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Starbucks ups prices to offset coffee costs

Starbucks ups prices to offset coffee costs

Analysts don’t expect consumer fallout

Starbucks’ latest plan to raise prices on some beverages is not expected to hurt consumer demand for the coffeehouse products and will serve to offset inflationary cost pressures, securities analysts said Thursday.

The Seattle-based coffeehouse giant said late Wednesday it would raise the price of certain beverages in some markets, while also lowering the price of other popular drinks.

The move is necessary, Starbucks said, to address the rising price of coffee beans, which the company said is close to a 13-year high. Starbucks is also dealing with volatility in the price of other key ingredients, such as dairy, sugar and cocoa, the company noted.

Other coffee producers have reportedly raised prices of late, including J.M. Smucker Co.’s Folgers and Dunkin’ Donuts brands, as well as Kraft Foods Inc.’s Maxwell House and Yuban products. Earlier this month, Green Mountain Coffee Roasters Inc., the Waterbury, Vt.-based parent to the Tully’s, Diedrich and Newman’s Own Organics coffees, said it would increase prices on its single-serving K-Cup packs by 10 percent to 15 percent over the next several months, starting Oct. 11.

“Over the last six months, a highly speculative green coffee market and dramatically increased commodity costs have completely altered the economic and financial picture of many players in the coffee industry,” Howard Schultz, Starbucks’ chairman, president and chief executive, said in a statement.

“And while many, if not most, coffee roasters and retailers began raising prices months ago,” he continued, “we have thus far chosen to absorb the price increases ourselves and not pass them on to our customers. But the extreme nature of the cost increases has made it untenable for us to continue to do so ...”

Sharon Zackfia, a securities analyst with William Blair & Co. that covers Starbucks, said it is difficult to gauge consumer response to price increases. She noted that the coffeehouse chain’s targeted price hikes in the latter half of 2009 were met with little discernable consumer resistance as traffic trends improved throughout that time.

“We also believe Starbucks’ methodology of strategically implementing price increases by market and by product and by size will minimize the potential for consumer pushback,” Zackfia said in a Thursday report.

The latest price increases at Starbucks will mirror what the chain had done in the past, including unchanged or lowered prices for some of the most popular beverages, including certain espresso drinks and, in most markets, its $1.50 tall brewed coffee. Prices will be raised on more labor-intensive and larger-sized drinks.

The company did not specify the price increases planned, but analysts speculate the upcharge will be modest, in the low-single digit range.

Officials with the 16,737-unit chain said the targeted price increases would mitigate the impact of rising commodity costs on corporate earnings. On Wednesday, the company reiterated earlier earnings projections for fiscal 2011 totaling between $1.36 and $1.41 per share, with the company planning to absorb 4 cents per share of coffee price inflation. Starbucks holds a September-ending fiscal year, and 2010 earnings are not yet reported. In fiscal 2009, the company earned 80 cents per share.

Starbucks officials also said they had not ruled out the possibility of raising the price of packaged coffee in grocery stores and other channels in coming months.

Contact Lisa Jennings at [email protected].

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