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Why Starbucks Prices Went Up as Coffee Beans Got Cheaper

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Why Starbucks Prices Went Up as Coffee Beans Got Cheaper STRAT-master675

Workers emptying bags of coffee beans at a Starbucks roasting and restaurant complex in Seattle.Credit Matthew Ryan Williams for The New York Times 


The opposite is true, however. Coffee has been caught in a commodities downdraft that intensified briefly last week as China, a big commodities consumer, devalued its currency. The currencies of commodity producers like Malaysia, Indonesia, Russia, Colombia and Brazil have fallen for months now, along with oil, iron and steel. Coffee has taken one of the deepest dives.

Starbucks disclosed in July that it had locked in prices for 80 percent of its coffee
Yet on July 6, Starbucks said that its costs were rising and that it was raising the price of much of its brewed coffee by 5 to 20 cents a cup.

At the Midtown Manhattan store I frequent, a “venti” cup — 20 ounces of joe — rose 10 cents to $2.55 before tax, while a “tall” 12-ounce cup stayed at $1.95. Tall cups rose in price in many other places, said Jim Olson, a spokesman. Prices for food remain unchanged. Over all, Starbucks said customer bills would increase 1 percent.

In a statement, Lisa Passe, a spokeswoman, said Starbucks tried to “balance the need to run our business profitably while continuing to provide value to our loyal customers and to attract new customers.”

It may be succeeding, though as a customer who happens to follow financial markets closely, I was startled by an apparent disconnect between world events and Starbucks decision-making. Why should I be paying more at Starbucks when coffee has been getting cheaper?

The price changes in the global coffee market have been breathtaking. The futures price for standard Arabica, the benchmark for premium coffee, peaked in October and fell 44 percent in world markets by July 6, the day of the Starbucks announcement. Some companies responded by lowering prices. J. M. Smucker announced in late June that it was cutting supermarket prices of its Folgers and Dunkin’ Donuts brands by an average of 6 percent. Starbucks left its packaged coffee unchanged, but decided to extract more revenue in its stores.

The company’s ability to raise prices has delighted the stock market. Starbucks shares have returned 5.4 percent since July 6, compared with a 1.3 percent return for the Standard & Poor’s 500-stock index. The company has outperformed over longer periods, too. Its shares returned 51 percent, including dividends, over the last year, compared with 9 percent for the index; over five years, the return was 412 percent for Starbucks versus 115 percent for the index.

Starbucks has been growing rapidly and profitably, expanding while calibrating revenues and expenses. In a conference call with investors on July 23, Starbucks executives disclosed that they had already locked in the price for more than 80 percent of coffee supplies for 2016.

Hamish Smith, a commodities economist with Capital Economics in London, said in an interview that a company like Starbucks “can’t afford to be in a position where it will run out of coffee or will suddenly have to pay an unexpectedly high price for it.”

Starbucks’s financial statements indicate that the company tries to insulate itself from exposure to currency and commodity fluctuations through hedging and advance purchase agreements. Operating costs dropped in the fiscal year that ended last Sept. 28 because of lower commodity costs, mainly for coffee, the annual report said

But when coffee prices drop unexpectedly, as they did this year, these advance strategies can have some negative short-term consequences: It’s likely that Starbucks paid more than the current spot market price for coffee stocks, which would be reflected in future financial statements.

That’s one reason Starbucks is on a different timetable than the broad market.
Another is that coffee accounts for less than 10 percent of Starbucks’s overall costs, Mr. Olson said. The premium Starbucks experience requires considerable spending on real estate and wages, and on extensive employee benefits, equipment, distribution and marketing, he said.

And there may be another factor. Howard Schultz, Starbucks’s chief executive, told investors during the conference call last month that “mobile payments now represent 20 percent of all in-store transactions in our U.S. stores, more than double the figure from only two years ago.” I use an iPhone app to pay these days: It’s easy to transfer money without noticing the cost.

