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Pricing Strategy Patterns
The desire to smooth prices has been posited by coffee manufacturers as one
explanation for not fully adjusting prices to changes in costs. In an investiga-
tion by the United Kingdom Competition Commission, Nestle commented:
Starbucks spokeswoman Helen Chung stated, “We do not change our prices
based on short-term fluctuations in the coffee market” (Seattle Times,
December 7, 1999). P&G commented in conjunction with its 2004 price
increase that P&G “increases product prices when it is apparent that
commodity price increases will be sustained” (Associated Press, Dec. 10,
2004). Coffee manufacturers often cite movements in futures prices as moti-
vation for price adjustments, further corroborating their stated desire to
smooth prices.
Not evident from market-level averages is the fact that individual manufac-
turer prices often remain fixed for long periods of time. Figure 2 presents a
typical manufacturer-price series for Folgers coffee.
Historically, adjustments in prices have occurred primarily when coffee
commodity prices are relatively volatile. Table 5 presents the standard devi-
ation of weekly coffee commodity prices by year, as well as the average
frequency of manufacturer price adjustments during the year. These statis-
14
Cost Pass-Through in the U.S. Coffee Industry / ERR-38
Economic Research Service/USDA
Figure 2
Atypical wholesale price series
0
5
10
15
20
25
10/29/97 10/29/98 10/29/99 10/29/00 10/29/01 10/29/02 10/29/03 10/29/04
Wholesale price
Coffee commodity price
Price per ounce (cents)
Source: Author’s analysis of Promodata wholesale-price da ...