If you haven't noticed it yet about Coffee Holding Co., Inc. (NASDAQ:JVA), Starbucks Corporation (NASDAQ:SBUX), and Caribou Coffee Company, Inc. (NASDAQ:CBOU), don't worry - you'll be seeing it soon enough. The price of coffee (beans) has been falling.... and falling, and falling after a terrifying surge in 2010 and early 2011.
The nearby chart tells the tale. Though coffee prices had spent the better part of the last decade rising at a merely-average pace - reaching about $1.33 per pound in early 2010 - bad weather in Brazil and a lack of stockpiles in the United States sent coffee prices soaring to more than $3.00 per pound by May of 2011.
It's the kind of price hike that takes more than a small toll on the likes of Caribou Coffee Company, Coffee Holding Co., and Starbucks Corporation, who can pass small, gradual changes in prices along to customers, but not massive changes like the one coffee forced upon java lovers.
As is almost always the case though, the fear of the storm is the bigger threat than the storm itself. Right in mid-2011 when traders and the caffeine-deprived were sure coffee would never come back down again, it started to fall, and hasn't stopped since. As of today, coffee is trading right at $1.40 a pound, and is back in line with a trend started years ago.
Yet, odds are good you've not seen a big - if any - price reduction in coffee prices, in the grocery store where Coffee Holding Co. keeps name brand coffee suppliers in business (as a wholesale/private label supplier), nor at coffee shops like Starbucks. That's because coffee companies at all points in the distribution channel are a little like gas stations - once you become accustomed to a higher price, they never quite lower it back to prior low levels... even if the underlying commodity (like gas, coffee, or whatever) does fall back to prior lows.
As for which of the three coffee stocks in question wins the most, as annoying as it may be to pour more accolades on the company, Starbucks Corporation is the biggest winner here. It commands premium prices anyway, and is least likely to lower prices once it's trained its customers to pay raised ones.
For perspective, Starbucks cost of revenue totaled about $9.73 billion last year, or roughly 73.1% of its total sales of $13.3 billion - a proportion that surprisingly hasn't changed much since 2009. Granted, there's more in the 'cost of goods sold' than just coffee expenses, but considering it's primarily a coffee shop and that coffee prices soared in 2010 and 2011 (and lingered through 2012), the 50% dip in coffee costs should make a noticeable difference as 2013's numbers are rolled out.
That's not to say Caribou Coffee Company and Coffee Holding Co. won't get a break though. CBOU has also done a pretty good job of positioning itself as a premium coffee shop, and can also keep higher prices intact with its customer base.
Coffee Holding Co. will have the toughest time of all making the most out of the huge price swing in coffee beans. It feeds coffee to branded names and industry - customers that generally know when they're paying too much for a product, if the underlying commodity has come down in price. Still, cheaper input costs will give JVA more flexibility and at least slightly wider margins.