--Pressure coming off margins as arabica futures hit two-year
low
--Companies expected to benefit from tailwind next year as
prices come down
--Investors betting on a glut of supply from Brazil
(Adds comment from Dunkin' Brands spokeswoman in sixth
paragraph.)
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
trend lower, taking some of the pressure off companies' profit
margins.
Coffee futures traded on IntercontinentalExchange, or ICE, have
tumbled 15% over the last month, easing 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 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.
"At Dunkin' Donuts, our major commodity is coffee. We are seeing
coffee and other commodities come down from their highs of last
year. We expect them to stabilize for the remainder of the year,
and as a result, our franchisees are experiencing some relief," a
spokeswoman for Dunkin' said.
The final size of this year's Brazilian arabica crop, which just
began harvest, 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 precursor to the rest."
Starbucks Chief Financial Officer Troy Alstead has said the
company expects its commodity costs to be at least $100 million
less in fiscal 2013 than 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