J.M. Smucker (SJM) Raises Prices of K-Cup Packs by 8%

The J. M. Smucker Co. (SJM) recently increased prices for its single-serve packs (K-Cups) in the U.S. by an average 8%, effective Jan 5. Ohio-based Smucker’s mainly increased K-cup prices for the Folgers, Folgers Gourmet Selections, Cafe Bustelo,and Millstone brands.

The continuous hike in green coffee costs is the reason behind the price hike. The rise in green coffee costs is largely due to increasing prices of Arabica coffee since January this year as a result of an ongoing drought in Brazil.

Earlier in June, Smucker had raised its coffee prices by 9% for its Folgers and Dunkin’ Donuts branded coffee products, which it licenses from Dunkin’ Brands Group, Inc. (DNKN) in response to rising costs. However, it did not raise prices for K-cups back then. (Read: Smuckers Raises Coffee Price)

The company had last raised its prices in May 2011 by an average of 11% for most of its coffee products. That followed a 10% hike in Feb 2011 and a 10% increase in Aug 2010. Other coffee companies like Starbucks Corporation (SBUX) and Keurig Green Mountain Inc. (GMCR) also followed Smucker, when it raised prices in June.

The profitability of Smucker largely depends on the prices of green coffee. Coffee prices are highly volatile and are affected by weather and pest infestation. Also political decisions in coffee-producing countries, worldwide supply and demand, the relative strength of the dollar and speculative trading also influence coffee prices.

We believe that though the hike in coffee prices will result in higher price realization but it will negatively impact sales volumes of the company as evident from the second quarter fiscal 2015 results.

In the second quarter, the company’s sales declined 5% year over year and also missed the Zacks Consensus Estimate due to decreased volume, primarily in the U.S. Retail Coffee segment, owing to higher coffee costs. K-Cup sales however increased 12%, driven by volume gains of 15% in the quarter. (Read: J.M. Smucker Q2 Earnings In Line; Sales Miss, View Retained)

Following this hike in K-cups prices, we now expect sales volume to decline. However, the company is positive that volume trends will improve in the second half of fiscal 2015, but is at the same time cautious about a negative impact from higher green coffee costs.

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