Starbucks is raising their prices by 10 cents in some regions. Yes, 10 cents. Big whoop. Everybody is freaking out about the wrong thing. There’s an elephant in the room that nobody is talking about when they’re talking about the Starbucks news.
Starbucks says they’re raising prices because of more competition. Really, from who? Seattle’s Best? Starbucks owns them, that was a trick question.
Side note, here’s an interesting branding story I read a while back on Starbucks’ mission to make Seattle’s Best the coffee drink for people who wouldn’t be caught dead in a Starbucks. It’s a complete rebrand. Starbucks wants the edgy non-yuppie crowd to drink Seattle’s Best. And you know that Starbucks just bought Evolution Fresh Inc for $30 million. I don’t really get that acquisition. I think it’s a stretch and will flop.
Anyway, aside from competition from I-don’t-know-who, the other reason Starbucks is raising prices is because of higher costs of coffee, milk, fuel, and other commodities. Higher coffee and milk costs are eating into their profit margins so they expect their 2012 earnings to decrease by about 20 cents as a result, even after raising prices. Restaurants like Chipotle and McDonald’s are raising prices too.
Here’s a chart of food prices over the last five years, you can see in the top left corner, +43%.
Here’s a picture of the price of coffee over the last five years, +92%
And here’s the price of beef over the last five years, +54%
With the cost of food rising, we’ll obviously have to pay more for your food since the cost will get passed on to us in the form of higher prices. Welcome to inflation.
But the big news isn’t that prices are going up by 10 cents. Big deal. Anybody who is freaking out about that probably shouldn’t be going to Starbucks anyway. They should be going to Dunkin Donuts, which I happen to like better anyway, especially those vanilla lattes.
The big news is that commodity prices are on the run and that definitely impacts us on a day-to-day basis, but not in the way you think.
The biggest impact inflation will have is on your bond exposure.
Bonds had a huge run last year. With the US debt downgrade and the European Debt Crisis, bonds were a safe haven for investors. They’re safe because you know you’ll get your principal back, and some interest, when the bonds mature. You most likely invest in bond funds, which is good. Same concept.
Here’s a chart of how all the major asset classes did last year:
via The Atlantic
If we continue to see prices rise and inflation starts to creep up even more in 2012, this will eat away at your bond fund returns since you’re getting a fixed payment, that’s most likely less than the rate inflation is increasing.
That’s the trade-off with owning bonds. They’re safe, but if inflation starts to creep up even more, the Fed will increase interest rates to cool down the economy and the value of your existing bond fund exposure could decrease (interest rates move inversely with bond prices) or produce mediocre returns.
This is the elephant in the room that nobody is talking about because interest rates have been going down (and bond prices have been going up) for the last thirty years.
mortgage-x.com
The elephant is waiting to get tipped over. Maybe this year, maybe next year, not sure. But it will get tipped over.
Add this to your list of things to talk about with your financial advisor. You can say it just like this:
“If inflation picks up and the Fed raises interest rates, do you think we should pair back some of my bond exposure?”
Charts via indexmundi.com
I have been reading your blog for a while now. I love how honest you are! This was a great one. I will definitely be emailing my advisor today.
Kristy
Great Kristy! And glad you like the honesty. It’s fun and it makes things easier on me, don’t have to work to filter so much if I stick with this strategy.