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Smucker's Puts a Jolt Into Your Morning Java as Futures Pressure Mounts

NEW YORK (TheStreet) -- When the coffee beans get expensive, J.M. Smucker Co (SJM) raises prices.

Earlier Thursday the food company reported a 9% drop in quarterly profits, in large part because the rising increase in coffee futures prices hurt margins. Shares were recently around $104, up less than 1% for the year to date.

It doesn't help that Smucker, whose many products include Folgers and Dunkin Donuts packaged coffee, is seeing a lot of competition in the coffee market, particularly in single-serving coffee offered by Keurig Green Mountain (GMCR), among others.

Smucker said sales volume for its retail coffee business rose by 1% but profits slid 10%. Arabica coffee prices, as seen by the iPath DJ-UBS Coffee TR Sub-Index (JO), had risen steeply in 2014 amid concern that unusually hot and dry weather in Brazil's key growing regions would dent coffee-bean output.

So it makes sense the Ohio company said Wednesday it plans to raise prices on its coffee brands to give its margins some breathing room.

Smucker is the first major roaster to act against the cost pressure of the futures spike. Other roasters, such as Maxwell House-maker Kraft Foods Group (KRFT), have resisted raising prices for fear of shrinking market share, and the trauma of the last price hike three years ago that cut deeply into consumption.

"No one really ever wants to take pricing (action) in a declining volume category," Jonathan Feeney, food and beverage analyst for Athlos Research, told Reuters. "Hopefully the private-label and other coffee processors follow. If they don't, you'll see a lot less Folgers sold and they'll have to respond."

In May 2010, Smucker made its first price hike in the early stages of a multi-year Arabica futures rally. Over the next 12 months, it raised prices four times by a combined 38%.

Smucker's sales volume fell 9% between 2010 and 2013, while rival Kraft Foods lost almost 20% of its volume over the same period.

And then there are those single-serve coffee products offered by Starbucks (SBUX) and Keurig Green Mountain.

Green Mountain's K-Cups, knocked Smucker off the top spot in the U.S. retail coffee market measured by value last year, according to a report from Euromonitor.

Smucker faces many challenges, especially in its coffee retail division. With rising Arabica futures prices and increased competition for shelf-space, the company is hoping it won't repeat the mistakes made in 2010.

SJM Chart
SJM data by YCharts

At the time of publication, the author had no position in any of the stocks mentioned.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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