J.M. Smucker management raised its full-year sales guidance after competitors followed their coffee price increases.
What to know
Despite being famous for its namesake spreads and jams, J.M. Smucker is predominantly a company that manufactures coffee and pet food. The two categories combine to comprise 70% of the company's yearly sales and generate most of the Ohio-based company's profits. With Folgers and Dunkin, the company owns two of America's five best-selling coffee brands.
Coffee is essentially a commodity product, which means that the price and profitability is largely determined by the price of coffee beans.
As you can see, since the pandemic, input costs for coffee and tea production have skyrocketed. The culprit here isn't demand but rather a poor crop driven by drought and frost. "That had kind of a double whammy on already a down year for coffee," Coffee Trader Ryan Delany told Bloomberg.
Fortunately for J.M. Smucker, the poor crop impacts everyone, creating a situation where everyone wants increased prices. Since Smucker dominates the American market, it is the first mover. "We have the responsibility to lead (price increases)," CEO Mark Smucker told an investor conference in September.
Competitors have followed their signal, giving the company confidence to increase net sales prediction by 150 basis points—from an upward guidance of 5% to 6.5%.
The Price Increases Initially Slowed Coffee Volume at Smucker
- Driven largely by price increases, Coffee sales revnue at Smucker have increased by about 10% this year.
- Significant price increased have been offset by volume declines. Management reported double digit volume losses for the first two quarters
Competitors are following the price increases—leading to anticipated benefits.
- "Price gaps in the premium coffee space have continued to close," Smucker told investors. "And so, we would expect over the subsequent quarters to continue to see growth for our Dunkin' business and our single-serve business."
- Management expects sales of premium coffee to increase relative to peers while its value offerings continue to shine.
- Essentially, competitors are raising their prices, masking Folgers and Dunkin's elevated prices.
They said it:
Here's how CEO Smucker described the strategy:
The first thing that we try to remind everyone is that we haven't seen record coffee costs like we saw a decade or so ago. And so the environment as we've managed through it, has been -- the playbook has remained the same. We continue to execute against those same activities that we always would, whether that's being very prudent about passing through the pricing, being -- thinking about promotional activity in a normalized way. So in other words, not out of the ordinary.
And then very importantly, and maybe most significantly, continuing to invest in our brands even in a period of inflation. And so just -- always taking the approach, Rob, of balancing pricing, volume mix and our -- the ways in which we support our brands, both with the consumer and customer. We've got to continue to take a balanced approach, and that has served us well, and we believe that will continue to do so.
- Currently, J.M. Smucker spends about 5.5% of its net sales on marketing.