STiR coffee and tea magazine

STiR coffee and tea 39 Coffee cafes, retailers, and their customers are getting hit. Some 79% of coffee professionals reported that inflation has affected their purchasing patterns and daily business, according to a July poll on coffee inflation by online coffee news source Sprudge. Yet consumers in the U.S., at least, have not quite given up on coffee. Although overall consumer spending dropped in June, spending in coffee shops and bakery cafes actually went up 1.9% during that same month, according to data from Ra- bobank reported by the Wall Street Journal. One recent factor favoring coffee retailers has been the trend of employees return- ing to work in their offices, according to the article. Tight labor market conditions have forced coffee companies to pay more for workers. "We noticed that the average asking salary for roles we've hired previously is about 20% higher than in years past for roughly the same experience," Mike Griffith, the owner of online coffee subscription company Delight Cof- fee, told STiR. "This is from a small sample size, so it is hard to tell how widespread this is, but we've definitely noticed it in our conversations." Major coffee companies like Starbucks have endured labor shortages that were exacerbated by the Covid-19 pandemic. In February, the company announced plans to continue increasing its menu prices by an unspecified amount due to the pressures of inflation and the labor shortage. Starbucks's pricing varies widely across different local markets, however. Coffee companies operating in California may see an in- crease in labor costs driven by legislation. Governor Gavin Newsom signed a bill that could increase the minimum wage for fast food workers to $22 per hour; the current minimum is $15 per hour. The fast-food industry's minimum wages will be adjusted for inflation beginning in 2024 under the new law. The Motley Fool, a personal investment website, pointed out that approximately 20% of Dutch Bros' stores are located in California. The new legislation could have a significant impact on this company and others with a significant retail presence in the state. If consumers are feeling a pinch, that doesn't mean all of them are cutting back on coffee, and some brands seem to keep selling strong. In Starbucks' third-quarter earnings call in Au- gust, interim CEO Howard D. Schultz claimed his company had maintained its pricing power. "While we are sensitive to the impact inflation and econom- ic uncertainty are having on consumers, it's critically important that you all understand we are not currently seeing any measur- able reduction in customer spending or any evidence of custom- ers trading down, reflecting the strength of the Starbucks brand, deep customer engagement and loyalty, pricing power, and the premium nature of our beverage and food offerings." Although high spending on labor and other inflationary pressures weighed on the company's third-quarter results, erod- ing its operating margin by 350 points year–on–year to 16.9%, Starbucks' consolidated net revenues were still up 9% to a re- cord $8.2 billion. Keurig Dr Pepper reported pervasive inflationary pressures in its second-quarter earnings call. "During the quarter, we experienced cost-of-goods-sold in- flation across all inputs, including ingredients, packaging, and manufacturing labor," said now CEO Ozan Dokmecioglu in the call. "In addition, we also experienced a much higher rate of inflation in transportation and warehousing at a time of robust consumer demand, and selling, general, and administrative cost inflation was also significantly higher." The company, which has a portfolio of coffee and other beverages, reported a gross mar- gin of 50% for the second quarter, down 6.4 percentage points year-on-year. Keurig sees no quick end to cost pressures. "We expect inflation to be even higher in quarter three, largely driven by our green coffee positions," Dokmecioglu said. Yet he asserted that the company would be able to offset inflation and deliver earnings-per-share growth in in the third quarter. Olam, the Singapore-based agricultural commodities com- pany and green coffee wholesaler, reported an 11.8% decrease in earnings before interest and taxes (EBIT) to S$265 million in the year's first half.. The company cited inflationary pressures, particularly energy costs, as a major contributing factor. Nestl too reported inflationary pressures related to com- modities, energy, and labor during the first half of 2022. The company had a margin decline in its coffee segment, which François-Xavier Roger, chief financial officer, attributed to cli- mate conditions in Brazil. The company's Nespresso business's trading operating profit margin dropped 170 basis points to 24.3%. Cost inflation did play a role in that dip, according to the company's news release. The year appears set to close on an inflationary note. Data analytics company GlobalData is forecasting global inflation to rise to 7.5% by the end of the year, driven by continued supply chain disruptions, rising cost of living, and energy prices.

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