Starbucks raises prices. When will they go back down?(Read article summary)
Starbucks is joining the growing number of coffee brands hiking up prices due to a worldwide coffee shortage. The coffee supply has been tight this year due to drought and disease, so when will consumers see relief in prices?
Starbucks customers now see slightly more expensive coffee after the coffee chain announced last week it would raise some of its prices on Tuesday.
Starbucks raised its prices on certain beverages Tuesday between five and 20 cents, depending on the order. For example, a 20-ounce, venti-sized cup of brewed coffee will be $2.35, an increase of 10 or 15 cents depending on the market, according to the Dow Jones Business Wire. Starbucks packaged coffee sold in grocery stores will increase by about $1 per bag on July 21.
CEO Howard Schultz had said Starbucks wouldn’t raise its prices because it has protection for 2014. In a March interview with Fox Business, Mr. Schultz said Starbucks negotiates and sets its coffee purchase prices for a number of years, insuring them against paying more in the event of supply problems like droughts and disease.
Starbucks joins a number of coffee vendors who have already raised prices. Dunkin’ Donuts slightly raised its prices of coffee sold in its stores earlier this month, and the price of Dunkin' Donuts brand coffee sold in grocery stores also increased by 9 percent after J.M. Smuckers, which has a licensing agreement with Dunkin' Donuts to sell its coffee products, announced the news. Kraft Food Group Inc. also announced a 10 percent increase for its Maxwell House and Yuban retail brands.
The reason for rising prices is simple: there's a coffee shortage. Brazil has been in a severe drought since January and that has been highly influential on prices, Thomas Copple, an economist for the International Coffee Organization based in London, says via e-mail to the Monitor.
"Brazil accounts for around a third of world production, so any disruption to its output has significant implications for global prices," he says.
The ICO composite indicator, which is a weighted average of a range of physical coffee prices across the world, was under $1 per pound in November 2013, Mr. Copple says. Now, it has jumped to $1.64 per pound. An El Niño weather event may also arrive earlier than expected this year and could hurt coffee growers. Coffee rust, a common disease infecting coffee leaves, also has contributed to the shortage, he adds.
What will happen to coffee prices in the immediate future? Right now, it isn't clear. The market is subject to price fluctuations and many experts are uncertain of the size of the upcoming Brazilian crop, Copple says. Once the Brazilian crop is harvested, people will have a better idea of the damage and the implications for the world market, he adds.
"However, the most important variable could be what happens next year," he adds. "If the drought in Brazil continues to affect its production in 2015, as many have speculated, then prices could certainly increase further."