Here’s why specialty coffee cup prices are going to rise – and why you should act now.
Last week we published an article explaining how coffee propositions can be developed into more viable niches using the concept of The Iron Triangle.
In summary, this concept puts forward that the three permutations of fast, cheap, and quality are viable, but offering all three is not.
This means specialty coffee business are likely to segment into:
- Fast and cheap (lower quality)
- Fast and quality (more expensive)
- Cheap and quality (slower)
We also pointed out that at present many specialty coffee shops are trying to offer all three qualities — and therefore find themselves with limited profitability .
We took the time to write the article because we wanted to suggest that it is the industry’s cultural norms — rather than consumers’ preferences — that is currently shaping many speciality coffee shop’s propositions. If you haven’t already read the article, we suggest you read at least the second half now.
Why we’ve focused the discussion on cup prices
Over the summer we suggested that coffee prices ought to rise in an article on how the specialty coffee industry had made a mistake linking the price of a cup of coffee in our customers’ minds with the cost of espresso machines and green beans. Many baristas liked it and it sparked conversation about how the industry could add greater value to specialty coffee. Others, however, have communicated their reluctance to charge more for a cup fearing that they might loose customers or reduce accessibility.
While the iron triangle concept proposes three different types of viable proposition, in practice many specialty coffee shops actually currently have more limited options. Let’s explore these current constraints:
Limitations to going faster
- Five years ago we would have argued that specialty coffee could prepare drinks considerably faster, but a good amount of work has been done on this front and smart operators have sufficiently developed their configurations and training so additional gains are becoming increasingly more difficult to achieve.
- Speed of service is critical at peak times, but often only at those times. As staff and equipment investments have cost implications, it has become less and less worthwhile to invest in solutions that meet these spikes in demand.
- We don’t foresee any technological innovation from the coffee-equipment manufacturers that is going to facilitate a step change in speed in the coming two years.
Now this is not to say that additional speed is not possible or desirable, but rather to point out that until a key technological or operational innovation occurs, it is not operationally or financially viable for already fast speciality coffee businesses to significantly further increase their speed.
- There are many routes open for specialty coffee to further lift quality — primarily through better buying, roasting and making — but at present most of the work being done at retail is actually going into reducing quality in order to protect or enhance profit margins.
- ‘Specialty’ has traditionally been defined as grades above 80 or 83 points. Many businesses in the UK are now buying coffee right at the bottom of the specialty range with a number having tipped over into the top end of commodity.
We think that this development is neither to be condemned nor celebrated; it was inevitable for a bunch of reasons we can unpack some other time. However, since a good proportion of the United Baristas community use the term ‘specialty coffee’, we think it’s important to point out that the industry has now hit the limit of reducing green quality whilst formally retaining its specialty status (our guess is that the definition of specialty will be redrawn over the coming years to include some of the lower grades).
This is yet another reason why, as an industry, we are going to have to broaden the concept of quality in customers’ minds so their willingness to pay doesn’t hinge on the fluctuating price of green coffee.
Reducing retail prices
As pointed out in The True Cost of Espresso much of the price of a cup of coffee is driven by staffing costs.
There is little prospect of specialty cup prices falling as there is a floor to staffing costs legislated by the minimum wage and increases in productivity through automation are still some way off.
The markets constraints of the iron triangle in practice
For businesses who have reached, or are approaching, operational constraints to volume growth or their maximum market share, the key remaining option is to lift prices and recalibrate the proposition to give their customers some kind of perceived greater value.
We have presented this option last, not because it is the only available option to the industry, nor it is the least desirable option; but in order to walk those who don’t wish to raise prices through the other options and constraints first.
Obviously, rules of thumb don’t fit everyone or every situation, but the current structure of the market makes widespread price increases (yes, we’re going to put our necks on the line and say it) inevitable.
Other reasons to think that prices will go up
Putting aside the rationale of the iron triangle, there are a variety of other reasons to think that cost increases are already in the pipeline:
- Following the Brexit vote, the GBP has depreciated significantly against the USD, and shows little sign of strengthening
- Green prices are currently relatively low, with most brokers agreeing that prices will rise
- The key costs of staffing, rent and rates have also recently increased or are increasing, whether set by parliament or the market
This being the case, we think that for a good number of specialty coffee businesses the best thing to do is to crack on and raise prices strategically and pro-actively; rather than reluctantly and with excuses. And the first step to doing that is to recognise that we need to link the price of a cup of coffee to factors other than the price of a machine and the beans in the minds of our customers.
There are many examples of how prices can successfully be raised, and we’ll return for another post with some thoughts on this in the autumn. In the interim, your questions, comments and criticisms are welcome. We’re on all the normal channels.