Starbucks Corp. (SBUX), along with other food and drink retailers, are innovating ways to combat the rising prices of grains, meat, sugar and other essential ingredients. In times of such hardships the survival theory becomes quite applicable for the food chain industry in the US.
Managements of the giant food chains accept the fact that a desired level of productivity is to be achieved and the macroeconomic difficulties will segregate the players of the food retail industry in to a different group, ones that will survive the darker times.
Rising global demand for protein, government regulations for turning corn into ethanol, and speculative investors have pushed the prices of many food commodities in recent times. Food prices have also soared as consumers in emerging economies have more disposable income, and erratic climate conditions have hurt supplies.
At the same time, in the face of high unemployment, weak home values and restless consumers in the U.S., escalating prices looms over restaurants. The economic downturn and drop in consumer spending has sent a handful of restaurant chains – such as Uno Chicago Grill pizza, Fuddruckers and Charlie Brown’s Steakhouse – into bankruptcy last year.
Starbucks wants to team up with other companies to buy milk, sugar and other essential food items. This will give the Seattle-based coffee giant a collective bargaining power for its raw materials.
With coffee prices forecast to rise in 2011, Starbucks has also purchased coffee for “a few months” in advance, according to a spokeswoman. In 2010, Starbucks’ profits were up after the execution of a two-year plan to cut costs and close some locations.
Similarly, Darden Restaurants Inc., owner of the Red Lobster and Olive Garden chains, is moving to a system where it buys only what it knows it needs.(not clear) Texas Roadhouse Inc. locks in 80% of the beef prices for its 345 restaurants once a year and buys cuts of beef it expects to fall in price on the open market. The chain is also lining up backup vendors, instead of just buying commodities from one supplier, to get better prices.
Large companies like Starbucks and McDonald’s Corp. (MCD) , which have the capital to hedge effectively even if they don’t always place the correct bets, are using commodity-price hedging to try to guard against massive swings.
We are encouraged by Starbucks’ significant presence in the international market. The company’s international division sells coffee and other beverages, complementary food, whole bean coffees, and coffee brewing equipment and merchandise through company-operated retail stores in Canada, the UK and several other markets. However, the company’s great dependence on information technology and its strong competitor McDonald’s Corp.’s growing market concerns us.
Currently, we maintain a Neutral rating on the stock. Further, Starbucks holds a Zacks #3 Rank, which translates into a short-term Hold rating.
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