Hartford Business Journal

14 Hartford Business Journal • February 1, 2016 www.HartfordBusiness.com Coffee prices fall, but Starbucks latte won't cost less By Patrick Gillespie CNNMoney T he commodity crash is coming to your local cafe. But don't expect to save any money. Prices for coffee beans are at their lowest point in nearly two years. A pound of Arabica coffee — the type Starbucks buys and serves to customers — has fallen to around $1.11 from $1.65 a year ago. That's a 33 percent drop. Officials in Brazil forecast that coffee farmers will have a huge harvest season this year, creating an oversupply of beans, which has led to the drop in prices. But no one expects latte prices to come down. "You'll never really see anyone cut menu prices," says Peter Saleh, an analyst at research firm BTIG, who covers Starbucks. Why? "You're seeing a pretty big rise in wages, which is the other component of making your coffee," Saleh pointed out. He has a point. States and cities across the country, including Connecticut, have been increasing the minimum wage. That affects all stores — from the local coffee shop to the McDonald's and Starbucks of the world. However, it's worth remembering that in 2014, when coffee-bean prices were rising, Starbucks, Dunkin' Donuts and other cof- fee brewers raised menu prices, citing the increasing cost of the commodity. But now the reverse is not true. In fact, Starbucks slightly raised its menu prices last July even as coffee-bean prices were falling. It cited rising costs. True, minimum wages are rising. And rents have also been going up in many mar- kets, at least for Starbucks, Saleh said. Star- bucks has also begun to pay college tuition for 4,000 of its employees. Those additional costs offset any gains Starbucks may get from the coffee bean price collapse. Analysts say coffee beans only make up about 20 percent of Starbucks' overall costs. Starbucks says its menu prices depend on a variety of factors and a spokesperson declined to discuss future menu prices, citing competitive reasons. A Dunkin' Donuts spokesperson says the company offers price recommendations to its independent franchisees but ultimately they choose what they charge at each individual store. Hope isn't all lost. At least not for people who buy their coffee at the supermarket. Last year, J.M. Smucker cut prices by 6 percent for Folgers and Dunkin' Donuts cof- fee sold at grocery stores. Starbucks could do the same for its store-sold coffee, says R.J. Hottovy, an analyst at Morningstar. But you can continue to expect Starbucks cafes to charge those higher prices. Why? Because it can. "Starbucks is able to charge those prices [because] consumers are willing to pay for it," says Hottovy. n current fiscal year's budget during a Decem- ber special session. It remains uncertain whether Demo- cratic leaders will attempt larger struc- tural state-budget reforms, as businesses and Republican policymakers are seeking, or simply close deficits projected for this and the next fiscal year. One important fac- tor is that legislators face an election nine months from now. Healthcare mergers and their poten- tial impact are also expected to undergo continued scrutiny this session, while funding decisions on Gov. Dannel Mal- loy's transportation infrastructure plan, including the potential adoption of high- way tolls, could be pushed out to 2017. It was unclear as of press time if there would be any legislation this session allowing a third casino in the state. Brian Flaherty, senior vice president of public policy at the Connecticut Business & Industry Association (CBIA), said he hopes lawmakers begin to take a longer-term view of the budgeting process this session. "Look at the horizon … look for long-term structural changes," Flaherty said. "For too long the numbers have driven policy. We want the policy to drive the numbers." Budget and tax uncertainty was one of several reasons cited by General Electric in its decision to move its headquarters from Fairfield to Boston. Senate Minority Leader Len Fasano (R-North Haven) and his House counter- part, Rep. Themis Klarides (R-Derby) are pushing the Democratic majority to support bigger budget changes this year, including separating pensions from state labor contracts, enacting a plan to control rising long-term pension debt (a process the Malloy administration kicked off last year), and strengthening the state's consti- tutional-spending cap, which was deemed unenforceable several months ago by Attorney General George Jepsen. "This is not just 'let's do what we have to do to get to the election,' " Klarides said. Fasano said he doesn't hold out much hope that Democrats will make major structural changes this year, given the looming election. "They'll just wait," he said. "In our view, they need to tackle it now." The $350 million budget hole legislators patched in December has opened up again, growing from $7 million to $72 