Does the rise in Starbucks beverage prices have an impact on the Chinese coffee market?

Starbucks CEO Kevin Johnson said on Feb. 2 that Starbucks has adjusted pricing twice in the past four months, but because of front-line employee raises and other rising costs, Starbucks will have to continue to raise prices in the coming months.

Apart from rising labor costs and higher Arabica bean futures prices due to the loss of Brazilian coffee beans, the main reason for the increase in coffee bean costs is that inflationary pressures far exceed Starbucks expectations. Rising costs shrink Starbucks 'profits, and Starbucks can only raise prices to ease the pressure of concentration. First of all, the increase in labor costs is due to the surge in infection caused by the variant virus omicron. Therefore, Starbucks in the United States did not reasonably arrange full vaccination and epidemic prevention measures in personal and public areas of the store, resulting in frequent infection of existing employees with the virus, which makes it difficult for Starbucks in the United States to attract new employees. In addition, the treatment time and isolation time after infection are long, which makes the operation of the store fall into the "deadlock" of manpower shortage + unstable existing manpower. Therefore, Starbucks must adopt multiple salary increases & welfare increases to retain existing employees in order to retain existing employees.

The increase in coffee bean costs is due to the loss of Arabica beans in Brazil. As the largest producer of Arabica coffee beans in the world, it has always been one of the most important source countries of Arabica coffee beans inventory on ICE Exchange in the United States. The amount of inventory will also affect the futures price of Arabica coffee beans at all times. Last year was a small year for the production of Arabica coffee beans in Brazil. Originally, the production of Arabica coffee beans in Brazil last year would be less than that in 2020. In addition, due to the influence of various bad weather such as frost, the harvest of Arabica coffee beans in Brazil also fell again and again. The reduction of production caused inventory deficit, which made the price of Arabica coffee beans rise again and again, and the futures price hit a new high in ten years.

2022 was supposed to be Brazil's biggest Arabica crop year, and the problem with coffee stocks should ease. However, at the beginning of December last year, due to the emergence of La Nina phenomenon, floods caused by heavy rains affected many Arabica coffee producing areas in Brazil to varying degrees, among which Minas Gerais, Brazil's largest Arabica coffee bean producing area, buried many coffee trees due to landslides. This puts an unknown cap on what was supposed to be a promising year for production, keeping Arabica futures high and ready for further increases…In the past 52 weeks, coffee bean futures prices have risen from 120.2 cents to 239.20 cents in recent days, which is Starbucks 'basic raw material and an important part of the cost.

Starbucks reported an 18% year-on-year increase in sales for the first quarter ended Jan.2, or a $1.3 billion year-on-year increase in revenue for Starbucks in the first quarter of fiscal year 2022, according to its first quarter results report released on Feb.1. But despite healthy trends in U.S. Starbucks sales, pricing has risen as multiple inflationary headwinds intensify."

Inflation is caused by the recent Federal Reserve meeting to raise interest rates (borrowing from banks/increasing interest rates on loans), printing money heavily (slowing down the economy), and shrinking the balance sheet (removing unimportant fiscal items), which will lead to a worse economy in the United States in the next year or two, while printing a lot of money, which will lead to a sharp increase in various costs. Although sales rose $1.3 billion year-over-year, revenue rose only $264 million. As Starbucks was hit by a number of cost increases, including employee salaries, supply chain challenges, new employee training and onboarding, Starbucks said total operating expenses increased by $994 million in the quarter. In addition, the mutant virus strain continues to affect Starbucks 'operations, Starbucks management does not expect high costs in the second quarter to subside, but Starbucks is still uncertain about how much prices will rise/how many times after that, because they do not have an accurate judgment on the future economic development.

For this US Starbucks price increase will affect the Chinese market, in fact it will not affect. The first is because Starbucks in China itself is priced much higher than Starbucks in the United States (after the last two price adjustments, the price of a large American cup is $2.95, about 18.8 yuan), while Starbucks in China costs 31 yuan for a large American coffee. It can be seen from the pricing that Starbucks in China has much more room for profit than Starbucks in the United States, so the existing pricing is enough to withstand the impact of Starbucks price increases in the United States. Secondly, China's epidemic prevention work has achieved zero tolerance, so in terms of personnel, Starbucks in China is not under pressure, or there are a large number of personnel to maintain the overall operation of the company. What is certain is that Starbucks in China will not have a serious shortage of staff (here refers to the overall). Starbucks in China also does not need to raise salaries because it still has enough labor to maintain operations.

The second is that the Chinese coffee market and the American coffee market are completely different ways of operation. If Starbucks in China also increases prices at this time, it will soon be unable to survive in the Chinese market. With the addition of more and more local chain coffee shops, prices are also rising at a time of crazy "low prices", consumers will not buy this account. For the US market, Starbucks is a civilian drink, while for the Chinese market, Starbucks is a high-end drink. Lucky may be the way Chinese coffee should survive in the future, so Starbucks in China will keep the existing beverage price in the short term, and even cut prices in the future to compete with Lucky. Image Source: Network

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