Coffee comes from coffee beans and rising prices may push big chains to charge more. Image source: Starbucks.
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After raising its prices in July, Starbucks (NASDAQ: SBUX) could be forced to consider another increase as prices for some coffee beans have reached 18-month highs.
Due to a recent stretch of arid weather in in Brazil and Vietnam as well as a multiyear global supply shortage, the cost of robusta and arabica coffee bean prices have been steadily rising, according to MarketWatch. That's not just bad news for Starbucks. It could cause pricing problems for any player in the coffee space including Dunkin' Donuts (NASDAQ: DNKN).
A research report from the U.S. Department of Agriculture found that "on average, a $0.10 increase in green-coffee-bean prices per pound would yield a $0.02 increase in both manufacturer prices and at the register," according to MarketWatch. It's not that simple, however, in part because Starbucks and Dunkin' Donuts have both recently raised prices, albeit for different reasons.
What have Starbucks and Dunkin' done?
Starbucks raised prices in July by $0.10 to $0.20 on brewed coffee and $0.10 to $0.30 on espresso beverages and tea lattes. The company said the move would cause the average check to go up by about 1%. It did not directly address rising coffee bean prices, instead saying that pricing is a perpetual work in progress. "Pricing is continually evaluated on a product-by-product and market-by-market basis in our stores in order to balance business needs while continuing to provide value to our loyal customers," according to Starbucks.
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Dunkin' Donuts also raised prices at many of its stores in July, but the franchise-based company did not do so as a corporate decision. Rather, CEO Nigel Travis said that he believes the increases were a reaction to something other than rising bean price, The Daily Caller reported.
We think that pricing got ahead of itself because (franchisees) saw the minimum wage going up, and the natural reaction is to increase prices. It's not always the best reaction. We've managed now to get price increases under control.
Will rising bean prices force more increases?
Coffee is not gasoline. Starbucks, Dunkin', and other coffee sellers do not change prices on a daily basis as the underlying commodity price changes. That's because unlike the price for a gallon of gas, which has only a small profit margin for the station, coffee tends to be marked up quite a bit. There's a lot of margin in a $6 latte and even a $2 small cup of coffee.
In addition, while bean prices have risen, those increases are already priced into current prices. Future increases are, of course, possible, but at the end of July, total U.S. green-coffee inventory, including arabica and robusta beans, was at the highest since 2003, according to data from the New York-based Green Coffee Association, MarketWatch reported.
"Although the latest data suggest that coffee demand picked up in the second quarter, we suspect this may not prove sustainable given generally lackluster economic growth," Caroline Bain, an analyst with Capital Economic, told the news site. She believes that a drop is coming. "We are conscious that prices have already surged and that the rally has, at least in part, been fueled by speculative enthusiasm."
That, coupled with the fact analysts expect that the market has peaked barring more unexpected bad weather, should send bean prices down.
For American consumers, this means that unless there is a sustained increase in bean prices -- which is possible but not expected -- what you pay for a latte, macchiato, cappuccino, or even a plain old cup of coffee should not increase anytime soon.
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Daniel Kline has no position in any stocks mentioned. He never notices when coffee prices go up because he uses the Starbucks app. The Motley Fool owns shares of and recommends 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.