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Starbucks speeds coffee hedging - as it boosts revenue prospects too

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Starbucks revealed that it had accelerated its forward coffee purchasing, as it unveiled an effort too to speed up its growth, expanding in the promising Chinese market through the group's largest ever acquisition.

Scott Maw, the Starbucks finance director, said that the coffee giant had - besides completing coffee pricing for its current financial year - bought forward 70% of its coffee needs for its 2018 year, which starts in October.

The rate of fixing represents an acceleration from last year, when the group had priced "more than 50%" of its forward coffee needs as of late July.

However, Starbucks is behind in its pricing compared with 2015, when as of July it had "over 80% locked for coffee costs" for the following financial year.

Cost implications

The accelerated purchasing has been made into a falling market, with spot arabica coffee futures last month hitting a 15-month low of 113.00 cents a pound in New York - although they have recovered sharply since, to 135.45 cents a pound on Friday, bolstered by a strengthening real and worries over Brazil's ongoing harvest.

By contrast, futures rose in the first half of last year, touching what was then a 16-month high of 153.05 cents a pound in June.

However, for Starbucks, the implications of the differing markets appear to have been minimal, with Mr Maw telling investors that purchases for the 2018 financial year had been made "at coffee prices roughly comparable to 2017".

'Macro pressures'

The comments followed the release by Starbucks of results showing an 8.3% drop to $691.6m in earnings for the quarter ending July 2, despite growth of 8.1% to $5.66bn in revenues, with margins pressured by factors including growing competition in the US market.

The group cut its earnings per share target for the full year to $1.96-1.97, from a previous estimate of $2.06-2.07.

"The combination of trends in the quarter and ongoing macro pressures impacting the retail and restaurant sectors has us a bit more cautious going into Q4," Mr Maw said.

Chinese expansion

However, the results also showed rising profitability in China, where Starbucks unveiled a $1.3bn deal to take full ownership of about 1,300 stores, buying the remaining 50% of its East China business from long-time partners Uni-President Enterprises and President Chain Store.

Kevin Johnson said that the deal - which will also see Uni-President Enterprises and President Chain Store buy Starbucks out of a Taiwan tie-up – "is a firm demonstration of our confidence in the current local [Chinese] leadership team as we aim to grow from 2,800 to more than 5,000 stores by 2021.

"Starbucks' opportunity for growth in China is unparalleled."

Belinda Wong, the chief executive of Starbucks China, said that "with the middle class rising, the coffee consumption rising, people picking up more and more, drinking coffee, I see enormous opportunities ahead".

Mr Maw said that Starbucks was seeing 20% revenue growth in China, "and operating income is growing quite a bit faster than that".

By Mike Verdin

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