Coffee – from plant to cup. What does it really cost?
Bean juice. Cuppa joe. The good stuff. The elixir of life. Coffee.
Throughout the UK in the good ol’ 1600s, the median breakfast drink of choice was beer. But then along comes coffee on its push to become the world’s favourite stimulant, with around two billion cups a day drank globally today, and it’s no coincidence the enlightenment started soon after. Turns out, starting your day with an energy-providing, memory-enhancing drug is better than being intoxicated.
Back home in Australia, people consume slightly less than a cup per person per day from instant, pods, espresso, filter, clever dripper, aeropress, or any number of types of coffee. Homing in on store prices, we pay on average ~$3.99 a latte or other milk-based drink, or a little less for non-milk drinks. Not the biggest dent in the wallet, but as we’ll soon explore, a combination of climate risks among other factors are threatening to push that price up.
Buckle up, as we’ll be going step by step through the costs of coffee, social and monetary, from the farmers across the world to the rents that stores pay. This is a long one, so feel free to jump to any section that interests you!
Sections in order:
Part 1: The café
- Operational costs, machinery, and other misc. costs
Part 2: The coffee
- Roasters, exporters, and importers
- The damn coffee
Part 1: The café
To kick us off, we’ll start outside of the actual coffee – materials, including the cup, lid, or straw you drink it from. For the price of coffee, we assume a cost of $3.80 for a plain long black, or ~$3.38 pre-GST, going forward. Materials makes up about $0.24, or ~7% of this pre-GST coffee, and enables its smooth transportation between the café and anywhere else. But the real cost of cups and lids are slightly more sinister.
At 2.7 million cups a day, it’s estimated that 1 billion disposable coffee cups are thrown out every year in Australia, making it the second largest contributor to litter after plastic bottles. Many of these cups contain a thin layer of plastic to help support the liquid, significantly contributing to microplastics in landfill. Not to mention a portion of these are all plastic cups for iced coffee.
Thankfully, there’s a growing trend for keep cups and other non-disposable cups in Australia1. Exact statistics are hard to come by, but reusable cup manufacturers have reported significant sales growth. This may have been encouraged by stores giving discounts to customers who bring a reusable cup, saving coffee shops the cost of the materials, meaning a win-win-win for the store, customer, and environment.
As a mere coffee consumer, how can you help further to reduce the waste? Let’s list it off.
- Bring a reusable cup. Not always practical, but a great habit to get into.
- Try and choose stores that serve bio-degradable cups. While more expensive for stores, these decompose faster and leave less of a lasting environmental impact.
- Encourage your local coffee shop to join in on the discounts!
- Recycle your used cup! There are plenty of places to recycle used coffee cups at work or out and about – why not encourage your workplace to join in?
On the topic of straws in iced drinks – a personal pain point. Anyone that has ordered such a drink in the past two years is acutely aware of the dreaded decomposition of the paper straw into the drink. Yes, we wanted it to decompose, but not that fast (check out this scholarly article for empirical evidence at how much paper straws suck). If we can get over the virtue signalling, it doesn’t have to be this way. There are other plastic alternatives, such as pasta, bamboo, agave, heck, even faster breaking down biodegradable plastic straws don’t cost much more.
Next on the list: the actual baristas that make the coffee.
A few readers may have experienced some of the sketchy employment practices in cafés. The Fair Work Ombudsman has repeatedly fined cafés for underpaying workers. Paying in cash, not paying overtime, underpaying younger workers, and other unfair employment practices are far too common in the industry.
However, this comes as no surprise – in such a competitive industry, labour continues to be a larger part of the cost of a coffee. This is perhaps due to increasing minimum wages, and a reduction of supply of high-quality baristas.
Pre-COVID, wages as a cost rose at a CAGR of 3.3% over 2014-19, outpacing minimum wage rise of a 2.9% CAGR over the same period. Significant demand falls during COVID, particularly in the CBD, dropped the cost of wages. It’s likely that these recover in line with demand. Labour indeed makes up a significant portion of your coffee, at $0.74, or ~22% of the cuppa.
On the micro side, there are government programs to support the training of baristas, such as through TAFE. For example, JobTrainer, a government initiative to train workers aged 17-24, fully subsidises the TAFE course for advanced barista training. Policies like this ensure the long-run supply of baristas.
Operational costs, machinery, and other misc. costs
Any coffee snobs out there will know how much some of the machinery can cost. A decent hand grinder? $200. Electric grinder? $500. For espresso? $1,500. Personal espresso machine? Low-mid range for $800. Hobbies can be expensive.
For a coffee shop, a typical grinder will cost $4,000+ outright, and a decent machine from $10,000-20,000. The question is, how do these small shops come to afford this equipment – particularly as many coffee stores are a sole-proprietorship? (ie. owned by a single person – not a huge Starbucks chain!)
