Coffee Price Hikes Make Starbucks Stock Look Costly

Starbucks (SBUX) has announced a 17% hike in the price of its packaged coffee to compensate for the steep increase in Arabica coffee prices. Its competitors in the broader market for specialty coffee include McDonald's (MCD), Caribou Coffee (CBOU) and Peet's Coffee (PEET). Our price estimate for Starbucks stands at near $40, which is in line with the market price.

Why Coffee Prices are Rising?

In May 2011, Arabica coffee futures hit their highest price in 14 years on concerns that upcoming harvests would be insufficient to supply the world's growing consumption of coffee. According to some analysts, a rush from coffee roasters such as Starbucks to hedge as much of their price exposure led to the increase in price of coffee futures. Many believe that Starbucks has typically hedged two to three months ahead of its needs due to the prospects of higher coffee prices in the near term. Increases in farming costs coupled with storms in Columbia also led to the substantial price increases.

Starbucks sells packaged coffee and tea globally through arrangements with grocery and warehouse club stores, such as Costco (COST). Currently, its packaged coffee and tea are available in close to 37,000 such stores worldwide.

The increased prices are likely to affect the company revenues. However, the customers who are habituated to Starbucks coffee might still splurge on their highly priced coffee products. Still, we believe the passing on of higher prices to customers will affect Starbucks' top line. Other sellers like Smuckers (SJM), Sara Lee (SLE) and Peet's have also raised prices on coffee products.

See our full analysis for Starbucks stock here

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