Coffee prices are on the rise thanks to unseasonably dry weather in Brazil, the world’s largest coffee producing country. The coffee bean shortage hasn’t had a major impact on businesses and consumers just yet. But experts say a price increase may be coming.
And small cafes and roasters are likely to feel the impact more than large suppliers. That’s according to Gregg Shefler, Vice President of Coffee Direct in Frenchtown, New Jersey.
In a phone interview with Small Business Trends on the coffee bean shortage, Shefler explained:
“Larger companies are more likely to have a stockpile locked in at lower prices. But smaller businesses probably don’t have huge warehouse spaces to store coffee. So you’re forced to buy coffee at higher prices and then you have to decide if you can just weather the storm or if you’ll have to pass some of those increased prices along to your customers.”
[Photo: Finviz.com]
The chart above shows the changes in coffee prices over the past year, with the largest spike appearing at the beginning of February. And Shefler agrees that the price spikes could have an impact on small businesses. But he cautioned against premature panicking.
“It seems like we deal with similar situations almost every year, and it’s almost never as bad as some people predict. For our business, we have a little bit of breathing room in terms of supplies and finances so we’re going to take a wait-and-see approach for the time being while we evaluate where we think this situation is headed.”
However, he added that with a coffee bean shortage the smaller the business, the less time they usually have to wait.
Buying coffee from another part of the world not impacted by droughts isn’t a viable cost cutting measure. Since Brazil produces such a large amount of the world’s coffee, even a small coffee bean shortage there is enough to spur demand for coffee elsewhere, driving up those prices as well. Shefler explained:
“You don’t have a choice – you have to buy it and those are the prices. The real enemy here is the uncertainty. Exactly how bad this whole situation will be is still up in the air.”
The key question for small roasters and cafes will be whether to raise prices or take some other cost cutting measure.
Coffee prices: Shutterstock
greg
Be serious. Coffee is less than 10% of Starbucks’ cost structure. It’s mostly labor. Thus even if the price of coffee doubles, your $4 latte would probably be closer to $4.30.
Annie Pilon
Hi Greg – thanks for the insight. Yes, I’m sure Starbucks probably wouldn’t have to raise prices that much. Smaller companies could be impacted more, but as Gregg said in the article – we’ll have to wait and see how the situation plays out. But if it only goes up by 30 cents then that is welcome news to me 🙂
keith johnson
The fact that starbucks would not have to raise prices in their stores does not mean others will not have to raise it on the grocery store shelf. Consider: The market increases by .82 per coffee lb.. The resulting roast shrink adds 17% more, making it .96 per lb increase in cost.
It takes 1/2 lb to produce 1.5 gallons, so the cost is spread over their finished cups——- They get 17 cups of their smallest coffee, so the actual increase per cup is .48 over 17 cups= 2.8 cents cost per cup increase. They can bear that cost.
Aira Bongco
I am pretty sure that this can somehow affect corporations that give free coffee to their employees. Since coffee will not become a cost, they will most likely stop offering it for free. I personally think that it is a good thing as it will lower the rate of coffee addiction.
Annie Pilon
That is a really good point, Aira! So this could have an impact even beyond coffee specific businesses. And I would agree with you on lowering the rate of coffee addiction but I have to admit that I’m just as guilty as anyone in that area!
keith johnson
So they can be addicted to tea’s caffeine?
Martin Lindeskog
As tea enthusiast, I have to say: Isn’t time to start to drink more tea! 😉
Joke aside, the coffee bean shortage you should have been able to cover by buying options and secure the price level.
Greg from coffeeratings has a point with cost structure. You have a good margin on end product of a cup of coffee at coffee chain. You have even better margins on tea! 😉 The thing is that coffee drinkers are not price sensitive at all. Look at the history and see the price increases during hard times, and people are still drinking coffee, at least in Scandinavia.
Annie Pilon
Great points! I know I would continue drinking coffee regardless of price increases (within reason). But I do also love tea and could probably stand to substitute more tea for coffee in my day-to-day life 😉
Martin Lindeskog
Annie: Do you have a favorite tea? Favorite coffee place in your area?
Annie Pilon
Good question – I like to try lots of different kinds of tea, so I don’t have just one favorite. But I’m always open to suggestions! And my favorite local coffee place just closed, unfortunately. But at home I drink green mountain hazelnut usually.
There are sources of caffeine other than coffee for small businesses to purchase to keep their employee sharp. In our company, we always have a good supply of Pepsi Max and even a few Red Bulls around just in case we run out of coffee. Besides, the great thing about the free market places when prices of coffee go up, less people will buy it which will then put pressure to keep coffee prices down.
Annie Pilon
Also a good point! I’m not a big fan of energy drinks personally but it is always good to have options.
theawaster
I have to say, it is not a good news for me. The higher price will let us dring less coffee. I personal like drinking coffee. But if the price is too high, I will choose other kinds of drink.
Well I have to agree with Gregg, the real enemy here is uncertainty. Climate is now getting unpredictable so are the prices of goods. Even if big companies have great storage of coffee beans still it doesn’t assure them to maintain their prices.