Starbucks and Luckin Coffee Price Increases Blamed on Inflation and Rising Costs! Coffee Futures Prices Take the Heat for Chain Coffee Price Hikes

News about price increases at major coffee chains has been piling up recently. The trigger was Starbucks' quiet price hike a couple of days ago, which led people to bring up Luckin Coffee and Tims, both of which had already raised prices in previous months.

On February 2nd, Starbucks CEO Kevin Johnson had already indicated that Starbucks would implement multiple price increases over the coming months, but he did not specify whether these would include the Chinese market, given that Starbucks' pricing in China was already quite high.

Starbucks beverage prices in China were already nearly double those in the United States. Logically speaking, the existing domestic pricing and labor force should be enough to sustain the company's overall operations. While everyone was still speculating that the Chinese market wouldn't see increases, the sudden quiet hike seemed both like a general increase and somewhat unexpected.

Price Increases Across the Coffee Industry

Coincidentally, after Starbucks announced its increase, Luckin Coffee and Tims Hortons — which had already quietly raised prices in previous months — were suddenly pulled into the spotlight. Many people suggested that the increases at major chains were due to Brazil's poor coffee harvest, leaving insufficient Arabica inventory at the ICE exchange, which sent Arabica prices skyrocketing and forced coffee businesses to protect their margins through higher prices.

In the past couple of days, however, Nicolas Rueda, director of Cecafe, Brazil's coffee export management organization, "couldn't stand it anymore." He stated that Brazilian coffee beans have not run out — inventory has fallen, but there is still enough supply for everyone.

Rueda explained: "The 2021 Brazilian Arabica harvest was challenging throughout, dealing with either frost or drought. This directly led to a 25% reduction in total Brazilian Arabica production in 2021 compared with 2020, with only 47 million bags (60kg per bag). In addition, the pandemic slowed related transportation, which held back the export of coffee beans from Brazil and contributed to the reduction in ICE Arabica inventory. But that doesn't mean the ICE has run out of Brazilian Arabica coffee beans, because the 2020 harvest was quite substantial, and with the current container shortage it's possible that large inventories are still accumulating in ICE warehouses."

The Real Reasons Behind the Increases

In other words: although Brazil's Arabica harvest was poor in 2021, there are still sufficient Brazilian Arabica beans in ICE warehouses. The significant price hikes cannot be blamed entirely on Brazilian coffee — transportation issues play a major role.

Beyond the container shortage, which slows transportation and raises shipping costs, leading to bean shortages and higher costs in various countries, the main reason for the increases at major chains is still inflation plus other rising costs such as labor and rent.

In the two years since the pandemic began, industries of all kinds have suffered, and the beverage industry is no exception. For coffee chain companies, costs such as rent for multiple locations, employee salaries, supply chain challenges, and staff training represent significant expenses. The instability of the pandemic has made it difficult for these chains to predict future economic developments, forcing them to keep implementing preemptive price increases to guard against potential future shocks.

Luckin Coffee's increase came in early December last year, and Tims raised prices in early January this year — both before Arabica beans "spiraled out of control" to a 10-year high. The increases at these two chains were therefore more likely adjustments based on operating circumstances.

Conclusion

Objectively speaking, Starbucks' latest increase is understandable. With bean costs and other expenses rising, it had little choice but to adjust beverage prices accordingly. The previous increase for Starbucks China was back in 2018; after nearly four years, a 1–2 yuan rise can only be considered a modest adjustment.

Choosing to implement a sudden increase at this time, even a modest one, is still quite conspicuous.

Image source: Internet

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