Analysis: Coffee Prices to Level Out Amid Inflation Setbacks

With inflation remaining steady, many companies currently face dilemmas.

Some are doing everything in their power to absorb the higher operating costs and to keep their prices down. Others, however, have been able to pass higher costs on to their consumers without much pushback – for now, at least.

The coffee industry is a prime example of this issue. The commodity has the advantage of consistently high demand, but it isn’t immune to the effects of evolving consumer habits and the dreaded post-pandemic supply chain issues. Just look at the price increases abroad.

News that coffee prices in the European Union were up almost 17% in August made headlines recently, as consumers and business owners worldwide face higher costs. For this industry, staying ahead of consumer expectations while remaining flexible in production can be key.

Fortunately, there’s been some improvement since late summer. According to CNN Business, arabica coffee futures have decreased roughly 35% since August to $1.59 per pound. Yet, while prices in the U.S. might see a modest decline, factors like labor and distribution costs are still making coffee roasts expensive to produce.

Whether it’s for at-home brewing or for local cafes, producing coffee is a long and labor-intensive agricultural process. Coffee beans are harvested and processed all over the world in different ways, but each includes several intricate steps, during which timing is critical.

The industry has faced a slew of different economic disruptions making it harder to export quality harvests. Larger coffee companies sometimes secure long-term contracts with suppliers, leaving them more insulated from drastic price changes, but smaller sellers are feeling the brunt.

London-based coffee shop owner Oli Baise has experienced price hikes firsthand.

“I spoke to some of our suppliers and they say that this rise in price is due to droughts. This has caused the cost to grow a bag of coffee (60 Kg) to rise around 33 percent,” Baise told The Food Institute. “Since the U.S. imports the majority of their coffee from Brazil (as does the rest of the world, barring parts of Southeast Asia) we should expect prices to rise in these areas, as well.”

According to Bloomberg, Vietnam, the world’s second-largest coffee producer, is experiencing significant decreases in output of the export throughout this year. Disruptions to global coffee supplies are just one piece of the puzzle affecting prices.

CONSUMPTION EVOLVING

Changes in coffee consumption are also a strong factor. In 2020 – like most things – the morning coffee ritual became a strictly at-home activity amid the Covid-19 pandemic, and consumers shifted their demand to quality coffee they can brew in their kitchen. Units of single-serve coffee brewers saw a spike in demand, but with many remote workers returning to offices or going hybrid in 2022, coffee shops are suddenly back in a big way.

While coffee sellers have the benefit of these two robust markets (at-home brewers and coffee houses) the challenge they face is maintaining supply levels within a changing workforce. Some workers are simply never returning to office life, while some offices are stocked on coffee products as an employee incentive.

Demand for coffee stays relatively the same, but the manner in which consumers are getting it has never seen such rapid change. According to Reuters, a majority of consumers are prioritizing higher quality coffee brews over large package volumes, even if that translates to higher costs.

These findings ring true, as some of the biggest coffee sellers report high earnings. Keurig reported strong results for the third quarter. Nestlé, producer of Nescafé and Nespresso, reported its strongest nine-month sales growth in 14 years, according to Reuters.
Demand for coffee on the go also has remained high despite price increases in coffee shops, resulting in record sales for Starbucks with sales in North America up 11% over last year, per NPR.

MAINTAINING LOYALTY KEY

So, is the coffee industry in trouble? Not so much, judging from recent sales.

The strength of the US dollar is one saving grace for the industry, according to CNN Business, as farmers abroad look to sell to the U.S. and earn a higher payout. This can lead to a drop in prices.

Yet, consumers are growing somewhat impatient with high prices on everyday items. Case in point: coffee chain Dunkin recently launched an updated rewards program that makes it tougher to earn free items, garnering mixed reviews from customers.

While the industry can continue to rely on an almost fixed level of demand, coffee sellers still must tread lightly as the morning latte is seen as less of a small treat, and more of an occasional luxury. Staying on top of demand and maintaining customer loyalty will be key for the industry to stay on its path to profitability.

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Source: ZACK JOHNSTON – The Food Institute (https://foodinstitute.com/focus/analysis-coffee-prices-to-level-out-amid-inflation-setbacks/)

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