By Annie Gasparro
Coffee shops, such as Starbucks Corp. (SBUX) and Dunkin' Brands
Inc. (DNKN), are looking at some relief next year as arabica prices
are trending downward, taking some of the pressure off companies'
profit margins.
Coffee futures traded on IntercontinentalExchange, or ICE, have
tumbled 15% over the last month, easing up the inflation that
coffee providers faced the past couple of years. On Monday, arabica
futures hit a fresh two-year low, as the market continues to
retreat in anticipation of a record harvest from the top producer,
Brazil.
Shares of Starbucks rose 3.1% to $54.18 Monday, while shares of
Dunkin' received a 3.4% boost, Green Mountain Coffee Roasters Inc.
(GMCR) was up 4.4%, Peet's Coffee & Tea (PEET) rose 3.2% and
Caribou Coffee (CBOU) rose 2.6%.
"The past couple of years, high coffee prices have killed the
coffee companies, because they didn't really raise prices to pass
on those costs to consumers, so it hit their margins," said
Investment Technology Group restaurant analyst Steve West. "Now
they are contracting their coffee for next year as prices are
coming down, so next year it will be a big tailwind for those
guys."
Coffee shops that don't franchise and own their locations
instead--such as Starbucks and Peet's--have felt the burden of the
higher coffee prices more, since the costs go directly to the
company, Mr. West added. Dunkin' Brands, on the other hand, is
almost entirely franchised, which insulates it from the volatility
of the commodities market.
The final size of this year's Brazilian arabica crop, which just
began being harvested, remains unknown, but investors are betting
on a glut of supply from Brazil. In the week ended June 12,
speculative investors in arabica added 770 short positions, or bets
that prices would fall, according to the Commodity Futures Trading
Commission's Commitment of Traders Report.
"Everyone knows coffee prices are coming down, but they won't
really know to what degree until management of these companies come
out with their guidance," Mr. West said. "The one to watch is
Starbucks, because they are usually a precurser to the rest."
Starbucks' Chief Financial Officer Troy Alstead has said the
company expects its commodities costs to be at least $100 million
less in fiscal 2013 than they were this year. In fiscal 2011 and
2012, Starbucks faced $200 million or more of incremental
year-over-year commodity cost increases each year.
"It is clear that we have a tailwind coming, certainly, in
fiscal '13 [which begins in October] as we have locked most of
those prices in for coffee," Mr. Alstead said at a recent investor
conference. "And I expect 24 months or longer of a more favorable
commodity cost environment," he added. The company has also started
buying some of its coffee for fiscal 2014.
Because companies like Starbucks need to contract out their
coffee prices ahead of time, their costs usually don't align
exactly with the spot market, but market prices are still a good
indication of the direction in which they are headed.
--Alexandra Wexler contributed to this article.
Write to Annie Gasparro at annie.gasparro@dowjones.com