Seattle-based Starbucks, the world's largest coffee chain, got a shot in the arm this week, reporting a 20 percent rise in second quarter profits. However, higher commodity costs are expected to take a bite out of earnings in 2011. New York coffee prices hit a 34-year high of $3/pound on Thursday. CNBC's Christine Tan caught up with the billionaire founder and CEO Howard Schultz in Shanghai during the launch of his latest book "Onward" for his take on rising coffee prices.
Q: How are you dealing with soaring coffee prices?
I think everyone in the food business is quite concerned about rising commodity costs and specifically for us, coffee. Especially when I know for a fact there's no supply problem.
Q: It's all about speculation you've been quoted saying?
Well I just gave a key note address at the National Coffee Association in New Orleans about a month ago. I met one-on-one with key suppliers. There wasn't one supplier that indicated to me that there was any supply issue. So we're living at a time right now where financial speculation index funds, hedge funds have created a rush of very, very high prices. And not only coffee, corn, sugar, cotton and obviously oil, and unfortunately it has to hit the consumer. We're working very hard not to put us in a situation where there's going to be pain for the customer.
Q: So you're holding back passing it on to the customer?
We are. We've also told the Street that regardless of where coffee prices go, we'll be able to navigate through this in 2012 but it's challenging.
Q: How do you manage the volatility in the meantime?
Well, I think there are other ways we can mitigate costs and we've lots of different levers. The fact that just this year alone, we have significant cost pressures. We are having a great year. We've been doing this for forty years. We've seen other cyclical changes. The only difference this time is there's no supply issue.
Q: If coffee prices continue to push higher, will it turn consumers off drinking coffee?
Well I think the question you have to ask yourself is the elasticity of pricing. And I think given the economic downturn, and the pressure on global consumers, we all have to be very conscious of it and that's why I don't want to raise prices.
This interview is an excerpt from CNBC’s longest-running feature program Managing Asia. Catch the full interview with anchor Christine Tan on 6 May 1730 (SIN/ HK) and over the weekend on CNBC.