, Starbucks' Via instant coffee, single-cup pods, and in-store beverages will not be affected by the drop. These are higher-margin items anyway, so leaving those prices as-is will do the most to protect gains from lower costs. Many people come to their nearby retail location to pick up a bag of coffee as well, so cheaper bags can act as loss leaders to get customers in the store, where they might stick around for a $4 latte.

Perhaps there is a third option
It may behoove Starbucks to lower prices on its K-Cups and Verismo pods, giving it an edge against Green Mountain Coffee Roasters (GMCR.DL). However, Green Mountain seems to be willing to give up its margin advantage willingly, by converting many of its blends to fair-trade beans. That will raise costs quite a bit, but the company has promised not to pass on those costs to customers. This move may help to win customer loyalty, however, allowing the company to make up on volume what it loses on margin.

Meanwhile, cafe competitor McDonald's (MCD 2.14%) is investing $6.5 million to help Guatemalan farmers produce more high-quality beans using sustainable methods. McDonald's U.K., New Zealand, and Australia already source all of their coffee from Rainforest Alliance Certified beans, and the Guatemalan investment should give the company access to even more supply for its other stores. That, in turn, may give investors a reason to smile.

On the other hand, while not all of Starbucks' coffee is fair trade, 90% of it is "ethically sourced," according to Coffee and Farmer Equity Practices, a set of standards Starbucks developed with Conservation International a decade ago. The company's goal is to reach 100% by 2015.

The Foolish bottom line
Coffee in the grocery stores should get a bit cheaper for now, which is a welcome change from the price increases of a couple of years ago. But rather than growing fat on increased margins or trying to undercut one another to take market share, some of the bigger coffee companies are using their profits to invest in more ethical and sustainable production methods. This strategy can go a long way to winning the hearts and wallets of customers and investors, but it's difficult to say which company benefits the most. Add these companies to My Watchlist to see how the trend develops.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$233.91 (2.14%) $4.91
Keurig Green Mountain, Inc. Stock Quote
Keurig Green Mountain, Inc.
GMCR.DL
Kraft Foods Group, Inc. Stock Quote
Kraft Foods Group, Inc.
KRFT.DL
The J. M. Smucker Company Stock Quote
The J. M. Smucker Company
SJM
$125.31 (-0.83%) $-1.05
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$73.39 (2.03%) $1.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.