As Coffee Prices Decline Worldwide, Starbucks Bucks the Trend

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Coffee BeansCoffeehouse chain Starbucks (SBUX) reported its most profitable quarter ever last month, and do you know whom they have to thank for it? Consumer ignorance ... and you.

That's right, you. Across the country and around the globe, coffee bean prices are plunging. Arabica bean prices are now down 55 percent from their highs set in May 2011. In response, the companies behind such big-name grocery store packaged coffee brands as Maxwell House, Folgers, and Dunkin' Donuts are all slashing prices regularly, and passing the savings on to consumers.

In fact, just earlier this week, J.M. Smucker (SJM) announced it is cutting the cost of most of its packaged coffee brands by 6 percent -- its third such price cut in the last three years. If historic patterns hold, then in the coming days we should see Kraft Foods (KRFT) follow suit with a price cut of its own. Dunkin' Brands (DNKN), which licenses its coffee brand name to Smucker for retail sale in grocery stores, says it lets its doughnut shop franchisees set prices as they see fit.

Hot and Profitable

Meanwhile, Starbucks has stuck firmly to its sticker price, refusing to follow the market down, or share its good fortune with its customers.

It's been nearly four years since the company announced its last (and only) significant price cut.

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Indeed, bucking the trend toward lower prices, back in November 2011 Starbucks actually increased prices on its drinks at cafes in the Midwest, Pacific Northwest, California, and Hawaii. It followed these price hikes by upping prices in the Sunbelt and Northeastern regions in January 2012.

As a result, lower input costs combined with growing sales and steady prices helped earn Starbucks a healthy 10.5 percent net profit margin last quarter. As fiscal fourth-quarter sales climbed 10.6 percent, the company only had to pay about 8.4 percent more for its cost of goods sold. When combined with the lower effective corporate tax rate Starbucks had to pay in the quarter (30.4 percent), this helped lift profits to $432 million -- or $0.58 per share.

What it Means to You

Does this seem unfair? Uncharitable, at least? Well, perhaps it is. But if Starbucks customers are willing to overpay for their coffee while everyone else is cutting prices in line with the coffee market, that's their choice. Starbucks is fully within its rights to accept all the cash consumers want to hand over.

On the other hand, if you don't want to overpay for your coffee, there are a few options for keeping your coffee costs down. For example:
  • Most obviously, you could eschew Starbucks' pricey brew, and simply patronize the companies that are cutting prices instead. For the cost of just one of Starbucks' pricier offerings, you can buy an entire can of Maxwell House.
  • If you simply can't bring yourself to "trade down" in quality, consider buying your Starbucks at the grocery store, and brewing it at home. Your average 12-ounce package of Starbucks ground coffee may cost a bit more than a similar-size package of Folgers -- but it's a heck of a lot cheaper than buying a cup made to order in a Starbucks store.
  • Don't drink a lot of coffee? Consider switching to a one-cup-at-a-time Keurig brewer. The specialized Green Mountain Coffee Roaster (GMCR) machines cost a bundle up front, sure. But as for the coffee itself, well, a recent Consumer Reports article notes that when bought in bulk, K-Cups actually only cost you about $0.60 for a cup o' joe after the up-front purchase costs.
  • For even bigger savings, consider pairing a Keurig brewer with coffee bought at the store and poured into disposable or reusable K-Cup surrogates such as Simple Cups ($14 for 50) or a K-Cup adapter ($18).
Long story short, Starbucks' ability to dodge the trend of coffee cost-cutting shows that the company has real pricing power. But that doesn't mean consumers are powerless. If you don't like the high prices Starbucks charges, don't pay them.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our newsletter services free for 30 days.


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