Trouble brewing in paradise
Date Posted:23 June 2018
Trouble brewing in paradise
Perhaps it was just an ironic coincidence, but it seems last month's Seeking - Attention Seeker article appears to have come at a time when sections of the Australian coffee industry were indeed navel-gazing, or at least looking at themselves in the reflection of their highly polished stainless espresso machines and shaking their hipster hatted heads.
There's a storm brewing. The wind has changed and you can smell something in the air besides the aroma of freshly ground beans and cardamom-infused slow-brewing chai.
Let's join some dots.
Cafes have traditionally acted as the bell weather for our Australian coffee industry and the segment that garners most attention. We can safely attribute Australia's rank as the world's best cafe coffee to the myriad of trends, innovation and constantly improving standards emerging from our highly competitive cafe segment.
After 10 years of solid growth, there are uncomfortable signs of struggle from excessive competition. This should not come as news or shock to anyone as it's also playing out across many other retail industries beyond coffee.
Rents, labour, energy and a raft of input costs are rising faster than cafes can adjust the selling price of their value-added products.
This in turn leads to further deflationary pressure on prices and diminished returns from cafe operations.
When the rewards reduce, it's human nature for people to find creative ways to compensate for what they may deem as having lost - whether it's running more cash off the books to avoid taxes, under paying staff, reducing staff levels (service) or cutting corners on both price and quality to suppress rising input costs. You only need to look at the atrocious situation arising from investigations into Australia's failing franchising systems built on business models where wage fraud is the only way to survive. To be clear, we are not pointing accusing fingers at the operators of these small businesses, it's the challenges from the struggle to keep their head above water.
Set against this pressure cooker environment is Australia's coffee roasting capacity that seems to trade for extended periods on the blue-sky premise of "if we build it they will come". With a sense of hubris that rising quality levels and prices are tolerable to cafe owners seeking distinct points of difference to their competitors. Unbelievably, there's a widely held and naive view that the market needs this capacity, or the demand can be easily found for roasted coffee beans.
It's easy to see what's likely to occur from the ever widening expectation gap of coffee roasters thinking cafes are willing payers of higher quality versus the economic reality of businesses attempting to ratchet down expenses.
The tide is turning as there is only so far price can stretch before it snaps.
Cafe owners are still demanding high quality coffee but they are not prepared to pay the going rate and discounting wars are erupting everywhere in the wholesale segment. Some would say it's always been going on, but this time it's a bit different as the bargaining power has shifted more in favour of the demand side.
With so much new roasting infrastructure and capacity added in the last few years, the supply side has been bullish for far too long and now it seems there is a sense of desperation in the market as coffee roasting operations seek to maintain their volumes each week, at the expense of quality and price.
The immediate reaction for cafe suppliers is to hunt for cheaper grades of coffee in order to hold onto their at risk margins.
But what they won't do is clearly communicate this strategic change transparently for fear of being regarded as a "commodity" or even non-specialty roaster.
In other words, their self-appointed specialty status and carefully crafted illusionary image of "only the best" must be maintained at all times, regardless of the real quality types they are pushing out the door.
Its a sense of relief we have a small exposure to the cafe supply market and an even greater comfort our product pricing still remains at 2009 equivalents. However, there will be a broader ripple effect across the entire coffee roasting industry and we can expect at some point to respond with changes as they arise.
We see this as a market segment showing initial signs of maturing, but not without some initial pain.
Growth slows, price wars escalate from desperation and frustration, damage is caused and some players will get hurt, others will exit the game or get swallowed up if mergers, acquisition and consolidation ever becomes a reality (unlikely as egos and short-sightedness continue to inhibit mergers between Australia coffee companies, which is a real shame).
With higher stakes and increased pressure on coffee companies to snare or hold onto cafe clients, there's an inevitable wind up of rumour, innuendo, mud throwing, slander and bitchiness as mind games play out to influence cafe owner's decision making.
Drums are beating and the small, crafty plays are perhaps most vulnerable with everything to lose by lacking scale to compete and removing the only card they can play - expensive, hand crafted offerings that it seems fewer people are willing to pay for. Costs rising against lower outputs and it's a pinch point that's not going to be comfortable.
Maybe it's why the specialty brigade are seeking to tear down the notion of speciality, or at least redefine it using different metrics and language.
Consumers will eventually benefit from over-capacity on the supply side.
Whether it impacts the existing quality standards is not easy to predict, however, recent pressure on wholesale prices can only lead to a greater proportion of lower grade roasted coffee product released into the market.
The bigger questions remain - will coffee in Australia eventually mirror Europe and when ?
We think price and value are now more important than ever before.