Soaring coffee prices are giving roasters, distributors and coffee shop owners the jitters.
It’s the roasters who are getting roasted the worst because the price of coffee is their biggest input cost, said Vince Piccolo, who has been involved in the coffee business for decades and earlier this year launched the coffee roasting business Ex Animo.
Bulk prices for unroasted coffee beans hit an all-time high of about US$4.40 per pound in early February.
“On top of that, you have a faltering Canadian dollar so Canadian roasters are hit double hard,” he added.
A severe drought in Brazil and increased global demand are two reasons for the price spike.
Piccolo said roasters usually resell coffee for between 30 and 50 per cent more than that input cost.
“I don’t think consumers have seen price increases happen yet,” said Piccolo, who co-founded Caffè Artigiano in the early 2000s and later owned 49th Parallel Coffee Roasters before selling that venture.
“A lot of the coffee shops haven’t really got their price increases yet because a lot of people have had contracts based on last year’s prices.”
High prices contribute to industry consolidation
Last month, what is now known simply as Artigiano bought the 29-year-old, Richmond-based coffee roaster Salt Spring Coffee for an undisclosed amount, Artigiano owner Dean Shillington told BIV.
“Salt Spring had run into some financial challenges with the coffee market,” he said.
Artigiano is better able to shoulder the rising cost of coffee because it has 25 locations.
Coffee shops, Shillington explained, are buffered because they have many more input costs than do coffee roasters.
The cafés sell food. Even when they sell liquid coffee, there is the value-added service of brewing or creating the beverages.
The franchise model also helps Artigiano, as 17 of its cafés are owned by independent entrepreneurs.
Franchisors generate revenue from one-time fees and royalties, which in Artigiano’s case are $40,000 for an initial franchise fee plus a six-per-cent royalty and a three-per-cent marketing fee.
This helps insulate the business from commodity spikes, Shillington said.
He told BIV that he wanted to buy Salt Spring Coffee for the “efficiency that it offered,” given that Artigiano has long bought its beans.
Shillington said he also felt a strong connection to the brand.
Coffee shop owners who do not own roasting companies say they fear price hikes will cut into whatever profit margins they make.
Ming Yang, for example, owns master franchise rights to Honolulu Coffee in B.C., and she owns and operates three locations: in downtown Vancouver, Kerrisdale and near False Creek.
“It is getting very expensive right now,” she told BIV.
She added that she was planning to soon meet her local coffee roaster to discuss options.
Her coffee chain is well known for selling Kona coffee from Hawaii, and those contracts are set with a specific Hawaii-based roaster.
She has some freedom to select her own coffee roasters for other varieties of coffee if the parent company approves, and if the beans meet quality standards and the roaster has a good reputation, she said.
“It’s very tough for the roasters, and then it’s going to be tough for us, because wholesale prices keep rising no matter which roaster,” she said. “They are going to pass it on to the cafés, and cafés pass it to consumers, so everyone will suffer.”
Yang said she believes the price of coffee could stay high because extreme weather events are likely to continue.
Shillington and Piccolo said they expect coffee prices to eventually normalize.
So does former Blenz Coffee president George Moen, who said many customers have a limit for how much they are willing to pay.
“There is a segment within specialty coffee where price doesn’t matter because the buyers live in a world where they can afford whatever coffee they want,” he said.
“It’s that middle-ground coffee segment where I believe consumers are tapped out.”
He suggested that coffee shop owners would be wise to also offer specialty tea beverages and other coffee alternatives.
“Coffee is an addictive substance,” he said. “But people will go down-market from the specialty coffees.”
By that, he means that some consumers could instead become regulars at McDonald’s Corp. (NYSE:MCD) restaurants instead of at Starbucks Corp. (Nasdaq:SBUX) locations.
