Starbucks 2011 Annual Report Download - page 12

Foodservice
Revenues from foodservice accounts comprised 4% of total net revenues in fiscal 2011. We sell Starbucks®and
Seattle’s Best Coffee®whole bean and ground coffees, a selection of premium Tazo®teas, Starbucks VIA®Ready
Brew, and other related products to institutional foodservice companies that service business and industry,
education, healthcare, office coffee distributors, hotels, restaurants, airlines and other retailers. We also sell our
Seattle’s Best Coffee®through arrangements with national accounts. The majority of the sales in this channel come
through national broadline distribution networks with SYSCO Corporation, US FoodserviceTM, and other
distributors.
Product Supply
Starbucks is committed to selling only the finest whole bean coffees and coffee beverages. To ensure compliance
with our rigorous coffee standards, we control coffee purchasing, roasting and packaging, and the global distribution
of coffee used in our operations. We purchase green coffee beans from multiple coffee-producing regions around the
world and custom roast them to our exacting standards, for our many blends and single origin coffees.
The price of coffee is subject to significant volatility. Although most coffee trades in the commodity market, high-
altitude arabica coffee of the quality sought by Starbucks tends to trade on a negotiated basis at a premium above the
“C” coffee commodity coffee price. Both the premium and the commodity price depend 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. Price is also impacted by trading activities in the arabica
coffee futures market, including hedge funds and commodity index funds. 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.
We buy coffee using fixed-price and price-to-be-fixed purchase commitments, depending on market conditions, to
secure an adequate supply of quality green coffee. Price-to-be-fixed contracts are purchase commitments whereby
the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date at which the base “C”
coffee commodity price component will be fixed has not yet been established. For these types of contracts, either
Starbucks or the seller has the option to select a date on which to “fix” the base “C” coffee commodity price prior to
the delivery date. Until prices are fixed, we estimate the total cost of these purchase commitments. As of October 2,
2011, we had a total of $1.0 billion in purchase commitments, of which $193 million represented the estimated cost
of price-to-be-fixed contracts. All price-to-be-fixed contracts as of October 2, 2011 were at the Company’s option to
fix the base “C” coffee commodity price component. Total purchase commitments, together with existing inventory,
are expected to provide an adequate supply of green coffee through fiscal 2012.
We depend upon our relationships with coffee producers, outside trading companies and exporters for our supply of
green coffee. We believe, based on relationships established with our suppliers, the risk of non-delivery on such
purchase commitments is remote.
To help ensure sustainability and future supply of high-quality green coffees and to reinforce our leadership role in
the coffee industry, Starbucks operates Farmer Support Centers in Costa Rica and Rwanda, among other locations.
The Farmer Support Centers are staffed with agronomists and sustainability experts who work with coffee farming
communities to promote best practices in coffee production designed to improve both coffee quality and yields.
In addition to coffee, we also purchase significant amounts of dairy products, particularly fluid milk, to support the
needs of our company-operated retail stores. Our highest volumes of dairy purchases are in the US, Canada and the
UK. For these markets, we purchase substantially all of our fluid milk requirements from seven dairy suppliers. We
believe, based on relationships established with these suppliers, that the risk of non-delivery of sufficient fluid milk
to support these retail businesses is remote.
Products other than whole bean coffees and coffee beverages sold in Starbucks stores are obtained through a number
of different channels. Beverage ingredients other than coffee and milk, including leaf teas as well as our selection of
6