How Starbucks minimizes the impact of coffee prices
I believe there are two explanations for the "irrelevance" of coffee prices. 1. Purchase contracts
Starbucks buys most of its coffee from suppliers through fixed-price commitments. This means that it won't feel the effect of short-term fluctuations in coffee prices, as the price and quantity are fixed. I estimate that these commitments typically last around a year. Hedging
Another way Starbucks can minimize its commodity risk is through hedging. Typically, the company will make an arrangement to sell coffee on a specified future date (it buys a future). This means that it earns money when coffee prices increase, and hence this cancels out the input cost risk.
Think about the commodity costs and margins this way: despite increasing commodity costs in 2011 and 2012, Starbucks was capable of improving its margins. In 2013, commodity costs will most likely decline, so Starbucks doesn't even need improved operational performance to improve profitability. Therefore, I think Starbucks has a lot of potential in the short run (especially if the imperfect hedge will benefit the bottom line), but I am also decently optimistic on the long-run prospects of Starbucks. I plan to follow this article up with other in-depth articles about Starbucks, which will elaborate on my long thesis.
Starbucks recently announced a revamped pricing structure. Prices for many of its popular (read: lower-end) products such as brewed coffees and lattes are headed downwards. A spokesperson claims that this is the first time in Starbucks’ history that prices have been reduced. According to an article written by Claire Cain Miller in the New York Times, the coffee purveyor is also redesigning its menu to feature lower priced brewed coffees, as well as...