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How Will Falling Coffee Prices Hit Starbucks Next Year?

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Coffee prices

Coffee is, of course, one of the most important commodities for Starbucks (SBUX), and coffee prices have been trending down in 2015. The company’s cost of sales as a percentage of revenue fell 0.5% in 2015, primarily as a result of lower coffee costs. A year ago, coffee costs were 5.7% lower as a percentage of the company’s sales.

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Low coffee costs anticipated

In the chart above, the white line is Starbucks’ commodity cost for coffee, per pound in US dollars, and the black line is the average cost of coffee per pound for the year. Starbucks uses two types of contracts to purchase commodities: fixed-price and price-to-be-fixed. In the latter arrangement, the company fixes the price based on market conditions.

The average cost for coffee in 2016 is anticipated to drop below fiscal 2015 and fiscal 2014’s prices. Bear in mind that Starbucks’ coffee costs may be higher because of its inventory purchased at a higher cost.

Lower coffee costs should also benefit Dunkin’ Brands (DNKN), McDonald’s (MCD)—which sells coffee through its McCafe brand—as well as Yum! Brands (YUM). You can also access some of these companies through exchange-traded funds such as the Consumer Discretionary Select Sector SPDR (XLY). This fund invests about 3% of its holdings in Starbucks, 4% in McDonald’s, and 1.5% in Yum! Brands.

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