Why Starbucks' Pricing Challenges Are
About to Get Worse
Justin Rohrlich March 23,
2010 2:10 PM|
The coffee chain is offering cheaper cups, USA Today, and free pastries. But rising bean prices could cause its new initiatives to backfire.
taking a cue from the Dollar Menus at McDonald's
(MCD) and Burger King (BKC), the Super
Value Menu at Wendy's (WEN), and a
Happy “Hour” at DineEquity Inc.'s (DIN)
Applebee's Neighborhood Grill & Bar that actually
extends from 11:00 a.m. to 7:00 p.m., then kicks in
again from 10:00 p.m. to closing time, Starbucks
(SBUX) is making a rather obvious effort to lure back
lost customers with a raft of new initiatives.
recently-introduced “Pike Place Brew” -- a cup of regular
coffee for $1.50.
“guns allowed” policy, which means no sales lost to
those packing heat.
were treated to a free pastry with the purchase of any
“handcrafted or brewed beverage” at participating stores.
in a thinly veiled admission that not everyone across
the United States of America reads the New York Times,
Starbucks will be offering USA Today to its customers
after 10 years of the Times, the Times, and nothing
but the Times.
news is part of the coffeehouse experience," said
Chris Bruzzo, VP for brand content and online at Starbucks
Coffee. "We're delighted to be able to provide
our customers with more selection in how they choose
to source their news content and customize their Starbucks
nice of Starbucks to give patrons “more selection in
how they choose to source their news content and customize
their Starbucks experience,” and that customers won’t
have to remove their weapons from their holsters while
purchasing a now-reasonably-priced cup of coffee while
thumbing through the Reader’s Digest of newspapers.
But what effect will it have on the stock?
Staszak of Argus Research tells Minyanville that he's
“confident Starbucks can boost traffic” as a result
of its new initiatives. He has a Buy rating on Starbucks,
as he sees same-store sales improving and costs remaining
founder and managing director of Wisco Research, has
a slightly different take.
is introducing a lot of new initiatives, and while each
one, individually, probably is not a huge driver of
traffic, they’ve each done a pretty good job of adding
incremental sources of revenue,” he says.
recently downgraded Starbucks to Hold, which was a function
of price, not fundamentals, as he thought the valuation
was “a little extended” after realizing a “good gain”
and suggested that investors start taking profits in
the $24 to $25 range.
and sub-$2 cups of coffee aside, how will the world
coffee market affect Starbucks’ fortunes moving forward?
Ryan Krueger of Houston’s Krueger & Catalano says
“supplies are very tight” and warns that risk exists
for the company in that regard.
president of Hackett Financial Advisors, who has a particularly
keen focus on the coffee trade, agrees.
uses primarily Arabica beans, and current supplies of
Arabica are the tightest they’ve been in a while,” he
explains. “Starbucks does benefit by buying six to nine
months out, but at some point, they’ll be forced to
pay higher prices.”
that, while Arabica supply isn’t a problem today, it
could become one come fall, winter, and spring 2011.
we could see coffee prices really skyrocket, raising
input prices for Starbucks -- and with a limited ability
to raise retail prices, they’ll get squeezed and the
stock might suffer,” he says.
this year’s expected bumper crop in Brazil will be enough
to offset lower yields in other parts of the world.
But due to
Brazil’s “oscillating crop seasons,” there’s good reason
to doubt that.
it works,” Hackett says. “One year, Brazil has a large
coffee crop, the next year, they have a small one. The
trees spend those 12 months resting until the following
season, when they explode again. This year is supposed
to be their 'on' year, with a 50 to 55 million bag harvest
expected -- one of the biggest crops ever.”
there’s a twist in the equation. Hackett points out:
19 million bags of coffee domestically and they export
32 million bags. That means they need to produce 51
million bags to meet domestic and international demand,
while also producing, hopefully, a few million extra
bags to build reserves for next year’s crop, which,
because of the oscillating seasons, will be small. This
will give the market a few months of breathing room
through the summer, but won’t change the tightness in
supply expected to come into play at the end of the
end of the year.
But now, there’s yet another twist to factor in.
concerned about the above-average rainfall Brazil experienced
this year, which he describes as a “question mark” going
into harvest time.
rainfall causes irregular flowering, which generally
does not lead to a high-end crop,” he says. “When Brazil
harvests its beans, we may see the crop yields come
in at less than 50 million bags -- only no one will
know until the beans are picked.”
If that happens,
the supply squeeze will come sooner than Hackett predicts.
even off-the-charts sales of USA Today won’t be able
to make up.