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Business News/ Companies / How Starbucks gets away with charging a fortune for cheap beans
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How Starbucks gets away with charging a fortune for cheap beans

The cost of coffee on commodity markets has been swooning, thanks primarily to a lot of rain and high temperatures in Brazil

Seeing the big dip in coffee bean prices this spring, Starbucks went ahead and locked in all of the beans it will need the rest of the year and about two-thirds of the beans it will need next year. Photo: Bloomberg Premium
Seeing the big dip in coffee bean prices this spring, Starbucks went ahead and locked in all of the beans it will need the rest of the year and about two-thirds of the beans it will need next year. Photo: Bloomberg

Millions of groggy people this morning grubbed up an additional 5 to 20 cents for their Starbucks fix. No biggie. Most probably swiped or scanned and didn’t even notice it.

But for Starbucks, those nickels and dimes add up—especially since it’s paying less for the beans while it’s ringing up higher-priced lattes.

The cost of coffee on commodity markets—the green, unroasted beans, or “berries," that are stripped off the branch—has been swooning, thanks primarily to a lot of rain and high temperatures in Brazil.

So, cheaper beans for them, higher prices for you—a simple and strong mix, with financial markets swirled just so and a light dash of marketing.

The Arabica empire said it hadn’t tinkered with prices on many of its drinks for about two years. It has “to balance the need to run our business profitably while continuing to provide value to loyal customers and to attract new customers," spokeswoman Lisa Passe said in a statement. Translation: Sometimes we realize you’ll pay more.

Seeing the big dip in coffee bean prices this spring, Starbucks went ahead and locked in all of the beans it will need the rest of the year and about two-thirds of the beans it will need next year. “We expected coffee prices to come down, just given what we saw in the market," CFO Scott Maw said on a conference call in late April. “We waited, we were patient, and when they came into our target range, we filled up our needs for the year."

Of course, hedging goes the other way as well. The recent dip in coffee prices meant Starbucks was forced to buy some of the beans it brewed this spring at above-market rates, because it had locked the price in months earlier when it was higher.

But if the market pans out as Starbucks thinks it will, coffee prices will tick up next year and it will still be paying this year’s low rates. Meanwhile, it will keep plinking that extra 5 to 20 cents per cup into the profit sack (and the bonus pool for their savvy hedging team).

In short, Starbucks is raising prices for one very simple reason: because it can. Bloomberg

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Published: 08 Jul 2015, 01:22 PM IST
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