Starbucks 2006 Annual Report Download - page 11

of a credit card with the convenience of a reloadable Starbucks Card. Through these arrangements, Starbucks primarily
receives commissions for each activated customer account and payments based on credit card usage.
Collectively, the operations of these other initiatives accounted for 2% of specialty revenues in fiscal 2006.
PRODUCT SUPPLY
Starbucks is committed to selling only the finest whole bean coffees and coffee beverages. To ensure compliance with its
rigorous coffee standards, Starbucks controls its coffee purchasing, roasting and packaging, and the distribution of coffee
used in its operations.
The Company purchases green coffee beans from coffee-producing regions around the world and custom roasts them to
its exacting standards for its many blends and single origin coffees.
The supply and price of coffee are subject to significant volatility. Although most coffee trades in the commodity market,
coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be
affected by multiple factors in the producing countries, including weather, political and economic conditions. In
addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain
organizations and associations that have historically attempted to influence prices of green coffee through agreements
establishing export quotas or by restricting coffee supplies.
The Company depends upon its relationships with coffee producers, outside trading companies and exporters for its
supply of green coffee. With green coffee commodity prices at relatively low levels in recent years, the Company has used
fixed-price purchase commitments in order to secure an adequate supply of quality green coffee, bring greater certainty to
the cost of sales in future periods, and promote sustainability by paying a fair price to coffee producers. As of October 1,
2006, the Company had $546 million in fixed-price purchase commitments which, together with existing inventory, is
expected to provide an adequate supply of green coffee through fiscal 2007. The Company believes, based on
relationships established with its suppliers, the risk of non-delivery on such purchase commitments is remote. During
the first few months of fiscal 2006, green coffee commodity prices increased moderately. Since then, commodity prices
have stabilized but still remain above the historically low levels experienced in recent years. Based on its market
experience, the Company believes that fixed-price purchase commitments are less likely to be available on favorable terms
when commodity prices are high. If prices were to move higher during fiscal 2007, Starbucks would likely return to its
previous practice of entering into price-to-be-fixed purchase contracts to meet a large part of its demand. These types of
contracts state the quality, quantity and delivery periods but allow the price of green coffee over a market index to be
established after contract signing. The Company believes that, through a combination of fixed-price and price-to-be-
fixed contracts it will be able to secure an adequate supply of quality green coffee. However, an increased use of
price-to-be-fixed contracts instead of fixed-price contracts would decrease the predictability of coffee costs in future
periods.
During fiscal 2004, Starbucks established the Starbucks Coffee Agronomy Company S.R.L., a wholly owned subsidiary
located in Costa Rica, to reinforce the Company’s leadership role in the coffee industry and to help ensure sustainability
and future supply of high-quality green coffees from Central America. Staffed with agronomists and sustainability
experts, this first-of-its-kind Farmer Support Center is designed to proactively respond to changes in coffee producing
countries that impact farmers and the supply of green coffee.
In addition to coffee, the Company also purchases significant amounts of dairy products to support the needs of its
Company-operated retail stores. Dairy prices in the United States, which closely follow the monthly Class I fluid milk
base price as calculated by the U.S. Department of Agriculture, rose in both fiscal 2004 and 2005, then declined in 2006.
Should prices rise significantly in the future, Starbucks profitability could be adversely affected. In the United States, the
Company purchases substantially all of its fluid milk requirements from two dairy suppliers. The Company believes,
based on relationships established with these suppliers, that the risk of non-delivery of enough fluid milk to support its
U.S. retail business is remote.
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