April 2022 - Unpacking that $7 cup of coffee. Secret Label is BOLD

Date Posted:6 April 2022 

 

The strongest people are not those that show strength in front of us, but those who win battles we know nothing about." - Unknown

April 2022

Welcome to our subscriber newsletter.

Over the last month we have received plenty of calls from customers worried about escalating coffee prices - courtesy of lazy and scaremongering journalism declaring a cup of coffee is going to cost $7 before too long. Read our article below as we unpack the true costs and explain what's really going on.

This month's Secret Label is a delicious dedication to our focus on Organic coffees. It's been hard work sourcing coffees from origin with so many logistics challenges, so we are happy to have assembled a quality portfolio of Organic certified lots that are some of the best we have seen in years.

April's Secret Label is a tribute to everything we love in Organic with a blend from 3 different origins, a tasty and surprisingly punchy coffee featuring rich black currant, bold hazelnut, black fruits, syrupy toffee and caramel with a milk chocolate finish.

Just a reminder there are 2 sets of public holidays this month and being close together we can almost smell the prospect of parcel network pain ahead. Like clockwork, every year around Easter parcel networks hit the wall with congestion and backlogs as freight staff take leave and accumulated orders sitting in retailer warehouses dump a week of accumulated freight in a single day.

With the logistics industry is still suffering from labour shortages, please consider getting orders in before the holiday periods to avoid the risk of frustrations from potential transit delays.

April 2022 Secret Label

I came to dislike the term "strong" when used to describe coffee, yet it's one of the most popular phrases some coffee drinkers use when asking for recommendations. "Gimme something strong".

Coffee strength is generally a measure of it's caffeine level and it may surprise many of you to learn that almost all the arabica varietal coffees, those high quality lots we and many other quality-focused coffee companies use, possess similar levels of caffeine.

So there is no secret insider knowledge that reveals coffees which are naturally "strong", that Brazil is not going to have less caffeine than a Colombia, etc. If caffeine strength is your desire, then take a walk on the robusta side of the coffee species to soak up higher caffeine levels that are generally more than double the arabicas.

It seems perfectly reasonable to describe a coffee as "bold" in a better choice to indicate it's relative flavor levels and this month's Secret Label is indeed a bold coffee.

There's that black currant note I am perpetually afraid of yet performed so majestically in November's Secret Label.

Black fruits of the sweetest and smoothest kind, punchy hazelnut, rich toffee and syrupy caramel with a milk chocolate finish.

Grab it here - April Secret Label

 

Unpacking $7 cups of coffee

An election year brings out the most dubious of media reporting, so it was only a matter of time until headline grabbing journalists turned their short attention spans to the rising costs of living in lazy attempts at horror story $7 cups of coffee.

Ironically the $7 coffee headline is only 6 months late to the party, but you see timing is everything in media and those $7 coffee headlines are classic eyeball grabbers at the very moment when everyone is trying to digest the fuel price and broader inflation shocks.

Since those articles started circulating a few weeks ago, we have received plenty of calls from anxious customers worried they might no longer be able to afford their beloved coffee fix.

It's been a similar case with all the drivers delivering goods to our warehouses over the last few weeks, all keen to engage in the conversation about whether a cup of coffee will in fact reach $7. Friends and family have hit us up with the same concerns - all frightened by the scaremongering media reports of rapidly escalating costs of living.

Perhaps there is more truth in the claims by former Prime Ministers Rudd and Turnbull that media influence is a dangerous factor in swaying public opinion.

The invasion of Ukraine in Europe affected the dynamic of global energy supplies, spiking the price of oil and gas and some commodities. However, it did not influence the price of raw coffee by much at all, in fact barely any change. Even before the unfortunate Ukraine event, inflation had been running out of control in every country around the world, especially the US.

Economic commentators have pointed out that rising inflation is like a contagion providing free license for many suppliers to keep lifting prices, whether it's fully justified or not. First it was manufacturing shutdowns due to the pandemic, component and material shortages, then sea freight jumped 400% and the trusty excuse of supply chain disruption that has never managed to return to stability which does seem rather odd given it's been 2 years now.

Inflation has been lurking undetected since the beginning of the pandemic, it's just that the global financial markets were in denial and blamed each new set of challenges or price spikes on a basic oversimplification of just another Coronavirus impact.

Some say most of these factors conveniently feed into a careful narrative enabling supply sides to extract higher prices and it seems there's been more than a bit of a compounding effect throughout supply chains to the point of opportunistic price gouging - and we don't mean just coffee, but literally anything and everything. Transparency it seems is at an all time low.

