Starbucks Under Pressure To Cut Packaged Coffee Prices, Krispy Kreme Enters India

Days after J.M. Smucker Co announced its plans to cut prices of its packaged coffee by 6%, Kraft Foods (NYSE:KFT) followed the lead by lowering the prices of Maxwell House and Yuban Coffee brands by 6%. It will also reduce the prices for Gevalia coffee sold in retail stores by 10%. ^[1] This will put pressure on Starbucks Corporation (NASDAQ:SBUX) to lower the prices of its packaged coffee as well.

In other events, Krispy Kreme signed an agreement to enter India. The move comes days after Dunkin’ Donuts, owned by Dunkin’ Brands Group (NASDAQ:DNKN), opened its first store in the country.

We have a Trefis price estimate of $55 for Starbucks, which is in line with the market price.

See full analysis for Starbucks here

Starbucks’ Global Consumer Product (CPG) division, which consists of packaged tea and coffee, is one of the faster growing segments of the company. The revenues touched $1 billion in 2011 helped by the transition in business model from in-house retail to direct distribution (i.e. through groceries, drugstores and other retail channels).

But the division’s margins took a fall earlier as this business is impacted the most by high coffee prices. Nevertheless, the drop in international coffee prices will bring little respite to the margins, if the company indeed decides to follow in the footsteps of its competitors.

Now Krispy Kreme Going to India As Well

After Dunkin’ Donuts opened its first restaurant in India recently, Krispy Kreme announced its plans to venture into the country. The 700-store doughnut chain has signed an agreement with Bedrock Food Company to open 35 new stores in North India within the next five years. Bedrock is the same company which holds the franchisee rights for Subway restaurants in India.

Dunkin’ Donuts, on the other hand, plans to add 80-100 stores in the country in the next five years. Local doughnut chain, Mad Over Donuts, will also add another 80 stores in 2012. ^[2] Starbucks is yet to open its first outlet in India but plans to do so this year.

See full analysis for Dunkin’ Brands here

Apart from donuts, most donut chains offer beverages and sandwiches which put them in direct competition with Starbucks. One advantage these restaurant chains have is that their menu prices are generally less expensive than Starbucks’. This could be detrimental to Starbucks’ growth in the country.

In the U.S. and elsewhere, Starbucks is generally associated with an exclusive and better quality coffee experience. But there is nothing that suggests that Indians perceive Starbucks as a grade above Dunkin’ Donuts or other coffee chains such as Costa Coffee or Cafe Coffee Day, and so the pricing (Starbucks’ prices are twice or more than those of other coffee/donut chains) will be difficult to comprehend. The company will hence have to chart out a strategy that promotes growth as well as conforms to the perception of Indian consumers.

Understand how a company’s products impact its stock price at Trefis

1. Kraft Foods lowers prices on select coffee, sacbee.com, May 23, 2012 [↩]
2. American doughnut makers Krispy Kreme and Dunkin’ Donuts now play out rivalry in India, economictimes.com, May 23, 2012 [↩]