Falling Coffee Prices A Boon For Starbucks and Dunkin’

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Prices of coffee futures hit a 2-year low as investors bet on a record supply from Brazil this year. Arabica futures settled at $1.4955 a pound on Monday, June 18. ICE coffee futures have plummeted 15% just in the last month. [1] This should be music to the ears of coffee chains who had their margins squeezed due to a spike in coffee prices last year. This article looks at the impact of lower coffee prices on Dunkin’ Brands (NADAQ:DNKN) and Starbucks Corporation (NASDAQ:SBUX).

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Impact on Starbucks and Dunkin’

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As of January 2012, Starbucks had 9,085 company-owned stores and 8,159 franchised stores. For all of its company-operated stores, Starbucks is directly responsible for purchasing coffee beans. Given the recent decline in coffee prices, the company should experience a boost to margins in the near term at those stores. Starbucks also sells packaged coffee and tea in grocery stores and other retail outlets. Margins had been falling for this segment, partially due to high coffee prices in recent years. This segment may also see a boost to margins in the near term from the recent decline in coffee prices.

On the other hand,  almost all of Dunkin’ Donuts stores operating in the U.S. are franchised. Thus, the company is insulated from the volatility in commodity prices as the franchisees are responsible for purchasing coffee beans. Therefore, a drop in coffee prices is not likely to have a direct impact on Dunkins’  margins. However, if franchisees are able to maintain prices and spend more towards marketing, they may experience an increase in revenues which can increase the amount of royalties paid to Dunkin’.

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Notes:
  1. Coffee Futures Hit Fresh Two-Year Low, wsj.com, June 18, 2012 []