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Starbucks Corporation (SBUX), Dunkin Brands Group Inc (DNKN): Coffee’s Curse

“Tall, Grande or Venti?” the barista asked with a smile. After taking a moment to contemplate how long my day would be, I decided upon a Venti. I removed three dollars and change from my pocket, and placed it on the counter. Thank you, Starbucks Corporation (NASDAQ:SBUX). Today will be a good day.

Starbucks Corporation (NASDAQ:SBUX)

Coffee is a morning institution among working adults. The average price for a cup of brewed coffee is $1.38, but many Americans are willing to pay much more for a “premium roast.” As you can see from my experience, I’ve been suckered into developing expensive taste buds.

It’s bean a while

Coffee bean prices have fallen 54% in the past two years. In 2011, coffee hit a 14-year high, selling for over $3 a pound. Today, a pound fetches about $1.22. The drop in price can be attributed to record harvests in the coffee growing nations of Brazil and Colombia. An increase in South American supply led to a drop in demand, bringing prices down with it.

Unfortunately for consumers, the falling price of the coffee-beans probably won’t translate to a cheaper “cup of Joe.” Morning customers of Starbucks Corporation (NASDAQ:SBUX), Dunkin Brands Group Inc (NASDAQ:DNKN), and McDonald’s Corporation (NYSE:MCD)’s shouldn’t count on it.

The curse

Big name roasters purchase coffee beans long before harvest season via futures. These contracts limit risk for both farmers and buyers. Because futures contracts are written so far in advance, price declines are often muted, meaning buyers might not see the discounted beans for months.

Even with cheaper beans, coffee drinkers aren’t likely to be the beneficiaries of reduced prices. A brewer’s brand name carries pricing power. A customer going to Starbucks Corporation (NASDAQ:SBUX) expects a higher priced, premium coffee. Someone going to McDonalds expects an inexpensive cup of coffee.

Additionally, American consumers are not exactly price sensitive to coffee: a marginal price increase will not break morning drinkers’ habits (addictions).

Grounds to buy

Contrary to popular belief, coffee does not stunt growth. Well, at least in the case of the three biggest coffee brewers in America. Starbucks Corporation (NASDAQ:SBUX) plans on opening 1,300 new stores in 2013, while Dunkin Brands Group Inc (NASDAQ:DNKN) aims to launch about 300 stores in the U.S alone. McDonald’s (NYSE:MCD) already has over 13,000 stores in the United States, and since its introduction in 2001, its McCafe has grown to account for over 5% of total sales.

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