Why Starbucks Could Emerge From the Coffee Shortage Even Stronger

Last week, an unexpected frost struck Brazil’s coffee crop, sending coffee futures prices skyrocketing, just as Starbucks (NASDAQ:SBUX) was suffering a menu item scarcity due to deteriorating transportation and supply chain constraints. “Some goods are temporarily unavailable owing to supply limitations,” the beverage company said in a Monday statement, echoing consumer claims of out-of-stock items.

While it is already under pressure from another cause, rising coffee prices may compel it to pass on more expenses to its customers. However, previous experience shows that, while Starbucks may have some difficulties in the short term, the disruption may eventually benefit the company.

Coffee bean scarcity and high transportation costs
A verified frost in one of Brazil’s key arabica coffee-producing regions, as well as the possibility of frost in two others, is the latest source of additional costs and probable interruption to Starbucks’ operations. According to a Reuters report, the coffee futures market “is attempting to estimate the damage,” and this “is the first time we have frost across a large portion of the coffee belt,” according to Carlos Mera, an analyst with Rabobank in the Netherlands.

As of July 20, arabica bean prices had increased by 6%, while robusta bean prices had increased by 2.4 percent. Arabica coffee was harmed more severely since it is grown at higher elevations, where frost is more likely. Starbucks has always utilised arabica beans for their coffee drinks up to this time, with Aaron Robertson, the company’s coffee engagement manager, stating that robusta’s “less refined flavour is exactly the reason we don’t even touch it.”

While arabica has “body and acidity that is interesting and can be used and played with and blended into new, interesting tastes,” according to Robertson, with arabica prices surging, Starbucks and other chains such as privately held Inspire Brands’ subsidiary Dunkin’ may be forced to choose between raising prices and using less appealing robusta beans in some of their concoctions.

At the same time, many Starbucks shops are experiencing shortages of goods like green tea, with other menu items being out of stock from time to time. Starbucks, Taco Bell, and other restaurant brands are experiencing shortages, according to statements from Yum! Brands subsidiary Taco Bell. Taco Bell management said in a statement last week that because of “national transportation delays happening throughout most of the industry, we may be temporarily out of some items,” while the president of Darden Restaurants remarked the “spot outages we have are due to warehouse staffing and driver shortages, not product availability,” Restaurant Business Online reports.

The “transportation squeeze,” caused by lack of drivers, fuel costs, and other issues, is affecting a far-flung array of industries, from increasing lumber prices to making it more difficult for motorcycle manufacturers such as Harley-Davidson to get their vehicles to showrooms in a timely, cost-effective way.

To see how today’s disruptions to the coffee market might play out, a look back at the lockdowns of 2020 in response to the COVID-19 outbreak might be a useful comparison. The government response to the coronavirus massively disrupted the entire industry. However, large chains like Starbucks had the resources to survive the disruption, while their small local competitors were frequently put out of business because they lacked the cash reserves to survive extended closure or the digital infrastructure to sell coffee in quantity curbside or through similar “social distancing” alternatives.

Read more • fool.com

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