Coffee Prices Are Going Through the Roof, and Starbucks Doesn't Care

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Source:  Starbucks

It probably sounds hard to believe. A coffee chain like Starbucks doesn't really care about coffee prices. Sure, no doubt cheaper is better, and it would love to acquire everything including its stirrers at as low a cost as possible. However, the impact to its results is less than you may think.

Brewing a fantastic track record
Starbucks has a long history of solid top- and bottom-line growth through all sorts of volatility in coffee prices. For the past 17 quarters, it has delivered domestic same-store sales growth of 5% or greater. Internationally, it's even better, with a consistent 6% to 8% increase for several years now.

Scott Maw, CFO of Starbucks, noted in a recent presentation that the chain has had several straight years of double-digit percentage gains in overall revenue and is on track for another double-digit jump for 2014 as well. Even when factoring in any effect of higher coffee prices, Starbucks is still guiding for earnings-per-share growth of between 20% and 22%.

The beans cost peanuts
You are probably aware that coffee itself can be very cheap to brew compared to what it fetches, but maybe you didn't know just how cheap. Maw pointed out that the "all in" cost of its coffee is only around 10%. That puts your $4 latte at less than $0.40 of drinkable product, or a 900% markup.

As evidence, Maw also pointed out that Starbucks has been continually expanding its operating profit margin. This even includes fiscal year 2012, when the company faced a "significant amount of coffee cost headwinds."

Source:  Starbucks

Additionally, Starbucks exercises complex hedging contracts that protect it from sudden, huge volatility in which it can't effectively change its prices in the near term. The cost is passed down to the consumer in the form of price rises. Even if coffee prices doubled, it would mean a digestible 10% increase in prices for Starbucks. Long term, as you can probably guess, coffee is very price-inelastic.

It's hard to imagine a couple of extra dimes will keep many people way from their morning fix of that cup of Joe. In the meantime, Starbucks has its buying costs locked in for all of this year and 40% of next year already. That may not be the case with all its competitors, however, that may have to raise their prices comparatively faster. While a higher price will do little to stop people from grabbing their much-needed coffee, price between brewers will certainly play some role, and Starbucks is safe.

Some tea and grab a bite
Another reason why coffee-price increases won't faze Starbucks much is because coffee isn't the only thing it sells. For example, 9% of its sales are actually just tea from both hot and iced tea. Starbucks even believes that if it gets the "right quality and relevancy of offer," tea can be "much more than 9%" of its sales.

In addition to tea and other non-coffee drinks, more than 20% of its revenue is actually from food, with a "significant opportunity" to grow that further. Obviously coffee prices don't have much of an effect on the profit margin of Starbucks' chocolate croissants. Speaking of which, croissant sales have doubled since the launch of its La Boulange brand for those products.

The launch of its La Boulange brand of food in its domestic restaurants is helping to drive higher food sales. In the first quarter, still only around half of those restaurants had them, which Starbucks expects to rise to 75% for the second quarter. For lunch in general, Maw stated:

The thing that we're quite excited about is we're already becoming much more relevant in lunch, we're already seeing a significantly outsized comp growth in lunch[,] and we haven't even gotten to the rollout of the up level lunch program.

Again, Starbucks is more than coffee.

Source: Starbucks

Foolish takeaway
Don't let the headlines scare you when you see that coffee prices are rising. One out of three, and growing, of transactions in domestic Starbucks stores involves a food purchase. Likewise, nearly one-third, and growing, of revenue is tea and food. Once you put into perspective just how little the actual cost of coffee beans are as a percentage of sales -- and even that little bit is hedged -- you start to realize how little coffee bean prices are to the big picture. No wonder Starbucks sources from the far reaches of the earth. It barely costs it anything to do so, relatively speaking.

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The article Coffee Prices Are Going Through the Roof, and Starbucks Doesn't Care originally appeared on

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. 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.

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