Creative Commons photo by Esparta Palma
Starbucks is reporting record revenue growth from coffee sales and increased paybacks to shareholders, as arabica coffee prices throughout the world continue to plummet. It begs the question, how can a company that buys and roasts 300-400 million pounds of arabica coffee annually continue its growth if its suppliers are struggling to break even?
In a recent consumer conference call hosted by Morgan Stanley, Starbucks Group President for Global Businesses and CFO Troy Alstead acknowledged the problem. “The seed prices trading at today is frankly too low, it’s below the cost of production in some of the growing regions and in some countries around the world,” Alstead said.
(more: Is the Coffee Business Broken? Thoughts from Let’s Talk Coffee)
Despite this awareness, Starbucks’ most recent quarterly report to shareholders cites the low cost of coffee beans as one of the primary reasons for what Chairman and CEO Howard Schultz described as “by far the best year in Starbucks 42-year-history,” adding, “our results were driven by disciplined, ongoing efforts to elevate the value and relevance of the Starbucks brand, continued innovation and the success of our efforts to deepen our connection to customers and communities around the world.”
The report noted FY13 earnings of more than $14,9 billion, an extra $1.2 billion through dividend payments and share repurchases to shareholders, and a more than 30 percent increase in operating income over the prior year, up to $128.4 million. How? “The margin expansion was primarily due to lower coffee costs and sales leverage,” Starbucks said.
(more: Starbucks Raising U.S. Drink Prices by 1 Percent On Average)
In essence, Starbucks is boasting to shareholders that it has successfully been leveraging lower coffee prices, among other strategies, to achieve higher margins. The admission is hard to reconcile as coffee farmers throughout the world struggle meet production costs, let alone put food on the table. Starbucks, for one, has already locked in its buying prices for 2014, leading to this recent analysis from the International Business Times:
Global coffee prices have plunged this year, and Starbucks Corp. (NASDAQ:SBUX) expects to see a positive impact of $110 – $120 million in 2014, according to a presentation made at the Morgan Stanley Consumer Conference on Tuesday. Last year, they saw a $97 million benefit, after a loss of $206 million in fiscal 2012 thanks to a global draught and jump in prices that year.
Again, how is this sustainable, especially as global prices continue their downward trajectory? To his credit, Alstead made some attempt to address the question at the Morgan Stanley conference, although there is a notable lack of specifics in his following statement:
So as the seed price falls further, we will benefit not at all from the seed pricing falling. In fact, we are not fully benefiting from where the seed is at today, given that we will support our farmers with incremental payments to make sure they can do the right thing. We are in this for the long game. We are going to take care of our farmers in the process that’s something we have done for a long time and are committed to.
Nick Brown
Nick Brown is the editor of Daily Coffee News by Roast Magazine.
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Nothing like a “superbrand” that knowingly and boastfully hoists its kingdom on the backs of underpaid and under-appreciated suppliers. Remember how much the world was told to hate Kathie Lee when we discovered the “sweat shop” connection?
Starbucks is an overrated coffee, but they have gone far in making you think their name whether you drink it or not. Back in the day, we used to “Xerox” when we made copies, and we all asked for “Kleenex” when we needed a tissue to wipe our nose.
Things have a way of changing when we insist our brand is above the threat of competition.
when you buy cheap, low grade coffee at cheap prices, pass it off as quality and sell it as such….well there lies the answer. if it’s too low, then pay more instead of saying its too low. some of these farmers are just scared to try to get more for fear they won’t get anything. however those farmers that are growing the world’s finest coffee are doing just fine.
That any company benefits from lower costs of inputs without having to lower its sales price should not be a surprise. Economist refer to selling prices being “sticky” coming down, while sellers are much quicker to pass along supply cost increases. More interesting is, given the size of the coffee market, is Starbucks’ ability to impact price levels of beans. My own suspicion is that they are a relatively small buyer in the global market with very little pricing power. Likewise, when considering the overall cost of coffee in their end product, the percentage is likely low single digits. Milk cost is likely much higher, all trumped by salary, wages, benefits, and property costs (real estate is not cheap). Lower coffee prices certainly help, but to say Starbuck’s profit is at the expense of the farmer is a bit extreme and not particularly helpful.
Starbucks specializes in making a killing, not a living. That’s all. folks!