NEW YORK (Reuters) - When J.M. Smucker Co, the biggest U.S. coffee roaster, changes prices of its popular retail brands, it usually follows big swings up or down in benchmark bean prices.
The company appeared to break that tradition on Tuesday when it cut prices for its flagship Folgers and Dunkin’ Donuts coffees by 6 percent.
While Smucker cited sustained declines in green coffee costs as the reason for the move, it was notable that arabica and robusta prices were almost the same as in July, the last time Smucker lowered retail prices. Back then, prices had slumped 25 percent over a year.
Rather than a response to raw material costs, experts said the step was more likely aimed at beating off growing competition from supermarkets, whose lower-priced private label brands have grabbed market share from established household names in recent years.
The battle with private label brands like Safeway Select, The Kroger Co’s Kroger and Costco’s Kirkland Signature has been brewing for years. But cutting prices to win customers when benchmark coffee costs have barely changed suggests the industry is prepared to take potentially riskier steps to boost sales.
“Coffee brands are seeking market share versus holding prices,” said Ross Colbert, executive director, global strategist of Beverages for Rabobank International.
“I think Smuckers is responding to increased competitive activity in coffee and looking to regain lost market share.”
While Folgers’ share of the U.S. coffee market is the largest by far, its portion has fallen for four straight years to 22.5 percent in 2015, Euromonitor International data show.
The second biggest coffee brand, Kraft Heinz Co’s Maxwell House, has had its market share shrink for five straight years to 9 percent in 2015.
Private label coffee brands as a group, however, has risen for five out of the past six years to command 12.8 percent of the market in 2015.
Smucker declined to comment ahead of the company’s announcement of its year-end financial results next month.
Wild swings in coffee bean prices and changing consumer habits in recent years have already forced roasters and retailers, including top names such as Starbucks Corp, to be more creative.
When the prices of arabica, beans used mainly in roast and ground brews, almost doubled in 2014 as a devastating drought in top grower Brazil wiped out crops, roasters hiked prices to cover costs and protect margins. Customers switched to cheaper brands and delayed purchases.
To win them back, Smucker lowered prices in July and cut its canister sizes, helping to boost sales.
In January, arabica prices hit two-year lows, but have recovered to around $1.22 per lb this week, almost level with last July.
Similarly, robusta, the cheaper bean traditionally processed into instant coffee but also used in roasted blends to reduce costs, now costs about $1,648 per ton, little changed from July. But the price is up 23 percent from a 5-1/2-year low reached in January.
Adding to the stiffening competition, Amazon.com will soon launch its own line of coffee, the Wall Street Journal has reported, citing people familiar with the matter.
Jonathan Feeney, food and beverage analyst at Athlos Research, said he did not believe Amazon’s plans had directly driven Smucker’s plans. But he noted that new entrants in a packed market would make the big brands take notice.
“Anytime a savvy retailer enters the category, I think the existing players have to question if their price architecture is right, particularly when someone enters the private label side of the category,” he said.
Editing by Josephine Mason; Editing by Richard Chang
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