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Why Starbucks can emerge from the lack of coffee stronger

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A sudden frost hit Brazil’s coffee crop last week, sending coffee futures prices up, just as they did Starbucks (NASDAQ: SBUX) Short on menu items due to transportation deterioration and supply chain stress. The beverage chain reiterated Consumer Reports out of stock with a statement on Monday that “due to a short supply, some items are temporarily out of stock.”

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Higher coffee prices may force it to pay extra costs to its customers when it is already under pressure from another factor. However, recent history suggests that although Starbucks may experience some difficulties in the near term, it may eventually benefit from the turmoil.

The coffee bean picker picks up the coffee beans and puts them into the harvest bucket.

Image source: Getty Images.

Shortage of coffee beans and high transportation prices

The latest source of additional costs and potential disruption to Starbucks’ business is confirmed frosts in one of the main Arabica coffee-producing regions in Brazil and possible frosts in two other regions. A Reuters article quotes Carlos Mera, an analyst at Dutch Rabobank, as saying that the coffee futures market is “trying to assess the damage,” adding that “this is the first time we’ve seen frost in a large part of the coffee belt.”

Arabica beans prices are up 6% as of July 20, while Robusta beans have seen a 2.4% price increase. Arabica coffee has been severely affected because it grows at higher altitudes that are more susceptible to frost. So far, Starbucks has used Arabica beans in its coffee drinks, with the company’s coffee sharing director Aaron Robertson noting that “the less subtle flavor is the reason we haven’t touched it.”

While Arabica has “an interesting body and acidity and can be used, manipulated, and combined into new, interesting tastes,” according to Robertson, with Arabica prices soaring, Starbucks and other chains like Dunkin’ privately held Inspire Brands may have to Choosing between raising prices and using less attractive Robusta beans in some of their ingredients.

At the same time, items like green tea are in short supply at many Starbucks locations, with other menu items also running out from time to time. data from WL! Trademarks The Taco Bell subsidiary has highlighted the shortages in Starbucks, Taco Bell and other restaurant brands. Taco Bell’s management said in a statement last week that due to “national transportation delays that are occurring across much of the industry, we may have some items on hold,” while the president of Darden Restaurants Note that “the spot outages we are experiencing are caused by warehouse staff and driver shortages, not product availability”, Online Business Restaurant reports.

“Transportation pressure” from driver shortages, fuel costs and other issues affects a wide range of industries, from increasing timber prices to making it more difficult for motorcycle manufacturers such as Harley Davidson To transport their vehicles to showrooms in a timely and cost effective manner.

How the shutdowns helped Starbucks

To see how the current turmoil in the coffee market could play out, a look at the shutdowns in 2020 in response to the COVID-19 outbreak may be a useful comparison. The government’s response to the coronavirus has severely disrupted the entire industry. However, large chains such as Starbucks have had the resources to survive the turmoil, while their smaller local competitors are often put out of business as they lack the cash reserves to survive with an extended shutdown or the digital infrastructure to sell coffee in bulk or from During “social” similar alternatives.

Then Starbucks and Dunkin’ swooped in to bring in the extra demand created by the loss of local coffee spots. Bloomberg reported in October 2020 that 7.3% of US retail coffee outlets have already closed or are expected to close by the end of the year, citing Euromonitor data. The expected number of outlets in the United States by the end of the year was 23,507, of which Starbucks and Dunkin’ would represent the vast majority of them.

Dunkin’ CEO Dave Hoffman highlighted the benefits of COVID-19 disruptions to major chains in an interview with Barclays analyst. He said, quite frankly, that Dunkin’ executives viewed the situation as a positive, noting “We really like what’s going on in terms of, if you call it herd culling during all of this.” He expanded by noting, “There will be opportunities for our franchisees to either re-establish a location to take advantage of locations, open new stores, etc.” “Relo” refers to moving to a better location that was opened by closing a small coffee business.

It’s hard to argue with Hoffman’s view given Starbucks’ strong recovery, return to pre-pandemic sales, and future growth potential.

Why the recent turmoil could help Starbucks again

With pressure from coffee prices and transportation costs potentially affecting its bottom line (or driving up prices), and some menu items running out, Starbucks will likely have some uncertainty in the short to medium term in the near future. It is very difficult to predict whether its stock price will rise or fall in the current quarter or two, and this may result in volatility.

However, shortages and supply chain issues should improve their long-term fortunes. Logistics and transportation problems will eventually be resolved, but while Starbucks has the money and financial strength to weather the turmoil, those difficulties are likely to put more small competitors out of business. These local stores will shrink due to higher coffee prices and the additional costs of transportation disruption, while any pause in deliveries could result in them being out of business with no network of franchises to back them up.

The situation reflects the state of shutdowns (perhaps on a less catastrophic level), which have caused temporary difficulties for huge companies while local businesses are permanently closed, leaving Starbucks and Dunkin’ in stronger positions. There is every reason to be optimistic about Starbucks if you are investing in restaurant stocks, provided your horizon for gains is more than a few months.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of Motley Fool’s premium advisory service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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