Photographer: David Ryder/Bloomberg

How Starbucks Gets Away With Charging a Fortune for Cheap Beans

1. Lock in low coffee costs. 2. Raise prices.

Millions of groggy people this morning grubbed up an additional 5¢ to 20¢ for their Starbucks fix. No biggie. Most probably swiped or scanned and didn't even notice it.

But for Starbucks, those nickels and dimes add up–especially since it is paying less for the beans while ringing up higher-priced lattes.

The cost of coffee on commodity markets–the green, unroasted beans, or “berries,” that are stripped off the branch–has been swooning, thanks primarily to a lot of rain and high temperatures in Brazil.

So, cheaper beans for them, higher prices for you–a simple and strong mix, with financial markets swirled just so and a light dash of marketing.

The Arabica empire said it hadn’t tinkered with prices on many of its drinks for about two years. It has “to balance the need to run our business profitably while continuing to provide value to loyal customers and to attract new customers,” spokeswoman Lisa Passe said in a statement. Translation: Sometimes we realize you’ll pay more.

Seeing the big dip in coffee bean prices this spring, Starbucks went ahead and locked in all the beans it will need for the rest of the year and about two-thirds of the beans it will need next year. "We expected coffee prices to come down, just given what we saw in the market," Chief Financial Officer Scott Maw said during a conference call in late April. "We waited, we were patient, and when they came into our target range, we filled up our needs for the year."

Hedging goes the other way, too: The recent dip in coffee prices meant that Starbucks was forced to buy some of the beans it brewed this spring at above-market rates because it had locked the price in months earlier, when it was higher.

Still, if the market pans out as Starbucks expects, coffee prices will tick up next year and the company will still be paying this year’s low rates. Meanwhile, it will keep plinking that extra 5¢ to 20¢ per cup into the profit sack (and the bonus pool for that savvy hedging team).

In short, Starbucks is raising prices for one very simple reason: because it can.

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