The J. M. Smucker Co. (SJM - Free Report) recently increased its packaged coffee prices by an average 9% in order to tackle a continuous hike in green coffee costs. The rise in green coffee costs is largely due to increasing prices of Arabica coffee since Jan this year as a result of an ongoing drought in Brazil.
Ohio-based Smucker, which is slated to release its fourth quarter and fiscal year 2014 results on Jun 5, mainly increased the price of Folgers and Dunkin' Donuts branded coffee products which it licenses from Dunkin’ Brands Group, Inc. (DNKN - Free Report) . However, the price increase does not affect K-cup packs sold at restaurants.
The company last raised its prices in May 2011 by an average of 11% for most of its coffee products. That followed a 10% hike in Feb 2011 and a 10% increase in Aug 2010. Other coffee companies like Starbucks Corp. (SBUX - Free Report) and Keurig Green Mountain Inc. also followed in Smucker’s footsteps and raised prices of their coffee product around the same time due to high green coffee costs and other factors like higher demand for the product and changing weather conditions for Arabica coffee crops.
However, green coffee costs started declining thereafter and in Aug 2011, Smucker cut coffee prices by 6% for its coffee brands, including Folgers, Millstone and Dunkin' Donuts. In May 2012, Smucker again slashed its packaged coffee prices by an average 6% owing to continuous decline in green coffee costs.
The profitability of Smucker largely depends on the prices of green coffee. Coffee prices are highly volatile and are affected by weather and pest infestation. Also political decisions in coffee-producing countries, worldwide supply and demand, the relative strength of the dollar, and speculative trading also influence coffee prices.
The recent hike in coffee prices is going to adversely impact the sales volume of the company. During the third quarter conference call, the company also anticipated lower volumes, a difficult pricing environment in key categories and currency headwinds to persist in fiscal 2014.
Smucker currently holds a Zacks Rank #4 (Sell).
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