Risk is being priced on top of risk and so on, spinning the cost dial forcefully into uncomfortable territory. The problem is that many companies are getting away with it - at least for the moment whilst hiding under the cloak of the universal and over-used excuse of "supply chain disruption".

But you only have to listen for the big clues being dropped repeatedly by CEO's from Australia's largest retail and market places - Harvey Norman, JB HiFi, Kogan, Wesfarmers, they are all shaking their heads in a similar way and singing from the same songbook - there's a massive storm coming with price hikes and it's not just another canary in the coal mine warning to soften up consumers ahead of the pricing pain, all these CEO's are seeing it in their procurement cycles which are typically around 6 months ahead from when the goods are being offered for sale.

Price takers
My favourite breakfast cereal increased by 15% in the last fortnight which is kind of suspect as I estimate the logistics component for that product cost is barely 5% given the brand's size, scope and maturity. Even if fuel has risen 25%, that's on a base of 5% which translates into a 1.25% total product cost increase, not an order of magnitude as played by the supermarkets.

So it begs the question for our powerful grocery players Woolworths, Coles, IGA and to a lesser extent the more competitive Aldi - are the supermarkets just conveniently riding the inflation wave as I'm sure all the big supermarkets have a generous 90 days grace period written on the majority of their supplier price increases, yet ironically the prices rise much sooner and it feeds straight into their back pockets as pure profits.

Why ? because they can. There's a well proven economic tailwind that benefits supermarkets during periods of rising inflation, so it will be interesting to see if the supermarkets resort to emotional marketing of "crocodile tears" pretending to help save consumers $$ whilst pocketing the differentials in the periods between a supplier price rise notice and it physically taking effect. Sneaky.

Just last week our sea freight provider informed us the fuel surcharge for container cartage on land here in Australia will be 24%. That comes on top of an already over-priced range of freight services - $1,500 to move a container from Port Melbourne to our Eastern suburbs warehouse - it's barely 2hrs effort in an efficient side loader. There's no doubt the costs of parcel shipping in Australia will rise steeply in the next month as adjustments to fuel surcharges are crunched by the carriers.

What a cup of coffee really costs
Rather than unpack the myriad of variables influencing economic conditions, let's focus on the coffee industry and the scandalous headline of $7 cups of coffee.

It's been well documented over the last 12 months how the raw coffee market has been rising and continues to hover at very expensive levels. Putting this in perspective - it's basically doubled.

Whilst it's true the impact of rising coffee prices are never felt instantly in the same ways which fuel or fruit and vegetables rise on a mere blink of a problem. Coffee is a highly competitive industry with many thousands of diverse players and with inventory held in supply chains to buffer for a short period there is always hope that market movements revert. But the coffee price has remained high and is expected to sit at high ranges for another 6+ months as everyone has given up that hope of prices coming down anytime soon.

With those buffer inventories in supply chains and company warehouses well and truly depleted months ago,  the sell/retail side has been lifting prices in earnest. On average, the impact is around $5 - $6 per kilo at the raw coffee point and how that translates into roasted coffee pricing is anyone's guess as each business will treat it differently based upon their competitive strategies.

It seems those lofty price aspirations had already been playing out with some keen sellers charging over $8 per cup where they have a captive market, e.g. Sydney's Darling Harbour on a Sunday for a large takeaway. It's also not unusual for the fancy pants hipster brands to market their over-priced coffees as "bucket list experiences" by charging up to $10 or more for a cup - but these are special cases and not representative of the market averages.

Even when the price of the wholesale coffee supplied to a cafe rises by $4 to $6 per kilo, how exactly does that impact costs ?

A rough rule of thumb metric is between 40 to 50 cups of coffee per kilo for a beverage outlet, although that can vary depending upon the workflow, barista, size of the filter baskets in the portafilters, wastage, purging, technique or policy for split shots versus doubles per order, etc.

So let's take the average and use 45 cups per kilo and $26 per kilo as the cafe's wholesale price, although that probably needs to lift a bit. This works out to around 58 cents per cup for the cafe and let's round it up to 60 cents.

Many cafes are well under this metric and some may also be well over.

The equipment such as espresso machine, grinder, etc. is generally supplied to the cafe free on loan (FOL) in return for loyalty to purchase coffee beans. It's an utterly ridiculous perk gifted to cafes, but let's not get into that argument at this time.

Whilst FOL this is not a universal and 100% rate of supply, let's assume that around 80% of cafes are obtaining their espresso equipment "free of charge". The remainder, even if they capitalize the equipment, the component cost on a per cup basis is minimal but for this case let's set aside 5 cents to be generous.

