Friday, December 21, 2007

Starbucks Dairy Problem

Let's just say it before they do. Starbucks (SBUX) will not meet its earnings goal this year. Why?

Back in May, months before Starbucks actually acknowledged this, I spoke about milk prices and their effect on the company. What has happened since then?

The price of milk has increase of 23.2 percent through November. The nationwide average for a gallon of whole milk is $3.80, according to the U.S. Department of Agriculture. That, by the way smashes the price of everyone largest gripe, the nationwide average for a gallon of unleaded gasoline which stands at $2.99.

Now, Starbucks actually came out in late summer and admitted diary prices were hurting them. What was the average price per gallon in May? $3.38, a full 13% lower than current levels.

Starbucks responded to these increases by raising prices, a move I panned then and a move that received the expected response, a dramatic decline in store traffic.

How do they expect to reach their lofty expectations in 2008? When facing lower store traffic and steadily increasing costs, another price increase for the company is just not possible.

With shares trading at levels not seen since early 2004, it would seem investors feel the same way...

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