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TheStreet Open House

Starbucks Price Hike Shifts Coffee War

Stocks in this article: SBUXMCDSJM

NEW YORK ( TheStreet) -- Starbucks (SBUX) is raising prices and McDonald's (MCD) is raising the coffee wars' stakes, but commodities costs may prevent other coffee competitors from making up ground.

Green Arabica coffee prices are hovering around a 13-year high, and while Starbucks today announced plans for price hikes on "larger, labor-intensive" beverages and price freezes or cuts on other beverages , Seattle's coffee superpower isn't the only company feeling the strain. J.M. Smucker's (SJM), which produces Folgers, Millstone and the commercial version of Dunkin' Donuts coffee, is already raising prices 9% to offset the burden of higher bean prices.

Meanwhile, Green Mountain Coffee Roasters (GMCR) -- makers of the Keurig single-cup coffee machines and producers of its house-blend coffees, Tully's Coffees and Newman's Own coffees, among others -- says it will raise prices of all its coffee offerings 10% to 15% next month as a result of the Arabica price surge. Even Wendy's Arby's Group (WEN) announced 2% to 3% commodities-driven price hikes earlier this month.

That leaves one last, big domino to fall: McDonald's. The fast-food giant began its all-out coffee war with Starbucks last year by selling Green Mountain-produced Newman's Own for $1 regardless of serving size. That offer ended this spring, after which McDonald's rebranded all coffee under its McCafe brand.

Unfortunately for Starbucks, Green Mountain, Smucker's and every other outlet that produces coffee and isn't a $29 million multinational powerhouse, McDonald's doesn't play with dominoes. When everyone else's bottom line is groaning under green coffee bean prices flirting with $2 a pound and McDonald's reps are still calling their specialty coffees "a tremendous value" only they can offer, someone's about to get roasted.

"It's business as usual for us," McDonald's spokeswoman Ashlee Yingling says. "While pricing is determined by independent franchisees and is evaluated based on a variety of factors, there are no recommendations to raise coffee prices."

That's a burn, and an especially painful one for Starbucks considering the price hike follows an unfortunate public-relations snafu involving the temporary removal of tall-sized beverages from menus at Starbucks drive-thru outlets -- creating an opening for McDonald's and smaller, surging coffee companies such as Tim Horton's (THI), Peet's (PEET) and Caribou Coffee (CBOU) if they can somehow absorb the price hikes. Unfortunately, there's no time to lick your wounds during the coffee wars.

--Written by Jason Notte in Boston.



>To contact the writer of this article, click here: Jason Notte.

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Jason Notte is a reporter for TheStreet.com. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, The Boston Phoenix, Metro newspaper and the Colorado Springs Independent.

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