Let’s start with loans. Small business loans are the most common route for café owners to go down, given their reasonable covenants and rates. Despite rates being supressed in the capital markets, in the small business world, there is a significant premium on top of the risk-free rate. Return hurdles for lending may have mildly reduced in search of yield, but financing is still expensive. Expect to be paying 10-15%pa on the loan – with the café or sometimes a personal house being the collateral.
Other loans can include borrowings from family and friends (good way to lose relatives), credit card debt (good way to go bankrupt), approaching outside investors (good luck), or using personal savings (good conviction needed). More or less, it is very capital intensive to start a café.
What are the other options? Well, leases are also a common avenue to finance equipment. Instead of buying outright, café owners enter into a lease agreement to be provided the coffee machine and grinder in lieu of regular lease payments. At the end, the café owner may have the chance to buy the unit outright.
There are also a bunch of other miscellaneous costs in a café, such as electricity (check out this article if curious why our energy isn’t all renewable yet), other utilities, condiments such as milk2, furniture, fittings, insurance, marketing, repairs, D&A, and so on.
Summing everything mentioned here, expect to be paying $0.99, or ~29% of your coffee to operational costs, machinery, and other misc. stuffs.
It’s free real estate. Except when it comes to rents, it absolutely is not free real estate.
As with most retailers, coffee stores need to rent retail space. Owning outright in more urban areas is incredibly uncommon as large REITs or other investors often hold the property, and it is prohibitively expensive. What’s more, cafés tend to want a central location with foot traffic, rather than be tucked away. This increases the cost of the space substantially.
Thinking about the Sydney CBD specifically, pre-COVID rents for some coffee stores are through the roof. For example, in 2019, a certain3 coffee shop of 14sqm at Wynyard station sold for $1.57m, with a rent per square metre of ~$6,000 per year. Crazy.
COVID hit retail rents across Sydney particularly hard, given the complete lack of people in office to buy stuff. Typically, store owners will give tenants incentives (ie. 3 months free) instead of reducing rents. However, it’s likely this is just a temporary suppressor to rents. We haven’t seen a significant enough shift in working habits of office workers to warrant concern over foot traffic for the more urban areas, and rents have recovered in lieu.
Rents as a portion of revenue for coffee shops in Australia has risen around 1% of total revenue for coffee shops over just the past 5 years – eating into profit margins. As it stands, roughly $0.35, or ~10% of your coffee goes to rent. It’s likely to be significantly higher than this in CBD areas.
There isn’t a particularly good solution to higher rents, and is really just an outcome of the commercial property market. Better government zoning? More development approvals? Better renter protections and bargaining power? Really just choose a policy, but there are pros and cons to everything, and really depends on what flavour you like your politics. Moving on!
Whilst not technically a cost, this is why coffee shops are able to stay in business – a return for the invested capital into the shop. For a combination of factors covered above, profit margins of cafés have been squeezed, despite prices rising.
Increasing competition prevents stores from jacking up prices, and a decreasing cost of capital means returns maybe don’t need to be as high to satisfy a hurdle return rate.
Before tax, profit makes up around $0.28, or ~8% of a cup of coffee, having contracted around 1% over the past five years. Really puts into perspective really how many cups of coffee a store has to sell to make any reasonable amount of profit. This is even more true when considering how fixed and variable costs may impact these estimates.
Part 2: The coffee
We’ve certainly been avoiding the elephant in the room – the actual coffee. Surprisingly, the beans at the café only make up around ~23% of the total cost for a cup. Let’s see how this is broken down…
Roaster, exporters, and importers
Coffee can really only be produced commercially within the coffee belt – countries between the tropic of Capricorn and Cancer, with the right tropical climates to grow coffee, such as Brazil, Colombia, Kenya, or Ethiopia. So how do the beans get to your local roaster? After growing, picking, drying, the beans are transported to Australia in cargo ships through exporters and importers, and then in trucks or trains throughout the country.
There are significant costs associated with paying these shipping costs, with the exporter and importer taking anywhere from $0.10-15, or ~4% per cup of coffee. These supply chains are essential for coffee, with the vast majority of top coffee drinkers being net importers.
After the coffee bean has been picked, processed, dried, and milled, exported, and arrives at the roaster, what we’re left with looks lightly green and undeveloped. Before it’s juiced into your cup, we need to roast the coffee, transforming the physical and chemical properties of the raw bean, releasing distinct flavour profiles of the bean and roast4.
Onto the economics.
After shipping, shrink loss, packaging, machinery, certification, and the skill and expertise to roast well, the roasters make up about $0.49, or ~14% of your coffee. These guys have slightly higher margins due to the high value add, and so when the price of coffee is high globally, may absorb some of the losses before coffee shops. Some of the largest roasters in the world are Nestle and Starbucks, but there’s a growing trend for coffee shops to have their own roastery – particularly specialty ones.
