Wholesale coffee prices plummeted 30% but still paying more than ever for a cup of joe
The price of Arabica coffee dropped to around $1.71 per pound in October, down 3% from the previous month and down about 30% from the $2.48-per-pound price of a year ago, according to the latest edition of the World Bank’s “ Commodity Markets Review Report .” Why? Supply is plentiful in Colombia and Central America, where much of the coffee that ends up in the American market is grown. In fact, Brazilian coffee growers, who provide a third of the world’s coffee, are predicted to harvest a record 6.6 billion pounds in 2012, according to a recent report in The Wall Street Journal .
But while coffee companies, cafes, and corner delis often raise prices, they rarely cut them. Earlier this year, Starbucks SBUX -0.51% increased the prices of many drinks by around 1% in much of the Northeast and Sunbelt, including in New York, Boston, Atlanta and Dallas. That followed a 17% hike on Starbucks packaged coffee in 2011. The company hasn’t cut prices this year, despite the fall in wholesale prices. J.M. Smucker Co., which sells packaged Dunkin’ Donuts and Folgers coffee, did reduce coffee prices by 6% in May, but it had hiked them by 23% in 2011. Most other grocery stores have also increased prices: A 1-pound can of ground coffee sold for $5.69 in September, still up more than 70% over the past two years , according to the Department of Labor.
Americans tend not to care about the price of coffee — at least not in the same way that they are sensitive to minute fluctuations in the price of a gallon of gas, currently more than $3 a gallon , experts say. Unless there is a “material slowdown” in traffic, specialty coffee chains will continue to charge the same or more for their drinks, says R.J. Hottovy, an equity analyst at Morningstar. Companies like Starbucks have successfully transformed the humble coffee bean into a premium product. “Starbucks is now one of the most powerful brands in the country,” adds Jack Russo, a consumer analyst with brokerage Edward Jones, “and when you have a premium product, you can charge premium prices.”
So will Starbucks consider dropping prices? A spokesman declined to comment. Of course, there are other reasons why Starbucks remains popular. Customers go there for the jazz music and free Wi-Fi, which encourages them to lounge with their iPads for hours — often nursing cold cups of coffee. Regular customers can build up loyalty points for free drinks and, last September, Starbucks sold 1.5 million $10 e-gift cards at 50% off through the daily deal site LivingSocial.com, according to company spokesman Jim Olson. “We also have other overhead like fuel and dairy products,” he says. But analysts say customers may not always be prepared to pay nearly $5 for a 16-ounce “grande” or medium Starbucks Frappuccino. “They do have to be careful,” Russo says. “Consumers are starting to watch what they spend.”