million, according to projections from the nonparti- san Office of Fiscal Analysis (OFA). OFA has also projected a more than $500 million deficit for the fiscal year that begins July 1, which legislators must tackle this session. Senate President Martin Looney (D-New Haven) said the legislature will likely have to rely on spending cuts to close the gaps. "I don't see at this point any sort of groundswell in support of a tax increase in 2016," Looney said. He said ongoing negotiations with state labor unions will also be important to con- trolling costs. Office of Policy Management (OPM) Sec- retary Benjamin Barnes told an audience of social-service advocates last week that he doesn't anticipate any tax-increase propos- als in Gov. Dannel P. Malloy's budget plan to the legislature. Malloy is expected to shed more light on his legislative priorities in his annual State- of-the-State address Wednesday to kick off the session. Barnes did say, however, that the legislature will have its hands full managing the deficit. CBIA proactive on biz mandates While businesses may be spared tax increases this year, CBIA has sought to build early momentum in opposition to business mandates that are likely to be raised in some form over the next several months. The association sent a letter to law- makers last month signed by nearly 70 chambers of com- merce and industry associations urging legislators to reject any bills seeking to establish a state- sponsored retire- ment plan, expand existing laws on paid family and medical leave, penalize employ- ers who pay their workers less than $15 per hour, or that govern how far in advance employers must provide work schedules to employees. "It is critical to Connecticut's businesses that the perpetual threat of new and expand- ed labor mandates ends now," the letter reads. CBIA said labor mandates adopted in recent sessions — including paid sick leave and minimum-wage increases — have hurt employers. Democrats have pushed back against criticism of sick leave, citing a 2014 study by the Center for Economic Policy Research that found nearly two-thirds of Connecticut businesses had small or no cost increases as a result of the state's recently changed law. CBIA's Flaherty said his members want to ensure the state can continue to grow jobs, just as the private sector finally regains all the positions lost during the 2007-2009 recession. "We're looking for the state to redouble its efforts so that they don't make it harder to maintain the jobs we have," he said. Flaherty also struck a positive note, say- ing that despite the state's low position in a number of business rankings, it has a strong workforce and high quality of life. "That needs to be affirmed and protect- ed," he said. Asked about whether legislators felt pressure to respond in some way to GE's departure, Looney pointed to a law passed last year that caps motor vehicle excise taxes at 32 mills. The impacts of that change will start to be felt later this calendar year, particularly for those in cities like Hartford. "The car tax component will be a tre- mendous benefit to businesses with fleets of vehicles in high-mill communities," Looney said. "I think we're always interested in help- ing businesses." Healthcare scrutiny One area of bipartisan agreement this year may be continued scrutiny of health- care mergers and consolidation. "We're very concerned about the effect of hospital consolidation on service delivery, quality of care, the workforce of hospitals and overall cost control," Looney said. A law adopted last year, which had the support of both Looney and Fasano, created greater state oversight of hospital mergers, required various disclosures, and capped facility fees, among other measures. In a similar vein, the Connecticut State Medical Society (CSMS) said it's planning to push lawmakers to probe the impacts of health insurance mergers, such as those pro- posed by Aetna and Cigna. "At the very least, we'd like some sort of public forum on mergers and the insurance environment," said Ken Ferrucci, CSMS' senior vice president of government affairs. The Connecticut Hospital Association, fresh off a months-long fight with lawmak- ers over supplemental Medicaid cuts, plans to make another attempt to convince legislators to phase out a hospital tax that took effect in 2012. The Associated Press reported in Novem- ber that CHA was considering suing the state on the grounds that the tax is unconstitutional. "We continue to move that effort forward," Michele Sharp, CHA's vice president of commu- nications, said last week. She said she couldn't comment further on the legal matter. n from page 1 Deficits will dominate session Rep. Themis Klarides (R-Derby) Sens. Martin Looney (D-New Haven, left) and Len Fasano (R-North Haven) plan to scrutinize healthcare mergers. P H O T O | C O N T R I B U T E D P H O T O | C N N

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