Dive Brief:

• Starbucks expects strong inventory levels ahead of the holidays after adding new suppliers and boosting production of oat milk, breakfast sandwiches, egg bites and other offerings, COO John Culver said in a Q4 earnings call.
• The coffee chain is working with suppliers "to invest in wage for their workers" to ensure factories are staffed, "and many of them have done so," Culver told Starbucks investors on the Oct. 28 call.
• The "headwinds on commodity pricing, challenges around transportation, and [issues] for our distributors and manufacturers to find labor to work in their factories and distribution centers" likely will continue into FY 2022, the Culver said.

Dive Insight:

Starbucks is closely monitoring inventory levels and its supplier network to ensure its cafes are stocked as customers return at record levels, CEO Kevin Johnson said on the call.

"We’re very confident that as we head into the holiday, our inventory position is very strong," Johnson said.

Prioritizing key holiday and Q1 merchandise helped Starbucks make "significant progress" on addressing supply chain issues, the CEO said. The company rolled out artificial intelligence to streamline ordering and inventory management, he said.

"We've really focused our production effort on high-volume items. In some of those lower volume items, we pull back on and deprioritize," Culver said. "We’re not out of the woods yet, but we feel very good about the path that we’re on."

Starbucks also locked in coffee prices for the next 14 months and has "several months of inventory in the warehouse," Johnson said.

But the chain is confronting the same inflationary pressures as McDonalds, whose executives expect commodities prices to stay up as much as 4% through the end of the year. The FAO Food Price Index, which measures monthly changes in food commodities prices, rose more than 31% YoY in October to its highest level in more than a decade.

Keurig Dr Pepper is passing on coffee commodity inflation to customers "immediately in the form of pricing in our owned and licensed brands," said CEO Robert Gamgort in a Q3 earnings call. "And we do think that's the right thing to do, given the inflation."

But commodities are far from the only inflated line item gulping coffee companies' budgets, Gamgort said.

"The inflation that the industry is seeing right now is way beyond commodities," he said. "It's packaging, it's labor, transportation. Some, if not most, of those cannot be hedged and are impossible to forecast. Everybody is getting exposed to a high level of inflation."

Starbucks CFO Rachel Ruggeri said she expects heightened logistics, labor and commodities costs to further impact the company’s margins at least through the first two quarters of 2022. "You really don't know ... when these inflationary pressures will subside," she acknowledged.

"Of course," Ruggeri warned investors on the call, "they could increase."