In June, Starbucks raised the price of the coffee by 10 to 20 cents at most of its company-owned stores in the U.S. The price for a drip coffee in a “tall” size went from $1.95 to $2.15, for example.
And it’s not just Starbucks. Coffee shops around the country are facing more saturated markets, which can lead to increased costs, said Shawn Hackett, president of Hackett Financial Advisors, a Boca Raton, Fla.-based agriculture commodity analysis firm.
We can’t blame the price of coffee beans alone, Hackett noted. Export data about the price of coffee for all major origins and type from the International Coffee Organization shows that prices have dropped for the third consecutive month in April 2018. The organization also says world coffee production in 2017-2018 is estimated at 159.66 million bags, or 1.2 percent higher than last year.
So if it’s not the price or amount of coffee imported into the U.S., here are four reasons why your caffeine addiction may take a larger chunk out of your wallet.
Cold brew is on the rise
Some American caffeine connoisseurs are clamoring for cold-brew coffees, as market research firm Mintel noted in a 2017 report that premium options are benefiting coffee shop sales. Because cold-brew coffees require more beans than regular hot brewed coffee per serving, it is sold at a higher price point than regular coffee, said Hackett.
The process to create a cold-brew coffee is also more intense than the one used to make traditional iced coffee. Instead of pouring warm brewed coffee over ice, the cold-brew blend is steeped in a container of cool water for hours (in the case of Starbucks, it’s steeped for 20 hours).
The intensity of the process, plus the additional beans used to make it, lead to a steeper price, he said.
In 2015, when Starbucks introduced cold-brew batches, the average price for a 16-ounce cold brew at Starbucks was $3.25, while the traditional iced coffee was $2.65.
Likewise, at a Starbucks in Dallas, a 16-ounce freshly brewed cup of hot coffee was priced in June 2018 at $2.25, an iced coffee was $2.75 and a Nariño 70 Cold Brew coffee was $3.45 (prices don’t include tax).
As cold-brew coffee continues to interest consumers, it could continue to be a factor that explains the increase in coffee prices seen in the marketplace, said Hackett.
Coffee culture
The maturation of the coffeehouse industry also plays a role. It may have already happened to you: A favorite local coffee shop closed and sent you to a competitor. Some coffee shops will shut down and others will raise prices.
If you think of the market for coffee shops as a pie, Hackett said, 20 years ago, there were not as many coffee shops, so business growth was inevitable. However, today, as coffee shops get closer and closer to finishing the pie, all coffee shops are “scraping for moderately incremental growth,” he said.
Data from Mintel estimated that sales in the coffeehouse market were expected to reach $23.4 billion in 2017, up 41 percent since 2011. Sales are expected to grow to $28.7 billion by 2021, even with a slowing of coffee shop openings. The total number of coffee shops was forecast to grow by 2.17 percent in 2017, much slower than in the previous six years, according to the 2017 report by Mintel.
“Many operators overproduce. (They) open up too many stores, so there’s oversaturation in some markets, meaning there’s not enough of the pie to actually support everybody,” Hackett said. “That’s why stores go out of business.”
When a big chain, such as Starbucks faces a maturing market, it will close down stores that are not profitable. But the company also will increase prices at high-performing stores to maximize the revenue it can create, he said.
A larger chain has more room than smaller coffee operation or individually owned shops to increase its price because of its brand and customer loyalty, he said.
For a small local cafe, a maturing market could mean scrambling to figure out what will differentiate its store or raising prices to stay in business. This is tricky, Hackett said, because businesses do not want raise their prices more than what consumers are willing to pay.
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