Please ensure Javascript is enabled for purposes of website accessibility

Will Higher Coffee Prices Burn Starbucks?

By Tamara Walsh – Feb 22, 2014 at 3:00PM

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

Starbucks and other coffee retailers could hike prices for consumers if the cost of raw materials continues to climb.

Coffee commodity prices climbed 9.1% on Tuesday, marking their biggest one-day percentage gain in nearly a decade. The move comes after futures traders drove up raw coffee prices this week because of concerns that supply could become crimped due to unfavorable weather conditions in Brazil. The question on many investors' minds now is whether this will drive up costs for Starbucks (SBUX 3.59%), particularly as Brazil accounts for as much as one-third of the world's total coffee supply today.

Coffee needs very specific amounts of rainfall to flourish, particularly arabica beans, which make up the majority of what's sold in the U.S. by upscale coffee retailers, including Starbucks and Dunkin' Brands' Dunkin Donuts. Arabica is one of two coffee species that control the $100 billion-plus global coffee market today, according to Bloomberg. Bad weather conditions in Brazil could be extra-damaging to Starbucks' bottom line because the upscale coffee retailer only buys arabica beans.

In 2012, Starbucks saved around $100 million amid favorable commodity costs thanks to a record arabica coffee harvest in Brazil that year. But the opposite may be true in 2014 as Brazil struggles with the worst drought in decades. As coffee commodity costs go up, it could burn Starbucks' profitability, but not in the near term.

Coffee retailers such as Starbucks typically purchase their raw materials months in advance and are therefore often able to lock in lower prices. Also, coffee beans account for just 8% to 10% of cafe operating costs for Starbucks, according to The Wall Street Journal. This means that even as coffee commodity expenses increase, it will still take some time before customers see a spike in the cost of a Starbucks latte.

Looking to the future, Starbucks plans to test 30 new arabica strains in a coffee farm in Costa Rica that the coffee giant purchased last year, Bloomberg reported. Still, experimenting with growing its own beans is a waiting game for Starbucks because it will take years before the crop is ready for commercial use. If things go well at this farm, Starbucks said it would consider buying more farms in the region. For now, Starbucks should be able to weather volatile coffee prices. But longer term, climate change and erratic weather in the world's top coffee-producing countries could take its toll on Starbucks.

Tamara Rutter owns shares of Starbucks. The Motley Fool recommends and owns shares of Starbucks. 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.

Invest Smarter with The Motley Fool

Join Nearly 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

Starbucks Stock Quote
$102.20 (3.59%) $3.54

*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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

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.