Coffee lovers can expect to pay a little bit more for a cup, now that coffee futures’ meteoric February rise has finally made its way to the grocery store. The J.M. Smucker Company (NYSE:SJM) has announced that it will raise the prices on Folgers (14% of unit coffee sales in the US) and Dunkin Donuts packaged coffee by 9% each, reports Venessa Wong for Bloomberg. Other retailers are expected to follow suit since the same increase in raw coffee prices will impact all of them to some extent.
Coffee futures driven by drought in Brazil
Coffee futures jumped back in February when Brazil, the world’s largest coffee grower, was hit by a severe drought while other Latin American coffee growers including Costa Rica, Guatemala, and El Salvador have seen their coffee crops damaged by fungus. The The J.M. Smucker Company (NYSE:SJM) COO Vincent Byrd said at the time that the company would raise prices when that became necessary, but it takes a while for futures prices to propagate down the supply chain and hit the shelves so that customers actually see a difference. Rain in Brazil has picked back up and futures are down, so coffee prices should fall back in a few months.
Coffee prices present a bigger problem for J.M. Smucker
A small increase in prices probably won’t be a problem for The The J.M. Smucker Company (NYSE:SJM), especially if other grocery stores increase their own prices, but coffee shops like Starbucks Corporation (NASDAQ:SBUX) have more difficulty navigating price spikes because they have less room to maneuver.
For a company whose main strength is giving customers a consistent experience, a price hike could cause more pushback than grocery stores have to concern themselves with. Obviously high-end coffee shops get a huge percentage of their revenues from coffee sales, so the stakes of changing prices and potentially alienating customers are higher, and the alternative to getting a Starbucks Corporation (NASDAQ:SBUX) latte is brewing some coffee at home. The alternative to brewing coffee at home – giving up coffee for a couple of months – isn’t something The J.M. Smucker Company (NYSE:SJM) seriously has to worry about.
The alternative is for Starbucks Corporation (NASDAQ:SBUX) to accept lower margins for the quarter and hope that investors understand the rationale behind the decision and don’t punish the stock the next time earnings are reported.