The Grounds of Wrath
National Review Online , February 4, 2022
I was wondering what to write about this week when a politician spilled (metaphorically speaking) a cup of coffee all over my screen. As so often, the trouble started on Twitter, specifically with a tweet by the New York Times’ Shane Goldmacher:
Headline: Starbucks will raise prices again, citing higher costs
Dek: The company’s profit soared 31 percent, to $816 million, in the last three months of 2021.
That’s true enough (note that those are year-on-year comparisons). You can see the results for the company’s fiscal first quarter — which ended on January 2, 2022 — for yourself here. And you can check out Starbucks’ fiscal first-quarter results for the period that ended on December 29, 2019 (in other words the last fiscal first-quarter numbers from before the pandemic) here. The company reported net earnings of $885.7 million for that quarter. Fully diluted earnings per share were $0.74 against $0.69 this time around.
I should stress at this point that I do not follow the Starbucks stock, nor I do not drink much Starbucks coffee (other than the Doubleshot Espresso, which is a damn fine can of coffee). I am not a Starbucks expert. Nevertheless, it’s not uninteresting (to me, anyway) that, looking at seasonally comparable quarters, the company did a lot better this time than in the previous first quarter (when we were deep in the pandemic), but somewhat worse than it managed in the last pre-pandemic first quarter. That might be a more relevant comparison.
But what did those who do follow the stock think about these latest results?
From (checks notes) the New York Times (admittedly this piece was by a different author):
Starbucks shares fell as much as 5 percent in after-hours trading after it announced its results for its fiscal first quarter, before recovering some of those losses.
Starbucks on Tuesday said higher costs are weighing on profits, leading the company to miss quarterly earnings estimates and cut its earnings outlook for fiscal 2022.
But investors were expecting a much gloomier forecast. Shares of the company were down as much as 5% in extended trading before rebounding after executives shared their revised projections. The stock was recently down less than 1%.
Higher costs, eh?
Stock prices move around for any number of reasons, but it does appear that, far from celebrating Starbucks’ ability to milk the latte-drinking hordes, the market was, at least partly, unhappy about the company’s failure to keep up with changes in the current pricing environment.
Representative Pramila Jayapal (D., Wash.) looked at the numbers in a different way. She retweeted Goldmacher’s original tweet, adding:
Despite soaring profits, Starbucks is raising prices AGAIN. We can’t accept this level of corporate greed as the status quo. Tax the rich and make sure every single worker in America can join a union.
Posting on NR’s very own Corner, Ramesh Ponnuru wondered “how higher taxes on the rich and more unionization are going to bring prices down.”
Good question.
Ramesh was responding to Phil Klein’s observation that the results were, in fact, a disappointment.
Phil also added that was “amusing to see liberals moving from slamming meat companies and grocery stores to the scourge of overpriced cappuccino.”
Indeed, but that evolution shows that the hunt for politically convenient scapegoats for politically inconvenient inflation is not slowing down. Big Meat, Big Grocery (Big Oil had its moment, too), and now Big Coffee. They are useful both as a way of deflecting blame away from the current administration (which is, to be clear, by no means solely responsible for the current surge in prices), but they also feed into a narrative of corporations as wrongdoers, and big government as the little guys’ protector.
Jayapal’s tweet is also of interest because of the way that it reveals a worldview in which corporations and “the rich” are resources that, on the most benign interpretation, can safely be made to pay up indefinitely. There’s an old story about a golden goose that comes to mind.
What’s more, either the reality that both companies and the wealthy respond to economic incentives/disincentives has either not occurred to Jayapal or she is choosing to ignore it. (This, I would stress, is a part the benign interpretation.) For example, businesses will typically (if they can afford it) pay up to get the workers they need (and Starbucks and other employers seem to be doing that). Beyond that (and to echo Ramesh’s point), however, they are unlikely to want to invest in hiring additional workers when labor (and other) costs are increasing. (Starbucks highlighted the fact that a “tight labor market” was among the challenges that it was facing.) Rather, they will look to do more with less or, indeed, turn their attention to automation.
