This article is completely wrong. If Starbucks has hedged, they aren't "losing" money on the price of coffee going up or down; their hedge pays out inversely with the change in operating costs due to coffee price fluctuations.<p>Another way to illustrate this is to note that the cost part of the equation is the same regardless of what happened to coffee prices in the last year: assuming they hedged, they'd probably raise prices by the same amount had coffee been up or flat for the year, too.<p>Another important flaw is that costs do not determine prices in this way. See this legendary Quora thread for details: <a href="http://www.quora.com/Why-is-iced-coffee-more-expensive-than-hot-coffee?q=iced+coffee" rel="nofollow">http://www.quora.com/Why-is-iced-coffee-more-expensive-than-...</a><p>Yet another problem is that even if costs did determine their pricing, Starbucks' big costs are real estate and labor. The markup on beans and hot water alone is staggeringly high.
Commodity Trading agreements are <i>for</i> businesses who use items as the input for their production.<p>Starbucks is one of the few types of companies that SHOULD be buying commodities contracts to control unpredictability
<i>But it doesn't really make sense for the Starbucks management team to be speculating on coffee prices. To run Starbucks successfully you need a lot of management skills related to operating and marketing a large chain of coffee houses.</i><p>I dunno I'd assume that an organization the size of Starbucks can probably afford to have a few folks dedicated to their supply chain economics separate from the coffee house operations and marketing folks.
> <i>A reasonable alternative strategy would be to just run the business as if the price of coffee was destined to be flat, and then place counterveiling speculative bets. The point of those bets, however, isn't to speculate it's precisely to try to eliminate the need to speculate.</i><p>The point of speculating is to eliminate the need to speculate? What the hell? This doesn't make a bit of sense.<p>What Starbucks did was place a bet that coffee prices would go up. Unfortunately for them, they bet wrong. That's the risk no matter how they bet, though. If they'd bet on flat prices (no lock-in) or declining prices (the other side of the bet they actually made), the price could have gone up and they could have lost money. That's why it's called speculation. Someone speculates that the price will go one direction, and they make a bet to that effect with someone else.
I used to go to Starbucks every morning. But they got too expensive. Their product always has had a ridiculously high profit margin, with the cost of preparing a cup being under 10 cents and selling for $1.49, then $1.59, then $1.79, now it is $2.19. Starbucks price should not have been raised in this economy just because raw inputs went from 10 cents to 13 cents. Finally the customers, well myself at least, said this is absurd I am being ripped off here, and I bought a good espresso machine for home. Come to think of it though, this is all pretty irrelevant since it seems they are still packed with enthusiastic customers most of whom are renting wifi for the price of coffee. Hey, if the market can bear it, jacking up your prices continually is not the worst plan.
Um, isn't this the definition of sunk cost? They already lost money on their bet. Trying to raise prices in the future to pay for the past is a blunder.<p>If they can get away with raising prices and not losing customers, it is irrelevant that they overpaid for coffee they already bought. They just earn more per cup. If they can't get away with it, then this is a foolish thing to do, as they can't make their previous payments vanish.<p>Didn't their executives go to business school?
Planet Money did a story that talks about fuel speculation in the airline industry: <a href="http://www.npr.org/blogs/money/2011/09/30/140954343/the-friday-podcast-how-money-got-weird" rel="nofollow">http://www.npr.org/blogs/money/2011/09/30/140954343/the-frid...</a> (The fuel speculation part is 8 minutes in.)
> <i>Unfortunately for them, the coffee market fell soon after that leaving Starbucks locked in to paying higher prices than what you can get on the spot market.</i><p>Just spin it as FairTrade supreme version?
I find it really surprising that the article doesn't once use the words 'hedging' or 'liquidity', since an understanding of those very basic concepts would have made the second paragraph either useful or redundant.