Starbucks assumes that customers will consider the new prices to be reasonable, and maybe they are, if you considered past prices reasonable. In 1994, when Starbucks opened its Manhattan stores, it charged $1.25 for a small cup — then only eight ounces, known as a “short.” In inflation-adjusted dollars, that would be $2.01 today, yet a short cup in Manhattan costs only $1.85. You have to ask for one specifically, though; a short is no longer listed on store menus. Still, if you are careful, you can spend less in real money than you did in 1994, even after the latest price adjustments.

Meanwhile, Starbucks is churning out profits. Even if its prices aren’t in sync with commodities markets, the stock market appreciates its timing.

http://www.nytimes.com/2015/08/16/your-money/why-starbucks-prices-went-up-as-coffee-beans-got-cheaper.html?_r=0

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Expert
Expert

"
But when coffee prices drop unexpectedly, as they did this year, these advance strategies can have some negative short-term consequences: It’s likely that Starbucks paid more than the current spot market price for coffee stocks, which would be reflected in future financial statements.”
 
These types of things can happen to anybody in this financial and commodity world.
 
Starbucks has another business now. It is hot Tea. They are going to do for tea what they did for coffee.  Some food stocks will outperform market in the coming decade.  
 
http://fortune.com/2015/04/23/starbucks-earnings-tea/
 
Starbucks reports increased traffic and sales thanks to...tea
By Claire Zillman
 
The coffee chain reported 7% sales growth thanks in part to the unlikely source.
 
Starbucks again got a big boost from its recent acquisition of Starbucks Japan and from its new Flat White and tea drinks. Here are some takeaways from Thursday’s earnings report.
 
What you need to know: The coffee chain reported 7% growth in sales at stores open at least 13 months for the period ending March 29, an improvement over two consecutive quarters of 5% growth. Analysts had predicted those store sales would rise 5% for a third straight reporting period. The company’s sales were $4.6 billion, up 18% from $3.87 billion in the same period last year. Foot traffic ticked up 3% globally.
 
The coffee chain got a bump from a somewhat unlikely source: tea. Sales by the company’s tea division rose 15% year-over-year, COO Kevin Johnson said on the earnings call Thursday, citing the popularity of its Teavana shaken iced teas and Teavana tea lattes. Tea drove 1 point of the Americas region’s 7% same store growth.
 
Johnson also gave a shout-out to Starbucks’ Flat White, introduced to United States customers in January. The drink—similar to a latte, but silkier and made with more espresso—has driven growth in the company’s core espresso segment and helped increase food sales, he said.
 
Revenues of the company’s segment that includes the sale of ground and whole coffee beans and ready-to-drink beverages at grocery, convenience, specialty, and warehouse stores grew 16% to $428 million
The big number: Starbuck’s China/Asia Pacific segment, which includes more than 5,000 stores, performed particularly well. Revenue for the division grew a staggering 124% to $595.2 million in the quarter, propelled by the company’s recent decision to acquire full ownership of Starbucks Japan. Same store sales in the region rose 12% as traffic grew 10%; the company has opened a net of 711 new stores in the region in the last 12 months.


The robust sales figures in Asia helped offset the 10% decline in revenue to $280.3 million that the company reported in its Europe, Middle East and Africa segment. The decline is attributable—in large part—to unfavorable foreign currency exchange rates and the company’s shift toward more licensed stores there. Same store sales and traffic in the region both increased 2%.


What you might have missed: Starbucks will tell you that its customers are loyal, and this quarter it really has the numbers to prove it. A record 1.3 million customers joined the chain’s My Starbucks Rewards program, which brings its total active membership to 10.3 million. Six million of those users are classified as gold members, meaning they’ve made at least 30 purchases with a Starbucks card or the mobile app within 12 months. Matthew Ryan, the global chief strategy officer for Starbucks, said Thursday that Starbucks expects My Starbucks Rewards to grow as the company continues to roll out its service for letting customers place orders ahead of time via their mobile devices. About 600 stores in the Pacific Northwest have the mobile order and pay feature; the company plans to expand it nationwide this year
 

peacockman


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Is this the reason of HVA shares rose up? 
Or. ...
any thing else. ..?

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