Starbucks Faces Huge Surge in Coffee Prices, Earnings Trouble

By Douglas A. McIntyre Published Jul 14, 9:15AM EDT

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Starbucks Corp. (NASDAQ: SBUX) will be unable to avoid the rising price of coffee beans due to tariffs on Brazilian imports.
This will affect the coffee company’s earnings.

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Starbucks Faces Huge Surge in Coffee Prices, Earnings Trouble — © Watson_images / Getty Images

Starbucks Corp. (NASDAQ: SBUX | SBUX Price Prediction) signs long-term contracts for coffee beans and has sources from all over the world. However, it will not be able to dodge the rising price of coffee beans due to Brazil tariffs undertaken by the Trump administration, particularly if they last for long. For now, these tariffs are expected to be 50%. Brazil is the source of 38% of the world’s coffee. No other nation is close. And, second-place producer Vietnam will have 25% traffic on goods it sends to the United States.

No one knows what the exact effect of higher coffee bean prices will be on Starbucks. Barron’s puts the figure at 3.5% on to the cost of goods sold at the coffee chain. This could be a 0.6% “headwind” on Starbucks earnings. Over the longer term, the figure could be higher. Last year, The Wall Street Journal reported that high drink prices had already started to change the buying pattern of Starbucks customers.

Coffee prices cannot be looked at in a vacuum. Starbucks has to overcome competition and problems with customer service. Among the long list of companies that compete with Starbucks, the largest of which are Dunkin’ Donuts and McDonald’s. Then there are tens of thousands of local coffee shops. China rival Luckin Coffee has just entered the United States. Its effects on Starbucks could take years to measure.

Starbucks CEO Brian Niccol thinks he knows what ails Starbucks. He wants the stores to become neighborhood gathering places as they were years ago. He wants to focus on the customer, and he has trimmed the Starbucks menu. For some reason, Niccol thinks baristas wearing new uniforms will change customer habits.

He has challenges he has not addressed, at least in New York. Stores are often dirty, particularly outside the locations. Starbucks stores frequently run out of food inventory, a problem McDonald’s does not seem to have.

Coffee prices are one among several hurdles. Its stock has slightly underperformed the S&P 500 year to date. The company will need to do better across a broad array of categories.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.