The damn coffee
Finally, the actual raw beans.
Coffee is traded as a commodity on global markets. It’s most liquid on futures markets – or where, say, a coffee roaster will agree to purchase a set amount of coffee 3 months in the future for a specific price that is fixed today. Where supply and demand meet, we find a futures market price for coffee – the ‘C’ price. See below!
The C price has fluctuated substantially over the past 5 years. In this price includes the farmers wages, crops, land, water, machinery, and everything else required to grow coffee. All up, the actual amount ending up back at the farmer is estimated to only be around $0.10-15 per cup, or ~4% of total the total cup price. Considering that’s the most important part of the drink, it does seem pretty rough.
So – what are the solutions to pay coffee farmers enough to both sustain their business, and even better, a fairer wage on top of that? Doubtless you may have heard of a variety of fair-trade organisations, which certifies the working conditions, fair wages, and sustainability of coffee being purchased. There is a considerable amount of literature on the maybe effectiveness of these certifications for farmers wages across the industry.
Another solution are coffee co-operatives, where a group of farmers will join and then negotiate with buyers, before deciding how to split the funds between the group. These are often supported by fair-trade organisations as a form of de-risking financing and free-rider risks. These can be effective, but again is debated heavily.
In general, many coffee shops and consumers are willing to pay more to see that coffee producers aren’t getting done over, and are making a living wage.
Another solution is to cut out the importer and exporter middle-men altogether, and significantly increase the cut that goes to the farmers. Specialty coffee stores often do this, travelling overseas to coffee producing regions and forging special arrangements with farmers. I highly recommend you support these specialty stores – for $5-10 more, you’re not only getting a far better cup of coffee, you’re also paying farmers enough to sustain their livelihood!
The other huge issue is climate change. Rapid global warming is increasing temperatures, decreasing precipitation, and causing more extreme weather, and has started to disrupt coffee producing regions.
Robusta coffee, as the name may suggest, is more resilient towards harsher weather conditions. Conversely, higher quality, better tasting Arabica coffee requires a stricter temperature range of 18-22 degrees Celsius to grow. Brazil, the largest coffee supplier worldwide, is at significant risk from rising temperatures. Studies have found a 20% decreased in yield in south-east Brazil since 1974, owing to temperatures rising on average 0.25 degrees Celsius per decade (check this out for further academic study on Brazil coffee’s climate issues).
Globally, other studies indicate that by 2050, land with the right climate and other conditions to support coffee growth will be reduced by ~50%. These are serious concerns for the long-term production and price of coffee.
What are the solutions for a coffee grower? Primarily, there needs to be either new production techniques and technologies to deal with increasing temperatures, such as better shading, or a dramatic migration of production areas.
Either this, or a significant shift in policy to address climate change, of course. Just a bit of food for thought while enjoying that morning brew!
Notes and appendix
1. It’s worth noting that reusable cups have their own drawbacks, particularly in the amount of resources used to create them. I’ve just considered the rubbish here, but in reality it’s a more complex argument.
2. Whilst I lumped it in as an off-handed mention, milk is an interesting point when it comes to the price of coffee. Milk, among other additions to the drink, make up less than 6c a cup. However, as milk replacements get better and better, demand is picking up for these alternative drinks. Coffee shops usually directly price this into the cost of the drink – such as an extra 50c per coffee. I’m not entirely sure whether this is accretive to profits or not.
3. Normcore Coffee – amazing coffee here. Highly recommend.
4. As the bean is roasted it moves from light, medium, and then to a dark roast. The associated coffee starts at a light roast with less sweet, grainy, grassy, and acidic flavours pre-first crack. Medium roast has slightly less acidity and more complex origin flavours – think fruity, floral flavours highly determined by the origin, or growing location of the bean. Finally, with a dark roast post second crack, you get next to no acidity, having been replaced by bitterness4.1, and associated dark, oily, and roast dominant flavours – think more chocolatey, caramel, and nutty notes.
4.1. This is the bitterness that many people taste in coffee, and perhaps why they don’t enjoy the taste as much. If you don’t like coffee I highly doubt you’re reading down this far in a footnote of a footnote in a 2,500 word coffee expedition, BUT if that is you, maybe it’s the roast of the coffee you’ve tried that turns you off. Medium roasted specialty coffee is an absolute treat, and can often just taste like a more complex tea. Highly recommend giving it a try at a higher quality store.
Note: A report by the Specialty Coffee Association was used. This breakdown therefore better represents the average coffee cup in America as opposed to Australia. However, these values will be different for every cafe, and so attempted was to just give an estimate of what the costs may look like. Moreover, some points have been glossed over in the sake of ‘brevity’ lol. Feel free to reach out with any comments, questions, or (constructive or not) criticism!