Last month coffee prices hit a 26-month high, forcing Brazilian coffee growers to dip into their reserves to increase coffee exports to meet rising demands, but relying on reserves can only temporarily hold down prices. On top of this, Brazil recently cut expectations for its 2014 coffee crop and does not expect a strong year in 2015, leading to a sharp increase in the price of coffee futures on Thursday, May 15. According to Starbucks' (SBUX 0.80%) fourth quarter 2013 earnings report, 58% of its revenue comes from beverages, the majority of which are coffee, along with an additional 15% from packaged and single-serve coffee. Starbucks' dependence on coffee sales combined with these rising costs has contributed to a 5% dip in the price of shares of Starbucks over the last two months.
Expanding Product Lines
Fortunately, Starbucks recently announced a new plan to expand its non-coffee-based lines. In the second quarter of 2013, it added 337 Teavana stores and just began selling Teavana Oprah Chai Tea in both its Teavana and Starbucks stores. For every item in this line sold, Starbucks will donate to the Oprah Winfrey Leadership Academy Foundation. Oprah is known for her ability to draw people toward products that she promotes--fifty-nine of the first 70 books which she promoted in Oprah's Book Club went on to become USA Today best sellers. This should help entice current, coffee-drinking customers, especially Oprah's over-50 million fans, to consider trying teas.
Starting in 2010, Starbucks began introducing alcoholic beverages into stores. Starbucks felt it would help attract more business at night and get the customers that were already in the stores to spend more. By the end of 2013, the company had introduced beer and wine to 26 US locations, and in March it announced plans to add beer and wine to thousands more stores based on the success at the original 26 locations. If this proves to be successful in many of these new locations, it will create another non-coffee revenue source for Starbucks.
Bottom Line
With coffee prices rising and expected to continue to rise, Starbucks will have to increase its prices for coffee or face decreasing margins. For this reason, it is good to see Starbucks creating other revenue streams which will help it grow into a company much more suited to absorb the negative effects of jumps in coffee prices. Although in the short term Starbucks may be hurt by rising coffee prices, in the long run, Starbucks is clearly positioning itself to expand its market and boost revenue while reducing its dependence on a single industry. Investors may want to wait to buy Starbucks until the severity of the coffee shortage and its effects on the overall coffee market are clearer, but shareholders should still be confident in its long term ability to continue to grow.
