UPDATE 2-Coffee price rally not sustainable - Starbucks CEO

Thu Apr 28, 2011 12:50am EDT

* Coffee price rally not sustailable: Schultz

* Starbucks plans to double S.Korea outlets in 5 yrs

* Company plans to pursue organic growth in Asia (Adds comments, details)

By Jungyoun Park

SEOUL, April 28 (Reuters) - The rally in coffee prices will not last long, Starbucks Corp Chief Executive Howard Schultz said on Thursday, one day after the world's largest coffee chain warned that higher costs could cut earnings.

But Schultz said Starbucks planned to double the number of its outlets in South Korea to 700 in the next five years even as the price of beans has soared, and coffee chains globally have hiked prices. He added that the firm would be very sensitive about raising prices.

New York arabica futures KCc2 struck a 34-year high at $3.0250 a pound last week on a shortage of high-quality beans in Central America, bullish charts and a broad commodities rally fueled by a weaker dollar.

"(The coffee prices) we see today are not sustainable. And hopefully we will see it come down to more reasonable levels," Schultz told reporters in the South Korean capital.

"We want to be extremely sensitive, given the downturn in the global economy, not to be in a position where we would raise prices across the board, but perhaps look at other alternatives within the business to be able to navigate through the coffee challenge," Schultz said.

The 57-year old CEO said the company's growth in Asia would "primarily be organic" and Starbucks was not looking for new partnerships other than current partner Shinsegae Co Ltd within South Korea.

The 40-year old coffee chain opened its first outlet in South Korea in a college district of northern Seoul in 1999. The company now has about 340 outlets in the country.

Starbucks said on Wednesday higher commodity costs will slash earnings by 22 cents a share this fiscal year, more than the 20 cents its original forecast. [ID:nN27175055]

Late last year, Starbucks started raising drink prices in the United States and China due to surging prices for coffee and other commodities. The company already warned that high coffee prices would trim profits this year. [ID:nN22103255] [ID:nTOE6BU02R]

GOOD-QUALITY BEANS SUPPLY CONCERNS

But some analysts said arabica futures, whose movements set the tone for robusta futures in London, were still supported by worries about the availability of good-quality beans from Central America.

The International Coffee Organization has estimated coffee stocks in producing countries at the beginning of the 2010/11 crop year were at the lowest level since it began keeping records in 1965. [ID:nLDE72U2C8]

"As long as the demand is there, the supply will take time to keep up with the pace," said Ker Chung Yang, analyst at Phillip Future in Singapore.

"The rally is likely to be supported in the next couple of months. It may take some time before prices pull back, although we don't rule out there might be some short-term correction also. Chartwise or fundamental wise, it's still pretty bullish."

ICE July arabica coffee KCc2 erased early losses to close up 0.10 cent at $2.9640 per lb on Wednesday, still within striking distance of the 34-year high of $3.0250 touched on April 20.

Most coffee roasters have been forced to pass on higher coffee prices to consumers. Most recently, Kraft Foods Inc raised list prices for most of its Maxwell House and Yuban roasted coffee products by 22 percent, its fourth-biggest increase in the past year. [ID:nN17221437]

Starbucks has been rolling out price increases in various markets since last year to offset the jump in coffee costs.

But in April, the firm's Greater China chairman Wang Jinlong said the company plans to have 1,500 stores in mainland China by 2015, nearly four times the current level. [ID:nL3E7FF139] (Additional reporting by Lewa Pardomuan in SINGAPORE)