If Only We Were All Starbucks: Frothing Up Rising Commodity Costs Onto Consumers

Nearly all purchasing -- and many finance -- executives I speak with suggest rising/volatile global commodity costs as their toughest challenge in 2011. Yet few companies are as fortunate as Starbucks, which has the ability to pass on rising commodity costs directly to consumers. To wit, Starbucks' new doublespeak "flexible" pricing policy is something many of us would dream about in our jobs. Starbuck's flexibility, however, is a one-way street. They're flexible on how best to meet their top and bottom line numbers and not to customers, who will now face rising prices for their Mocha No-Whip Venti Lattes. The coffee giant can pass along increased dairy, coffee, cocoa, sugar and other costs directly to those who enter their stores (or pull up to the drive-through).

True, Starbucks is probably feeling the impact of rising prices more than most food, CPG and restaurant companies (except those who are reliant on fresh produce, a market which has seen massive price spikes in the past few months). And most followers of the company probably don't equate rising chaos in Africa (which we all know is impacting the oil and energy markets) with Starbucks key commodity inputs as well. Specifically, Reuters notes "although Starbucks has already secured coffee supplies through to end-September, other ingredients like cocoa and sugar are causing concern as supply fears fan prices." Moreover, in recent days, "coffee and cocoa futures are trading at historic highs on the back of supply concerns and political unrest in Africa."

For those companies that are not as fortunate as Starbucks in being able to pass along price increases to consumers, dealing with the commodity rollercoaster is challenging, to say the least. Yet the very, very basic advice we often provide is fairly straightforward. First, understand your total exposure -- at all levels of the supply chain (i.e., not just what you buy, but what your suppliers buy, too). Second, research the different mitigation, risk reduction and related strategies available to you (e.g., escalation/de-escalation clauses in contracts -- buy and sell -- and associated commodity management/transparency via indices, hedging via exchanges, hedging via ETFs, suppliers/third-parties assuming price risk for a premium, etc.). Third, work closely with the finance team to understand all of the accounting implications of potential strategies. And last, build a core team (potentially current resources with a trading/commodity management background) to execute on the strategies.

Only once you've gone through these steps should you even think about a relaxing trip to Starbucks (which you'll probably pay 3-8% more these days, if my anecdotal observations are correct). Otherwise, stick with the industrial brew pot in the office kitchenette.

- Jason Busch

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