Here’s What Falling Coffee Prices Mean To Starbucks

Coffee prices are witnessing a downward trend in the past one year with the Coffee Sub-Index total return (JO) being down by nearly 26%.

Source: Nasdaq

Coffee is an important raw material for Starbucks (NYSE:SBUX) and the company consumes nearly 500 million pounds of coffee every year. While lower coffee prices would mean better margins for Starbucks (assuming that the selling price of its products remains the same), the equation is not that straightforward due to the following reasons:

1. Starbucks usually locks its coffee prices ahead of time to save itself from fluctuations during the year. In its Q2 2017 earnings the company mentioned that it had already price- locked its coffee needs for 2017 and hence this decline might not impact the company significantly in the short term. However, lower coffee prices in the longer term can impact Starbucks’ margins positively.
2. Coffee is not a very significant part of Starbucks’ cost of goods. In a 2014 interview the company’s CEO had mentioned that coffee beans account for only 20% of the company’s total cost, thus falling coffee prices would not impact Starbucks significantly.
3. While Citigroup has lowered its price forecast for Arabica coffee on the back of higher than expected production, Starbucks Arabica beans are different from the regular beans. The company has high procurement standards and is very picky at the harvest. With zero tolerance for defects, prices of Starbucks’ high quality coffee beans might not trend as low as regular coffee beans.

While a decline in coffee prices is a positive development for Starbucks, it does not impact the company significantly. Volatile coffee prices impact its operating costs more due to the costs associated with hedging to lock in the price. Low prices of coffee beans can impact the company in the longer term, but for the short term, falling coffee prices will not have a significant impact on the margins of the company.