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Will Your Favorite Coffee Cost More in 2014?

by Eileen Rojas, The Motley Fool

As 2014 approaches, coffee industry analysts and investors are betting that coffee prices are gearing up for a turnaround after hitting multi-year lows in recent months. Will the rising cost of coffee beans mean higher coffee prices at your local cafe?

The Wall Street Journal looked at prices for arabica coffee beans, known for producing better tasting coffee, and lower quality robusta beans and found that the price differential between the two beans narrowed to just $0.28 per pound in December. This is the narrowest price gap seen since October 2008. The drop in the price of arabica beans is in part due to an abundant crop out of South America hitting the market. In November, the price of arabica hit a seven year low.

As the price difference narrows, roasters choose higher quality beans The narrower the difference in price between the two types of beans, the greater the tendency for roasters to use more arabica beans in their coffee blends. Global beverage strategist Ross Colbert told the Journal that when the price gap is about $0.30 apart, older arabica beans offer a better value for coffee buyers than robusta beans. As coffee buyers demand and purchase more arabica coffee beans, market prices for these beans will tend to rise .


In 2011, arabica beans commanded an almost $2 premium over robusta beans. Fast forward to 2013, and the robusta beans now look overpriced. Part of the reason for this is that Typhoon Haiyan in the Philippines delayed the harvest of top-exporter Vietnam’s robusta crop. Some growers have also held onto their supplies and waited for prices to rise.

If coffee bean prices do head higher in the next few months, consumers shouldn’t expect to pay higher prices right away. At Starbucks , the price of beans makes up a small amount of the total price customers pay. Historically, the price of coffee makes up about 8%-10% of the company’s operating expenses .

Starbucks coffee — a premium product with a premium price In its 2012 annual report, Starbucks noted that it only buys arabica beans through fixed price contracts and price-to-be-fixed contracts. The price-to-be-fixed contracts have certain terms that are negotiated except for the delivery date and commodity price, which are set at a future point in time. Starbucks has the option to “fix” the price before the coffee beans are delivered, which it does through futures contracts . Losses from these contracts recognized in fiscal 2012 earnings were $3.4 million .

Total green coffee purchase commitments for fiscal 2012 were $854 million. Fixed price contracts totaled $557 million, and price-to-be-fixed contracts were estimated at $297 million . Starbucks’ customers, as well as other coffee drinkers on average, are not as sensitive to the price of coffee as they are to other commodities like gas. This makes it easier for premium roasters like Starbucks to maintain high prices.

Dunkin’ Donuts — over 1 million cups of coffee served annually Like its rival Starbucks, Dunkin’ Donuts, owned by Dunkin’ Brands Group , uses only arabica coffee beans in its coffee drinks. Dunkin’s franchise-based businesses use a cooperative run by franchisee members to purchase their coffee supplies. The cooperative lets franchisees buy larger quantities of coffee at lower prices and establishes consistent product quality across all Dunkin’ Donuts restaurants .

Although Dunkin’ Brands does not directly purchase coffee supplies for its franchisees, coffee prices still play a critical role in the company’s ability to generate royalty revenue. Coffee drink sales make up a major chunk of royalties for Dunkin’ Brands due to the company’s change in strategy that places greater emphasis on selling coffee drinks than baked goods. In 2012, Dunkin’ Donuts’ U.S. segment royalty revenue grew 6.3%; the company’s international segment, while much smaller, grew 6.5% .

Green Mountain Coffee Roasters’ coffee expenses improve in 2013                                                                                 As with Starbucks, for Green Mountain Coffee Roasters changing coffee prices directly impact its over 200 varieties of coffee. For fiscal 2013, Green Mountain Coffee had favorable green coffee costs that improved by 290 basis points. Fourth-quarter green coffee costs improved even more by 380 basis points . The company uses coffee futures to attempt to fix prices for three to four fiscal quarters prior to delivery .

