Smucker And Rising Coffee Prices

By Greg Sushinsky | July 08, 2011 AAA

Food and snack company JM Smucker (NYSE:SJM) recently raised its coffee prices, the fourth increase in the last two years.With commodity prices rising for food and beverage companies, investors will want to watch these to try to gauge what impact this might have on the consumer, the business and ultimately the stock. (To learn more about commodities, read Commodities That Move The Markets.)

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Smucker, Coffee Company
Smucker, whose total revenue now consists of more than 40% from its coffee sale, including its well-known Folgers brand, and license to sell popular Dunkin' Donuts brand coffee, recently announced an 11% price increase. Along with a 10% increase earlier this year on top of two increases last year, this marks a 30% total price increase for Smucker's coffee.While pricing has contributed to the top and bottom line gains Smucker has been making, investors may rightly wonder at what point this will no longer benefit them.

Food Input Costs Continue to Rise
The food commodity input costs have been rising across the board, and this continues. Coffee, sugar, cocoa virtually every conceivable commodity that is eventually packaged and sold as something we consumers eat, has risen in price and is expected to continue to do so. Kraft Foods (NYSE:KFT) has raised its Maxwell House coffee prices, while Hershey's (NYSE:HSY) raised the price of its candy nearly 10% in March to offset input costs. Recently, soft drink giant Coca-Cola (NYSE:KO) announced it will implement 3% to 4% price increases at the end of July. Coke also had an earlier 2% increase this year. As Coke is the industry leader, other soft drink makers will no doubt follow. Pepsico (NYSE:PEP) has already announced similar price hikes. Investors might note that the price increases by the food packagers are coming more frequently, and that the original historical lag time from commodity input cost to product price increase is no longer buffering things on the consumer end. (To help the consumer cope with rising food prices, check out 22 Ways To Fight Rising Food Prices.)

Pricing Pays Off So Far
How's this working out for sales thus far? In the case of Smucker and Folgers, the company increased its total revenues in the last reported quarter by 11%, to $1.187 billion, with 8% of that due to pricing. U.S. retail coffee sales for Smucker was $505 million in the last quarter, a 21% jump year-over-year. The volume increase was 3%.

How about others in the coffee business? A recent analyst's note had Starbucks (Nasdaq:SBUX) growing its core business into 2012. There has been a slight dip in the commodity price of coffee recently, but that's certainly nothing for investors necessarily to count on as a trend.

So what about Smucker? It has a decidedly different business model and space than Starbucks. Given Starbucks' strong brand loyalty, consumers probably won't trade down en masse if the price trajectory continues upward for coffee. However, it's hard to imagine consumers, despite brand preferences and loyalty, going for ambiance on the retail shelf. Smucker's growth trend has been modest on the topline and recently negative for net income quarter over quarter. Commodity costs with Smucker's other food products have also been rising, so it's not as if there is going to be an alternative dynamic available for Smucker to generate more revenue: it's brand, pricing and volume or nothing.

Smucker Stock
Smucker stock has been living near its 52-week high, as it recently traded around $76, off slightly from its $79.84 52-week high. It trades at about 16.27 PE and, while it's been a great company and a strong stock, it's hard to see the pressure from the input prices doing it much good from here on out. Hershey even cited gasoline prices as a factor in its price raises for candy. In a similar vein for Smucker and its coffees, at some point in the near future the rising retail price for consumers to fuel themselves each morning is going to cause them to balk. (To help you take advantage of the rising commodities prices, see Cashing In On A Commodities Boom.)

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