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

Recently, news about price increases at major coffee chains has been emerging one after another. This was mainly triggered by 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 their prices in previous months.

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

Originally, 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 sufficient to maintain the company's overall operations. While everyone was still speculating that the Chinese market wouldn't see price increases, the sudden quiet hike seemed both like a general increase and somewhat unexpected.

Coffee Industry Price Increases

Coincidentally, after Starbucks announced their price increase, Luckin Coffee and Tims Hortons, which had already quietly raised prices in previous months, were suddenly brought into the spotlight. Many people suggested that the price increases at major coffee chains were due to Brazil's coffee bean harvest failure, leading to insufficient Arabica coffee bean inventory at the ICE exchange. Consequently, Arabica coffee bean prices skyrocketed, causing many coffee businesses to face rising costs and forcing coffee shops to maintain profitability through price increases.

However, in the past couple of days, Nicolas Rueda, director of Cecafe (Brazil's coffee export management organization), "couldn't stand it anymore"! He stated that Brazilian coffee beans haven't been exhausted yet - although inventory has decreased, there's still enough supply for everyone!

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

Real Reasons Behind Price Increases

In other words: Although Brazil's Arabica coffee beans had a poor harvest in 2021, there are still sufficient Brazilian Arabica coffee beans in ICE warehouses. As for the significant price hikes, Brazilian coffee beans cannot be entirely blamed! Transportation issues play a major role.

Beyond the container shortage causing slow transportation and increased shipping costs, leading to coffee bean shortages and rising costs in various countries, the main reason for price increases at major coffee chains is still inflation + increases in other costs (labor, rent, etc.).

In the two years since the pandemic began, various industries have suffered severely, and the beverage industry is no exception. For these 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 chain companies to accurately predict future economic developments, forcing them to implement continuous preemptive price increases to guard against potential future shocks.

Luckin Coffee's price increase occurred in early December last year, while Tims raised their prices in early January of this year - both before Arabica coffee beans "spiraled out of control" to a 10-year high. Therefore, the price increases at these two coffee chains were more likely adjustments based on operational circumstances.

Conclusion

Objectively speaking, Starbucks' latest price increase is understandable. After all, with rising bean costs and other expenses, they had no choice but to adjust beverage prices accordingly. The previous price increase for Starbucks China was back in 2018. After nearly 4 years, a 1-2 yuan increase can only be considered a modest adjustment.

Choosing to implement a sudden price increase at this time, even if it's just a modest hike, is still quite "conspicuous."

Image source: Internet

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