Coffee bean volatility: Will Tim Hortons join competitors in raising prices?
Published Wednesday, November 5, 2014 6:21PM EST
A Tim Hortons coffee cup is seen in New York on Wednesday, July 22, 2009. (AP / Seth Wenig)
TORONTO -- Coffee drinkers at Tim Hortons may soon have to swallow a more expensive cup of joe as the restaurant chain responds to the soaring price of beans.
Price for Arabica coffee have nearly doubled this year and chief financial officer Cynthia Devine said it's a factor being taken into consideration as the company prepares for 2015.
"It's something that we will, and are, working on closely with our restaurant owners to understand what actions may be necessary," she said Wednesday during a conference call with analysts to discuss the company's financial results.
"Coffee costs, as everyone knows, are much higher than they have been historically and it's been a fairly continued kind of rise in those prices."
Tim Hortons Inc. (TSX:THI) locks itself into long-term contracts with coffee suppliers, which gives it flexibility and protection from market fluctuations.
Most of the company's key coffee deals were negotiated more than a year ago, which has allowed executives to navigate through one of the most volatile periods for coffee prices in recent memory.
But the value of coffee beans has nearly doubled this year, partly on concerns that lack of rain in Brazil could affect the world's top exporter.
In October, the price of Arabica beans jumped to a two-and-a-half year high, as weather forecasts for the region suggested that next year's crop could be dramatically impacted.
Already, some of Tim Horton's competitors have jacked up how much they charge for a cup, in anticipation of future supply levels. Coffee chain Starbucks increased prices during the summer and other suppliers have followed suit, like Keurig K-Cup maker Green Mountain Coffee Roasters and J.M. Smucker, which makes the Folgers brand.
During the third quarter, Tim Hortons delivered results that exceeded analyst expectations, helped by more customers buying its higher-priced menu items like the crispy chicken sandwich and steak and egg breakfast sandwich.
Adjusted earnings per share totalled 95 cents, seven cents higher than analyst expected, according to a survey by Thomson Reuters.
However, overall profits were dragged lower by costs associated with Burger King's agreement to buy the company, which pulled net income down to $98.1 million from $113.9 million a year earlier.
Burger King agreed in August to buy Tim Hortons in a friendly deal worth more than US$11 billion in stock and cash. The deal still requires shareholder and regulator approvals.
Excluding $27.3 million in costs related to the deal with Burger King Worldwide Inc. and 3G Capital as well as $1 million in corporate reorganization costs, Tim Hortons said it earned an adjusted operating profit of $196.1 million for the quarter, up from $169.8 million a year ago.
Total revenue rose to $909.2 million from $825.4 million.
Tim Hortons reported same-store sales were up 3.5 per cent in Canada as customers spent more, offsetting a slight decline in the number of same-store transactions, while in the U.S. same-store sales increased 6.8 per cent.
Chief executive Marc Caira said more attention will be paid to rolling out lunchtime side dishes, which complete a combo and help boost the average dollar amount spent by each customer per visit.
"That's work in progress and you should expect to see a lot of exciting things in that area in the months ahead," he told analysts.
Tim Hortons is already testing a few side dish ideas, like both a "classic" and "Asian" coleslaw that are already available at select locations in the Barrie and Kitchener, Ont., areas.
Tim Hortons shares were ahead 73 cents at $92.57 Wednesday afternoon at the Toronto Stock Exchange.