Crockery is mostly provided again free of charge or even if it's paid for by the cafe, or in the case of takeaway coffees, let's assume a 12 cent cost inclusive of lid.

So cafes spending around 77 cents for their "dose" of coffee and this includes the cup or takeaway - around 11% of the mooted $7 cup.

Now let's look at milk and dairy alternatives. Some of the newer innovations in plant based dairy are not cheap compared to milk, but for the sake of this exercise let's assume an average of 300ml per cup at $1 per 300ml which should allow for plenty of wastage, etc.

Sugar sticks are relatively cheap and given these days many consumers are health conscious with added sugar on a steep decline, we can safely assume that only 25% of coffee beverages require additional sweeteners, sprinkles, etc at a generous 7 cents per cup.

There you have it folks, the ingredients for coffee beverages costing around $1.84 before rent, energy, labour, other costs, etc.

With a fair bit of gap between the raw ingredients costs of $1.84 and the headline grabbing forecast of $7, successful cafe operators can drive that $1.84 per cup lower but it's the other costs influencing the final finished product such as labour, rent, overheads, efficiency and compliance that add significantly to the total costs.

Musical chairs
There has been a lot of hype from the wholesale coffee sector in anticipation of cafes resuming to the boom times prior to the pandemic, but we are not so sure that everything will return to those buoyant levels.

What is not clear today, due to a lack of solid or trustworthy statistical data, have the re-distribution of wholesale hospitality coffee volumes from city to suburban outlets resulted in a net zero overall gain or loss for that segment of the coffee market ?

Certainly, social commentary reveals major changes to future working arrangements with less desire for workers to commute into city offices daily with the inevitable solution being remote working may prevail longer than expected.

It's probably safe to assume the overall size of the hospitality segment coffee volume has contracted during the last 2 years from lockdowns or trading restrictions and in turn has been replaced with the strong growth in online sales, although online growth has not continued in 2022 at the same rates as 2020 and 2021. The migration away from city to regional areas over the last 2 years is also not represented in the coffee market stats.

As hospitality outlets continue to struggle in finding labour, the costs associated with paying for that labour has also skyrocketed. A recent discussion with a cafe owner revealed that experienced (or w should say professional) baristas are now asking for close to double their pre-pandemic salary as demand outstrips supply.

Putting aside the higher rents from Australia's property bubble, increases to wages and higher ingredients costs, we don't think a cup of prepared coffee will reach $7 this year, except in those instances where a captive customer situation prevails and competitive choices are removed, or it's marketed as a "privileged experience".

But it has breached the $5 mark and that $5 is likely to become the previous $4 floor price for prepared coffee beverages, with establishments likely to price somewhere between $5 and $6 as the year progresses.

Wait a moment - $7 cups of coffee might be real
The commentary around why a cup of coffee might cost $7 has been dominated by rising input costs and missing from the analysis is the forgotten impact from a decade of coffee beverage deflation.

A few years ago we wrote about how deflation had affected the coffee industry more than any other beverage, margins were being progressively squeezed. During the last decade, all non-coffee beverages (including alcohol) enjoyed between 25% to 50% price growth, yet coffee had barely nudged 10% in the same period.

Had the price per cup of coffee moved at the same rate as other beverages during that period, a more realistic, adjusted price for a cup of coffee would have been $6 today. It's also interesting to note this modelling occurred well before the cost of raw coffee doubled and pandemic induced inflation cycle we are now entering, so the $7 cup of coffee may not be outside the realms of possibility.

Many believe the extreme competition for coffee drinkers put a tight lid on price increases over the last 12 years, holding it down to those $3.50 - $4.50 ranges as cafes were too scared to lift prices and risk losing customers that could easily go nearby for an alternative.

Is a coffee beverage fairly priced ?
Coffee beverages require a lot more stages and labour tasks to produce the final product compared to most other beverages - farmers toiling their land, exporters and brokers storing and forwarding, roasters blending and crafting, packaging and delivery, baristas pulling everything together for that final moment of enjoyment.

It takes on average 20 different sets of hands from seed to cup and there are still a lot of manual, labour intensive stages. An effort that has been largely undervalued in the last decade.

Our message to customers is simple - don't be fooled by the scare tactics of $7 coffees and certainly don't panic buy or hoard fresh roasted coffee because it won't remain tasty, even if you don't open the pack, coffee continues to stale inside of sealed bags.

We continue to do our absolute best in keeping prices down. There are ongoing adjustments, but it's not going to jump to levels that will elevate coffee to a luxury that's not affordable - at worst the difference is likely to be around 5+ cents a cup. What can you really get for 5 cents these days ?