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Starbucks' slow coffee buying leaves it vulnerable to price surge

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Starbucks revealed that it remains well behind on sealing forward coffee purchases, leaving the group vulnerable to the rally in bean prices - even as futures hit a 21-month high.

"We have our coffee needs about two-thirds price locked" for Starbuck's 2017 financial year, which started in September, Scott Maw, the group's chief financial officer, said.

In comparison, at the same time last year the company had over 90% of its forward coffee supplies covered.

The lag extends a policy of slow buying which the group signalled earlier this year.

In July, Starbucks said that it had secured 50% of its coffee for 2017, behind the rate of "over 80%" priced forward a year before.

No 'major impact' on profits

However, the policy looks increasingly ill-conceived given a continued rally in futures in the arabica beans that Starbucks uses, with prices lifted by worries over flowering in Brazil, besides output disappointment supporting prices of robusta coffee.

Arabica coffee futures for December touched 168.80 cents a pound on Friday, the highest price for a spot contract since February last year, and taking to 50% gains since March.

Nonetheless, Starbucks, which has been enjoying a boost to profits from the lower price of coffee bought during the 2014-15 slide, downplayed the potential for a margin squeeze.

"Neither foreign exchange or commodities are expected to have a major impact on year-over-year profit growth with FX slightly unfavourable and commodities slightly favourable," Mr Maw told investors.

'Doubling down' on China

The comments followed the release by Starbucks of results showing that stores in China produced record revenues and profits and a strong sales growth in both the June to October period and the fiscal year 2016.

As a result, the company said it was "doubling down" on China.

"Because we have consistently invested ahead of the growth curve, we can continue to open over a store a day," said Howard Schultz, chief executive, Starbucks.

He said while there were countless examples of Western countries failing to find relevance in China, "Starbucks had cracked the code".

In 2016, group revenue rose to $5.71bn from $4.91bn a year earlier, beating analysts' estimates.

The company earned 56 cents per share, slightly ahead of analysts' forecasts of a 55-cents-per-share result.

In early New York Trade on Friday, Starbucks shares traded 11 cents higher to $51.88.

By Tanya Ashreena

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