For fiscal 2013, Green Mountain Coffee Roasters’ coffee futures contracts had deferred losses of $6.6 million, reported on the balance sheet and with no current impact on earnings. The company reclassified $1.48 million of these losses to cost of sales, making up more than half of the total cost of sales for 2013 of $2.7 million. According to the company’s 10-K report, an additional $3.5 million of losses on coffee futures will hit earnings in the next 12 months. All of these losses reflect decreasing coffee market prices .

My Foolish conclusion Coffee traders I&M Smith predicted in their Dec. 19 report that current coffee crop volumes are meeting market demand. Robusta crop volumes are expected to increase through the first quarter of 2014, which could put downward pressure on coffee prices. This could mean more losses on coffee futures for some of these companies.

If coffee prices increase instead, Dunkin’ Donuts franchisees, which target a more value-conscious consumer, could see decreased profits from higher coffee bean prices. For Green Mountain Coffee Roasters, as well as Starbucks, the purchase of coffee futures decreases the impact of coffee price volatility and helps to maintain more stable product prices when coffee bean prices are rising.




The Coffee King Is Here to Stay

by Waqar Saif, The Motley Fool Dec 16th 2013 2:00PM

Whenever we talk about coffee, Starbucks Dunkin’ Brands Group(NASDAQ: DNKN) and McDonald’s (NYSE: MCD) catch our attention. With more than a 50% gain year-to-date, Starbucks remained one of the top buys in the restaurant industry in 2013. Will the coffee giant continue to outperform its peers going forward as well? The answer is a “strong yes” and here are the two reasons.

Strong earnings In its fourth quarter of 2013, Starbucks reported earnings per share of $0.63, 37% more than its earnings of $0.46 per share a year earlier. Analysts at Thomson Reuters had expected the company to report earnings of $0.60 per share. In comparison with the last year, revenue also rose 13% to $3.8 billion.

Same-store sales grew by 7%, driven primarily by the company’s biggest regions — the U.S. and China, where comparable sales rose by 8%. The U.S. market is of foremost importance to Starbucks as it constitutes more than 75% of the company’s business.

In the Asia-Pacific region, comparable-store sales rose 8%. This figure jumped 2% in Starbucks’ Europe, Middle East, and Africa region.

Expansion across India & the U.S. As Starbucks continues to post higher profits, it plans massive expansion throughout the globe. As part of this plan, the company announced that it will introduce a new hiring strategy that will focus on hiring veterans and military spouses.  Starbucks will establish an internal infrastructure dedicated to matching the skill sets of veterans and military spouses with the specific talents needed at the company. The company will make sure that this talented bunch of individuals fit into the organization and add value to the company.

In contrast to most of the multinationals, which are slashing employees instead of hiring them, Starbucks has its eyes set on increasing its workforce. This indicates that Starbucks’ management strongly believes that the company will continue to multiply its revenue just like it has done in the past. The company already anticipates that its workforce will grow to 500,000 in a few years’ time.

Recently, Starbucks opened its much anticipated flagship store in one of the most populated cities of India– Bangalore. This is the 30th store in India as Starbucks continues to make inroads into the Indian coffee market.

Howard Schultz has already said that the company will open “thousands of stores” in India in the near future, making it one of the biggest markets for Starbucks along with North America and China. He further mentioned that just like China, India provides a huge growth opportunity for the company. The emergence of a growing middle class, an inclination toward western culture, and steady infrastructure developments in India bode well for Starbucks’ future in the region, he added.

According to analysts at Morgan Stanley, Starbucks has identified its “drive-thrus” as a major revenue source in the U.S. As a result, the company is continuing to add more drive-thrus across the region. In addition, Starbucks’ new strategy of replacing its traditional pastries with La Boulange brand pastries and heating up its pastries before serving them is already paying off. Starbucks’ new items such as soups, sandwiches, and Teavana teas are also seen as a huge opportunity in the region, according to analysts. That’s why the company will add more than 1,000 Teavana cafes in the next few years.

