Starbucks is immune to the recent spike in coffee prices thanks to a common yet brilliant business strategy

July 31, 2021

Starbucks is immune to the recent spike in coffee prices thanks to a common yet brilliant business strategy

Roasted coffee beans is seen being inspected at specialty coffee shop Onibus Coffee on May 20, 2016 in Tokyo, Japan. The Onibus Coffee building was originally a old traditional Japanese house that was converted to what it is at present. With the rise of specialty coffee shops opening all over the world in recent years, Tokyo's coffee culture catches on to offer quality coffee to like minded people across all walks of life.
Christopher Jue/Getty Images

Starbucks said it has coffee prices locked in for the next 14 months.
The chain hedges coffee beans, locking in a price in advance.
As coffee prices climb, analysts say Starbucks made a smart move.
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Prices are going up for ingredients and food across the retail industry, but Starbucks says it has coffee prices locked in for months.

Starbucks buys coffee beans using a method called hedging. Basically, Starbucks locks in a price to buy coffee beans over an agreed-upon future period, "hedging" against risk. The contract acts almost like insurance, protecting Starbucks from paying higher prices if coffee beans spike due to a weather event, shortage, or some other issue.

"Over the years we've created a very thoughtful approach to how we source, warehouse, and use hedging techniques to ensure we always have supply of premium Arabica green coffee at an attractive cost basis," Starbucks CEO Kevin Johnson told investors in an earnings call in July. "In fact, we purchase green coffee 12 to 18 months in advance, and we never stopped buying green coffee through the pandemic."

Coffee bean prices just hit a six-year high as Brazil, a major coffee producer, was hit by a drought followed by the worst frost in over 20 years. The full effect won't be realized until the 2022 crop is harvested, meaning coffee prices could remain inflated for months or longer.

Starbucks is insulated from those price increases for a while, though.

"We currently have over 14 months of price-forward coverage, which means we have price locked on our coverage for the next 14 months, which gets us through the rest of fiscal year 2021 and most of fiscal year 2022," Johnson said in the earnings call.

Starbucks declined to comment further on how it buys coffee beans.

Starbucks' buying strategy "looks really smart right now," Edward Jones analyst Brian Yarbrough told Insider. "They've been doing it for years."

Hedging coffee beans is working out well for Starbucks right now, but it can also go the other way, for example if the chain bought coffee beans at a high price before the rate dropped. For now, though, Starbucks can avoid price increases for customers if the price of coffee beans spikes in the coming months and goes back down.

Hedging is a common strategy in other industries. "Most international companies hedge commodities and raw materials," Yarbrough told Insider. "A lot more companies than you think hedge."

For example, fuel prices can have a major impact on airlines' bottom lines, so some airlines hedge on fuel using the same method Starbucks applies to buying beans. When oil prices plunged in 2020, British Airways and other airlines saw major losses.

Do you have a story to share about a retail or restaurant chain? Email this reporter at mmeisenzahl@businessinsider.com.

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