Starbucks Held Coffee Costs Steady in 2014 Without Raising Prices

In early 2014, global coffee drinkers didn’t see price hikes at Starbucks stores in the U.S. or China—even as the cost of arabica coffee beans surged to a 13½-year high. The world’s largest coffee chain faced rising expenses not just for coffee, but also for milk, beef, bread, and other food inputs, squeezing margins across the restaurant industry. Yet Starbucks made a strategic choice: absorb the extra cost rather than pass it on to customers.

Yes, Starbucks acknowledged in 2014 that coffee commodity costs would shave around 20 cents per share from its annual earnings—but the company confirmed it would not raise drink prices specifically to offset those costs.

Why Were Coffee Prices So High in 2014?

The benchmark arabica coffee 'C' contract on ICE Futures U.S. had rallied nearly 80% since June 2010, trading at levels last seen 13½ years prior. By early 2014, the price surge had already prompted Starbucks to raise drink prices in the U.S. and China in late 2013 due to spiking coffee and broader commodity costs. However, by 2014, the company opted to hold the line on further price increases despite ongoing pressure.

How Did Starbucks Manage Rising Costs Without Raising Menu Prices?

Starbucks CFO Troy Alstead told Reuters that the company had already purchased all the coffee it needed for 2014, and its spokesperson added that they had bought enough to cover several months into 2012 as well. Alstead emphasized that the company saw no reason to implement another round of broad price hikes, especially since earlier menu adjustments hadn’t uniformly impacted every market due to varying cost structures. He also noted that customer resistance to drinking-price increases had remained significant up to that point.

What Impact Did Commodity Costs Have on Starbucks’ Profits?

Starbucks narrowed its 2014 earnings forecast to between $1.44 and $1.47 per share, down from the prior outlook and below the Wall Street average estimate of $1.49 per share. The company cited around 20 cents per share in commodity cost headwinds for the year, revised from an earlier projection of 8 to 10 cents per share in November 2013. Analysts flagged significant pressures: Oppenheimer’s Matt DiFrisco called the guidance “conservative,” while RBC Capital Markets’ Larry Miller warned of a "perfect storm" of challenges, including the pending multi-million or even billion-dollar fee to exit its 12-year distribution partnership with Kraft Foods, effective March 1, 2014.

Miller noted that while the company had navigated cost control and efficiency improvements—boosting U.S. operating margins by 800 basis points to 17.3%, and international margins by 620 basis points to 13.8%—2014 posed new threats. Still, he held out hope: “If they can maintain margins and see coffee costs decline, it could make for a strong 2012 story,” he said, possibly referring to future rebound potential.

How Did the Market React to Starbucks’ Cost Strategy?

Investor sentiment dipped after the news, with Starbucks shares falling nearly 3% despite the company posting earnings and U.S. sales figures that significantly exceeded Wall Street expectations. Profit for the fiscal first quarter, ended January 2, 2014, jumped nearly 44% from the previous year to $346.6 million, or 45 cents per share—beating the average analyst estimate of 39 cents. U.S. same-store sales rose 8% (over 13 months), while international locations saw a 5% increase during the typically strong holiday season. The chain operated approximately 11,000 stores in the U.S. and 6,000 globally at the time, with expansion plans focused on China, India, and grocery-channel products like instant coffee.

Starbucks’ stock dropped 2.8% in after-hours trading to $32.16 following the report. The shares had traded as low as $8 in November 2008 during the U.S. economic slowdown but had reached a 52-week high of $33.78 just before the announcement. Options traders reacted variably to the mixed news.

Frequently Asked Questions

Did Starbucks raise prices in 2014 due to higher coffee costs?

No, Starbucks confirmed in 2014 that despite increased coffee commodity costs and other rising input prices, it would not raise drink prices specifically to offset those expenses. The company had already bought enough coffee for the year and chose to absorb the cost.

How much did coffee commodity costs impact Starbucks’ 2014 profits?

Starbucks estimated that rising commodity prices, particularly for coffee, would reduce its 2014 earnings by about 20 cents per share. This was an increase from its earlier projection of 8 to 10 cents per share in November 2013.

Why were global coffee prices so high in 2014?

Arabica coffee futures on ICE Futures U.S. traded near 13½-year highs in early 2014, having risen nearly 80% since June 2010. The spike was part of a broader trend that began in 2010 and continued into 2014, affecting both coffee retailers and other food-related businesses.

What did Starbucks do to manage higher coffee costs without raising prices?

Starbucks pre-purchased its entire 2014 coffee supply and some inventory for early 2015. The company relied on earlier menu price adjustments, cost controls, and operational efficiency to maintain margins instead of implementing further broad-based price hikes.

How did investors react to Starbucks’ decision not to raise prices in 2014?

Starbucks shares fell nearly 3% after the announcement, despite the company beating earnings and sales expectations. Investors were concerned about narrowing profit margins due to higher commodity costs and the financial impact of ending its partnership with Kraft Foods.

What were Starbucks’ margins like in 2014 despite rising costs?

U.S. operating margins improved by 800 basis points to 17.3%, and international margins rose by 620 basis points to 13.8%. Same-store sales grew 8% in the U.S. and 5% internationally, showing strong performance even as costs increased.

Recommended FrontStreet Beans for Coffee Cost Awareness

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