As for corporate “greed,” it is worth remembering that the managers of a business cannot operate their pricing solely on the basis of past cost increases. They also must look ahead. Starbucks’ recent experience has been of higher-than-expected costs, including of labor, but also, inevitably in current conditions, arising out of supply-chain disruptions. The company reported that
like many others in the industry, Starbucks experienced a rapid increase in supply chain costs in the U.S. related to distribution and transportation driven by supply chain staffing shortages. This required the company to identify more expensive alternatives to meet strong customer demand. While supply chain driven inflationary costs were unexpectedly amplified and rapidly accelerated in December, these disruptions are expected to continue for the foreseeable future.
And, as the company correctly notes, Starbucks has hardly been alone in this. Turn, for example, to that full New York Times report on the Starbucks’ numbers to discover this:
The price of menu items at fast-food restaurants rose 8 percent in 2021, the biggest jump in more than 20 years, according to government data, with the chains citing higher costs for food, transportation and workers.
The link leads to another Times story (but from mid January), the message of which is clear:
The pandemic has led to price spikes in everything from pizza slices in Manhattan to sides of beef in Colorado. And it has led to more expensive items on the menus at fast-food chains, traditionally establishments where people are used to grabbing a quick bite that doesn’t hurt their wallet.
At a Chipotle in Costa Mesa, Calif., the price of a chicken burrito — nothing fancy, hold the guacamole — about a year ago was $7.25. These days, that same burrito costs around $7.95, according to price data collected by analysts. In Ann Arbor, Mich., a ShackBurger at Shake Shack used to cost $5.69; now it’s $6.09. And in Oklahoma City, an order of 50 bone-in wings from Wingstop that cost $41.99 early last year is now $47.49, a 13 percent increase.
The overlap between Starbucks and less upscale food chains is (I’d guess) fairly limited, but some, at least, of the cost pressures will be the same.
The New York Times:
Last year, the price of menu items at fast-food restaurants rose 8 percent, its biggest jump in more than 20 years, according to government data.
And that is in what the Times describes, correctly, as a “hypercompetitive” fast-food market. That Big Coffee, Big Burrito, and Big Bone-In Wings are all involved in various dastardly plots to gouge the public seems unlikely. They are simply responding (when they can) to higher costs.
Recent experience, amplified by the way that so many governments (the Biden administration is by no means the only culprit) have been either insouciant or actively irresponsible (the American Rescue Plan, anyone?) in the face of inflationary experience (not to mention the behavior of central banks) will, I am sure, have led managements — in Starbucks or elsewhere — to factor in higher costs in the next six to twelve months when planning pricing policy. And so, for instance, note how Starbucks stated that “supply chain driven inflationary costs . . . are expected to continue for the foreseeable future.”
And while longer-term contracts and hedging mean that higher coffee costs should take a good time to filter through, so to speak, they cannot be ignored indefinitely. I couldn’t help noticing this from Fortune in December:
Coffee prices rose to a decade high on Wednesday, fueled by a shipping crunch, a spike in demand, and dry weather.
The ICE Arabica coffee futures contract, which tracks the higher-quality bean, was sitting above $2.40 per pound midmorning in Europe—more than double what it was at the start of this year.
Robusta, the world’s second major coffee contract—which tracks the more highly caffeinated, often lower quality, robusta bean—was also sitting just off 10-year highs on Wednesday, after hitting its highest point since 2011 on Tuesday.
Together, those contracts show a coffee market in chaos. Coffee has posted the largest price rise of any commodity in 2021—a year that has consistently broken records across markets for energy and food.
And (my emphasis added):
Although there isn’t a direct relationship between the futures markets for coffee and how much you’ll be paying for your morning coffee, prices for such staples are rising for consumers. Factors that have hit prices for the bean, including shipping shortages and weather, are also hitting everything else that goes into that cup—from packaging materials, to labor costs, to the cost of energy involved in shipping and roasting coffee.
The least benign interpretation of Jayapal’s tweet (and of the arguments made by others in the same camp) is that those seemingly prepared to ignore the reality of the economic environment in which a business operates are in fact well aware of where it will lead and see the resulting catastrophe as a feature — central planners can then (allegedly) sort things out — not a bug. If that’s the case, long lines won’t be confined to Starbucks. Meanwhile, I’d pay attention to growing murmurings about the usefulness of price controls. A cloud no bigger than a man’s hand? Maybe.
The above is taken from the Capital Letter, February 4, 2022