The Price of Your Morning Cup of Coffee Keeps On Rising
(Bloomberg) -- The price of a cup of coffee keeps rising -- and nobody seems to care.
Prices for arabica beans are up 50% in the past 12 months, hitting seven-year highs in July after drought and frost damaged crops in top producer Brazil and signaled tight world supplies for at least two years. The rally comes as high freight costs and shipping container shortages continue to rattle global supply chains, squeezing margins and heightening inflation fears.
Many consumer-facing businesses face a stark choice: raise prices or switch to cheaper beans.
The good news? Coffee drinkers are so addicted that consumption is unlikely to be hurt much, especially with demand still recovering from the pandemic.
The drink is “such a key part of [consumers’] daily routines, it would take a lot to change their coffee habits,” said Darren Seifer, food and beverage industry analyst at research firm NPD Group. Customers are “accustomed” to volatile prices, he added.
This year, global coffee consumption is expected to rise to 168.8 million 60-kilogram bags, according to Rabobank International, up from 164.8 million bags in the previous period.
The world market is expected to expand at a compound annual rate of 9% over the next three years to “well over $400 billion,” Starbucks Corp says. In Asia -- the fastest-growing coffee market -- consumption will rise thanks to bigger incomes and a burgeoning cafe culture in China, India and Indonesia, according to Fitch Solutions.
Demand for coffee is not completely unshakable: The pandemic brought the first dip since 2011.
But while higher prices this year may curb the post-pandemic rebound, consumption won’t decrease, Rabobank analyst Guilherme Morya said.
Prices would have to climb above $4 a pound to start making a dent in consumption, according to Sterling Smith, director of agricultural research at AgriSompo North America. Until then, price-sensitive consumers may seek out cheaper cafes or make more coffee at home, he said.
The impact will differ according to region, said Vanusia Nogueira, director of the Brazilian Specialty Coffee Association. Consumers in producing nations like hers tend to be more price-sensitive, she said, while coffee drinkers in wealthier places like Europe and the U.S. are less affected. There’s already a switch toward cheaper robusta beans in Brazil, according to Rabobank.
For companies like Starbucks, coffee beans represent a small part of overall costs compared with labor and rent. Still, the world’s largest cafe chain says it is feeling inflationary pressures.
“Pricing will be one of many levers that we use to offset these headwinds,” the company said, as well as encouraging consumers to buy more expensive items like food and cold drinks.
Nestle SA Chief Executive Officer Mark Schneider said “premiumization and the higher price point” give the maker of Nespresso and Nescafe options. “Where appropriate, we’ll raise prices,” he said.
Some businesses may try tactics such as fewer free refills or reducing the weight of packages without changing prices, said Judy Ganes, president of J. Ganes Consulting.
For smaller coffee shops, charging more may be easier than altering the taste of loyal visitors’ daily cup.
“Some of our customers have been drinking [our blends] for many, many years. If we change them, they’ll notice it,” said Marissa Crocetta, manager at London’s Algerian Coffee Stores, which has been selling coffee since 1887.
“If [raw coffee prices] go up dramatically with all the other costs then we’ll have to increase our prices.”
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