The J. M. Smucker Co. SJM recently raised the prices of the majority of its packaged coffee products sold in the U.S. The products primarily consist of items under the Folgers, Dunkin' Donuts and Cafe Bustelo brands. Smucker licenses Dunkin’ Donuts from Dunkin’ Brands Group, Inc. DNKN.
Ohio-based Smucker increased prices by an average 6% on all products under the Folgers, Cafe Bustelo and Dunkin' Donuts brands, due to a continuous rise in green coffee costs, both arabica and robusta. This raise is not related to Dunkin' Donuts coffee or other products for sale in Dunkin' Donuts restaurants. Also, the price increase will not affect K-cup pods.
Smucker’s profitability largely depends on the prices of green coffee. Coffee prices are highly volatile and are affected by weather and pest infestation. Also political decisions in coffee-producing countries, worldwide supply and demand, the relative strength of the dollar, and speculative trading also impact coffee prices.
The recent move, to raise prices, comes at a time when coffee’s future prices have been rising sharply, hurt by drought conditions in major coffee-producing countries.
Notably, Smucker had last raised its coffee prices in Jun 2014 by an average 9% for Folgers and Dunkin' Donuts branded coffee products. That followed an 11% hike in May 2011, 10% hike in Feb 2011 and a 10% increase in Aug 2010.
However, since July 2015 there has been a sustained decline in the costs of green coffee. In Jul 2015, Smucker had lowered its packaged coffee prices of the majority of its products sold in the U.S. by 6%. In May 2016, the biggest U.S. coffee roaster further lowered its coffee prices by 6%. The cumulative 12% list price decrease for coffee significantly helped the business volume.
Apart from lower green coffee costs, the move to cut packaged coffee prices was to counter competition from lower-priced private label brands like Safeway Select, The Kroger Co.'s KR Kroger and Costco Wholesale Corporation’s COST Kirkland Signature, which had grabbed higher market share in recent years.
A hike in coffee prices will now lead Smucker to raise the pricing of its branded roast and ground coffee offerings, which will erode its sales volume. Higher pricing of Smucker products can also result in customers switching to cheaper brands and delaying purchases. This might significantly hurt the company’s coffee segment.
In fact, the company has been reporting sluggish sales of late. While Smucker beat earnings in the second quarter fiscal 2017 on Nov 17, sales marked its second consecutive miss. Sales also declined 8% in the quarter. Sales in Smucker's U.S. consumer foods segment – the biggest business – fell 13% in the quarter, partly hurt by the sale of its canned milk operations and lower demand for some products under its Jif and Pillsbury brands.
The company said sales of Jif peanut butter were hurt by customers adjusting their inventory. Smucker's U.S. coffee sales, its second-biggest business, fell 6% due to lower prices and volumes for Folgers. Currency headwinds and sluggish pet food sales have also hurt sales.
Also, Smucker shares have been underperforming the Zacks-categorized Food-Miscellaneous/Diversified industry over the past six months. The stock declined significantly by 14.4% in comparison to the Zacks-categorized industry, which slipped just 9.6%. Notably, the industry is part of the bottom 31% of the Zacks Classified industries (183 out of the 265). The broader Consumer Staples sector is placed at the bottom of the Zacks Classified sectors (16 out of 16).
Though the company remains optimistic on the company’s acquisitions and innovation program and focuses on improving the performance of the mainstream dog and cat brands, heightened competition in the pet food business in the near term remains a concern. Further, we remain concerned that the company's weak sales in the first half will put its full-year forecast under threat. Now, the recent hike in coffee prices will further lead to a decline in volumes in the coming quarters.
Smucker holds a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Zacks’ Best Private Investment Ideas
In addition to the recommendations that are available to the public on our website, how would you like to follow all Zacks' private buys and sells in real time?
Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Zacks Investment Research