Coffee prices fluctuate with supply, but a severe drought in Brazil and a fungus called coffee rust in Central America have taken a toll on crop yields, sending coffee bean costs soaring this year with the expectation that they’ll go even higher in 2015.
A report earlier this year from the International Center for Tropical Agriculture in Colombia predicts that climate change will bring more of the same in the future. Arabica bean prices rose at least 72% this year, and they’re likely to continue climbing in 2015, according to Citi Research.
Total global supply is on track to rise 1.5% this year compared to 2013, but it’s the second year of a supply deficit, according to a report by Rabobank earlier this month. And the hit comes as coffee consumption around the globe continues to rise, driven in large part by Starbucks and Dunkin’ Donuts expansions into new markets, and the expansion of quickservice coffee programs like McDonald’s McCafe line.
Retail prices for packaged coffee have gone up this year, and the cost of a cup of coffee has also increased in many places. Starbucks, Dunkin’ Donuts and Tim Hortons announced small price increases on some of their coffee drinks this year, but they’re also taking other steps to offset the pain of higher coffee costs, including diversifying their menus.
At Starbucks, the food menu has grown significantly in the past year, with sandwiches, salads, baked goods and other items designed to boost sales throughout the day and make the chain less dependent on morning traffic. Next year, the company will introduce new formats including express stores and high-end reserve shops, and it will expand its evening beer and wine service to 3,000 of its nearly 12,000 U.S. locations.
Dunkin’ Donuts has also focused on expanding its food menu, and ramped up more seasonal and limited-time offerings, including a premium-priced croissant-doughnut hybrid that proved so popular the chain is holding it over into the new year.
Canadian chain Tim Hortons, which this week made its $11 billion merger with Burger King official, said in November that tweaks to its menu boosted U.S. same-store sales 6.8% in the most recent quarter.
Thus far, it seems consumers don’t mind paying a bit more for their jolt — 34% of Americans sip pricier gourmet brews, up from 31% last year, according to the National Coffee Association USA. The report also found that 61% of Americans drink coffee, more than the 41% who consume soft drinks.
Price is a factor, though convenience is much more of a determinant in how and where consumers opt to buy and drink their coffee, said NPD Group’s Harry Balzer.
“At one time it was all about the price,” he said. “We never imagined the $5 cup of coffee.”
That began to shift with the rise of Starbucks and a few other chains, which transformed coffee drinking from a simple morning routine to a trendy experience. The phenomenon drove changes at rival chains including Dunkin’ Donuts, which has been in growth mode for the past few years, and spurred quickserve chains to invest in upgrading their coffee offerings. McDonald’s even launched a separate McCafe chain, which began in Australia and grew internationally.
“I would say the most important thing today is the convenience of coffee, the ability to get good quality coffee on the road,” he said. “Restaurants realized they could make coffee a category all its own, and they upped the profile of coffee in the American diet.”
Still, price matters, Balzer said, and any time the price of a cup of coffee or any other food category or menu item rises at a higher rate than overall food inflation, consumers take note and some will switch to less-pricey alternatives.
So, eateries are likely to take more steps to avoid bigger price increases, including promotions, smaller packaging and spreading price increases out over the entire menu, he said. When Tim Hortons raised its coffee by 10 cents a cup in November, it also upped the prices of its breakfast sandwiches.
Has your restaurant raised coffee prices or found another way to cope with higher costs? Tell us about it in the comments.
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