Quality coffee, quality prices.
Starbucks is committed to paying the higher prices that premium-quality coffee commands. This means our approach to pricing (meaning the amount we pay for coffee) is largely based on quality. In fact, when we’re working closely with people throughout our coffee supply chain – farmers, millers, exporters and importers – quality is always stressed as the best, most sustainable driver of higher prices.
Extra rewards for extra effort.
Other factors can influence contract decisions and how suppliers are rewarded for certain coffees, too. Suppliers who have been independently verified and scored against our social and environmental criteria are able to join C.A.F.E. Practices and become part of a network that we buy from first. Suppliers strive to continuously improve and increase their yearly scores against our criteria—because improved scores mean higher preference in terms of our purchasing decisions.
When suppliers achieve Starbucks best practices levels, reaching 80 percent or more in each of the social and environmental categories, they become Starbucks "strategic suppliers", the highest level that can be achieved in C.A.F.E. Practices.
Suppliers are rewarded with a five-cent per pound premium on their coffee deliveries to us, on top of the purchase price paid, for the first year after they achieve strategic supplier status. They receive the same reward when they have improved their scores by another 10 percentage points over their previous scores.
In fiscal 2008, 38 million pounds (17 million kilograms), or 13 percent, of all the coffee we purchased from C.A.F.E. Practices suppliers came from new strategic suppliers and existing strategic suppliers who had improved their scores by 10 percentage points or more. These suppliers were rewarded with an additional $1.9 million in premiums, over their fiscal 2008 contract prices.
The $1.9 million in extra money earned from these premiums helps farmers offset the out-of-pocket investments they may have made to improve their agronomy practices and/or enhance the working conditions on the farm.
The facts on pricing.
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What determines coffee prices? |
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For Starbucks, quality is the most important factor when it comes to pricing. Other contributors include the cost of production and the prevailing market conditions, which vary from country to country and even from region to region. Social and environmental practices on the farm are considered too, based on information gathered through C.A.F.E. Practices or through certification systems like Fair Trade and Certified Organic. |
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How much does Starbucks pay for coffee? |
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In fiscal 2008, Starbucks purchased 385 million pounds (175 million kilograms) of coffee and paid an average price of $1.49 per pound ($3.28 per kilogram). Our total purchases include some third-party certified coffees, such as Fair Trade Certified™ and Certified Organic. These certified coffees often cost us a little more because they include licensing fees and charges for third-party labeling. If we remove the purchases of certified coffees from our total coffee purchases in fiscal 2008, then our average purchase price is $1.48 per pound. |
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What is the "C" market price? |
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Arabica coffee is traded as a commodity on the New York "C" market (the worldwide pricing mechanism for commercial grade arabica coffee and a reference used by coffee traders). In the early 2000s, "C" market prices were depressed due to an oversupply of coffee that exceeded demand. In the past few years, demand and supply have been more in balance, which has been reflected in the rise of "C" prices. (see chart) |
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Why doesn’t Starbucks buy coffee at the "C" market price? |
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Prices for premium-quality arabica beans, sold as specialty coffee, are often negotiated independently of the "C" prices. These prices are set higher to compensate farmers for producing premium-quality beans. Coffee can be purchased from exporters, brokers, multi-national trading companies, cooperatives and, in some cases, directly from farmers. While the "C" market price tends to fluctuate as a result of weather conditions, speculation and other factors, the price we pay remains relatively stable. In 2002 and 2003, Starbucks paid approximately twice the "C" market price. Although the "C" prices have gradually risen in recent years, the average price paid by Starbucks continues to be higher than the market price. (see chart) |
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Up close: How much a Guatemala farm got paid.
In fiscal 2008 we purchased coffee from Finca El Hato, an approved C.A.F.E. Practices farm since 2007 located in Guatemala. In fact, Finca El Hato became a strategic supplier in fiscal 2008 and was eligible for a five-cent per pound premium for deliveries made to Starbucks during that period, which was in addition to the purchase price reflected below.
Our contract for this coffee was negotiated with the exporter, in which we agreed to pay $1.37 per pound for coffee from Finca El Hato. Of this purchase price, the exporter retained five cents per pound and paid $1.32 per pound to the producer who grew and milled the coffee. Based on our transparency requirements noted in the contract, we received documentation from the exporter indicating how much coffee was received by the exporter and paid to the producer. This was in the form of notarized receipts and statements from the producer.
In addition, Finca El Hato became a strategic supplier in fiscal 2008 and was eligible for a 5-cent-per-pound premium on top of the negotiated purchase price for deliveries to Starbucks during this period.
Based on our transparency requirements noted in the contract, we received documentation from the exporter indicating how much coffee was received by the exporter and paid to the producer. This documentation was in the form of notarized receipts and statements from the producer.
Our coffee supply chain is diverse and complex, and it differs from country to country, or even within areas. So the price distribution can vary depending on different purchase and delivery structures, production costs, quality premiums and the margin distribution within each country.
