The J. M. Smucker Co. SJM recently lowered packaged coffee prices of the majority of its products sold in the U.S., primarily consisting of items under the Folgers and Dunkin' Donuts brands. Smucker licenses Dunkin’ Donuts from Dunkin’ Brands Group, Inc. DNKN.
The news has brought relief and excitement to all Folgers fans. Ohio-based Smucker has slashed prices by an average 6% on all products under the Folgers and Dunkin' Donuts brands, including the new reduced canister size of Folgers ground coffee, in response to the continuous decline in green coffee futures market. However, the price decrease does not affect K-cup pods.
We note that Smucker’s profitability largely depends on the prices of green coffee. Coffee prices are highly volatile and are affected by weather and pest infestation. Also political decisions in coffee-producing countries, worldwide supply and demand, the relative strength of the dollar, and speculative trading also influence coffee prices.
Since Jan 2014, Smucker has been witnessing a rise in green coffee costs, largely due to increasing prices of Arabica coffee due to a drought in Brazil. As a result, in Jun 2014, Smucker increased packaged coffee prices of Folgers and Dunkin' Donuts branded coffee products by an average 9%. In Dec 2014, Smucker raised the price of K-Cups in the U.S. by an average 8%.
A hike in coffee prices led Smucker to raise pricing of its branded roast and ground coffee offerings, which eroded its sales volume. Higher pricing of Smucker products also allowed customers to switch to cheaper brands and delayed purchases. This significantly hurt the company’s coffee segment.
The recent cut in coffee prices is expected to ease the volume declines witnessed by the company. During the fourth quarter fiscal 2015 conference call, the company also anticipated net commodity cost to be favorable, primarily due to lower green coffee cost beginning second quarter of fiscal 2016.
Other major coffee companies like Starbucks Corporation SBUX and Keurig Green Mountain Inc. GMCR are also expected to follow Smucker’s footsteps and cut prices of their coffee products, in response to declining green coffee costs.
Smucker currently has a Zacks Rank #3 (Hold).
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