How does it stack up against Dunkin’ Brands and McDonald’s? Starbucks still has the largest market share in the coffee industry but rivals such as Dunkin’ Brands and McDonald’s are by no means far behind. Dunkin’s third quarter results show the company’s profits are on the rise, thanks to massive expansion in the U.S. In its latest quarter, the company’s earnings per share grew 36% from the same quarter, last year. Revenue also increased 8% from the previous year’s quarter.

As the holiday season approaches, Dunkin’ has started to offer special discounts on its items. An example is Dunkin’s Medium Hot and Iced Lattes that can be bought for just $1.99 until December 31.

Recently, Dunkin’ Brands opened a restaurant that offered products from both Dunkin’ Donuts and Baskin-Robbins in Atlanta, Georgia. Customers can enjoy Dunkin’s world famous donuts and coffees, and relish Baskin-Robbins’ wide variety of ice creams as well.

As the company keeps opening new locations around the U.S, investors believe that it will continue to grab significant market share. Dunkin’ Brands seems slightly more expensive than Starbucks at this stage, but it’s definitely worth it.

On the other hand, McDonald’s and Kraft Foods Group will test McDonald’s McCafe-branded packaged coffees at U.S. retailers in 2014. The tests will include packages of whole bean and ground coffee plus K-cups for Green Mountain’s Keurig brewer. Since McCafe is popular in the U.S., its K-cups are set to become an excellent revenue source for McDonald’s.

Just like most of the fast-food giants, 2013 has not been a great year for McDonald’s amid tough competition. McDonald’s continued to witness slow growth in its most important growth metric — same-store sales. In November as well, the company’s comparable-sales dipped 0.8% in its biggest market — U.S. Because McDonald’s faces competition from food chains such as Burger King,Wendy’s, and Chipotle Mexican Grill, the company isn’t expected to outshine its rivals by a great margin in the near future.

Conclusion As Starbucks keeps on growing incrementally, its future looks better than ever. The company has rightly identified the Indian coffee market as its biggest revenue source in the years ahead. With steady investment in the region, the company’s sales are bound to go even higher. Moreover, the company can finance its investments through its high level of cash on hand, which testifies to its strength.

Workforce expansion truly suggests that Starbucks plans on expanding further in its biggest market — North America. Investments, especially in new drive-thrus, will certainly give Starbucks’ sales a further boost in the U.S. In short, Starbucks has been a leader in the coffee industry and it will continue to be one of the best investments in its industry.

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Starbucks in space? Scientists help astronauts drink coffee

Starbucks in space? Scientists help astronauts drink coffee

By Brad BalukjianJuly 17, 2013, 10:30 a.m.

How do you take your coffee? In a cup?

That’s the dilemma facing astronauts needing their caffeine fix in space. The almost-zero-gravity environment makes pouring hot coffee into a cup a dangerous task, said Mark Weislogel, who studies fluid dynamics at Portland State University (and whose faculty profile photo bears an uncanny resemblance to another college professor). It may be hard to get the coffee to move, let alone go into your cup.

Working with much more important fluids, such as fuel and water, is essential to establishing a permanent human presence in space. But fluids behave in a very different way outside of Earth’s atmosphere.

“There’s no top, no bottom, no up and down, no sideways,” Weislogel said in between communication with the astronauts at the International Space Station, who carry out his various experiments.

Watch: Astronaut wrings out washcloth in space, and it’s stunning

One of those experiments was to design a coffee cup for astronauts. The key to dealing with minimal gravity is capillary action, in which liquids move through a confined space against gravity (or in the absence of it). Think of water moving between the hairs of a paintbrush. The liquid’s surface tension and the adhesive forces between the solid and liquid provide the mechanism for capillary action.

Drawing on this principle, Weislogel and colleagues, including a team of mathematicians, designed a cup with a sharply angled interior corner. Positioned correctly with your lips, the coffee travels along the corner via capillary action and into your mouth. Weislogel got astronaut Don Pettit to try it out aboard the space station, making it the first patent brought to practice in orbit, he said.

Now to add sugar…