Kraft Follows JM Smucker, Ups Coffee Prices

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According to media reports, Kraft Foods Group, Inc.(KRFT) increased the U.S. retail prices for its Maxwell House and Yuban roast and ground coffee brands on Jun 6 – making it the second company to increase coffee prices in the same week.

Last week, The J. M. Smucker Co.(SJM) increased its packaged coffee prices by an average of 9% in order to counter the continuous hike in green coffee costs.

Kraft raised the prices of its coffee products by approximately 10%. According to The Wall Street Journal, Kraft stated that the price rise does not apply to its instant and single-serve coffees or Gevalia and Tassimo brands.

The rise in green coffee costs is largely due to increasing prices of Arabica coffee since January this year as a result of an ongoing drought in Brazil.

On Jun 3, J. M. Smucker announced list price increases of its Folgers and Dunkin' Donuts branded coffee products, which it licenses from Dunkin’ Brands Group, Inc.(DNKN). However, the price increase does not affect K-cup packs sold at restaurants.

Per media reports, both Kraft and Smucker last raised their coffee prices in 2011 in response to higher green coffee costs and other factors like higher demand for the product and changing weather conditions for Arabica coffee crops.

However, green coffee costs started declining thereafter and the companies slashed packaged coffee prices.

Coffee prices are highly volatile and are affected by weather and pest infestation. Also, political decisions in coffee-producing countries, worldwide supply and demand, relative strength of the U.S. dollar and speculative trading influence coffee prices.

Another coffee player, Starbucks Corporation (SBUX) may follow suit. However, at its second-quarter conference call, the company announced that though coffee costs are rising lately, lower coffee costs should benefit fiscal 2014 earnings as 100% of its coffee needs for 2014 are hedged. Moreover, more than 40% of its coffee needs for FY15 are locked at favorable prices. Further, management argued that since coffee cost is only about 15% to 20% of its COGS and less than 10% of total operating costs, rising coffee prices should not pose any problem.

Kraft carries a Zacks Rank #3 (Hold).

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