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Economics of Coffee

The coffee economics and numbers and details related to coffee production and consumption is extremely mesmerizing for marketers. A glimpse of some of the facts is given below

- Coffee consumption in North America and Europe comes to about one third of the tap water consumed.

- Throughout the world, nearly 25 million small producers derive their livelihood from coffee.

- In Brazil alone, which is the worlds largest producer of coffee, about 5 million people are involved in the labor intensive activity of cultivating and harvesting 5 billion coffee plants with hardly any automation available.

- 6.7 million tons of coffee was produced annually in 1998-2000 and this is slated to touch a figure of 7 million tons by 2010.

- In the United States, the number of retail specialty outlets including cafes, kiosks, coffee carts, and roasters touched 17,400 selling $8.96 billion worth of coffee in 2003.

- According to SCAA, 16% of adults in USA drank coffee daily at one of these specialty coffee outlets.

Considering these scope of these numbers, it is normal that coffee drinkers would be concerned about the price that they have to pay for their daily cup of coffee.

The price of coffee as a commodity has seen huge fluctuations in the recent past, especially after the breakdown of the International Coffee Agreement of 1975-1989 and the lifting of the US imposed trade embargo on Vietnam. The flooding of Robusta beans from Vietnam, which are cheaper and therefore preferred by larger companies, resulted in a crash in the commodity price of coffee. By 2001 the prices had reached abysmally low levels. As it became financially unviable it resulted in loss of livelihood for many coffee farmers in Africa, Indonesia, and South and Central America

The coffee growers retaliated by forming co-operatives and were able to get a better price. The major coffee companies were compelled to pay nearly 3 to 4 times the price that they were paying to individual farmers. The Dutch brand ‘Max Havelaar’ also pitched in with a concept of honest trade which tried to guarantee a negotiated pre-harvest price to the growers. Nowadays, the price of coffee is also impacted by the trading done in futures and options on the commodity exchanges. These are financial assets based on a standardized contract for future sale or buy at a settled price.

The right perspective of the economics of what you pay for a cup of coffee is revealed by what transpires after coffee reaches the manufacturer’s premises. Raw beans are roasted, grinded, and packed for distribution. This adds to the cost but still would not tantamount to the kind of prices that you pay. A cup of coffee would still cost you hardly anything above a few cents to make at home and a bit more at a small coffee shop. Still customers are ready to pay much more in espresso bars at premium locations.

The consumer who visits a café is concerned not only about the quality of the coffee but also the service that comes with it. This need of the discerning consumers is met by companies that open outlets that sell specialty coffees within an ambience.

Specialty coffee is not bought on the commodity exchanges and is an entirely different economic product than the wholesale coffee that is traded in these exchanges. Large companies usually enter into multi year private contracts at prices sometimes doubles the price that one gets to see in the newspapers’ commodity columns. When you go to a specialty retail outlet, you are not only getting your coffee the way you relish it but also the service and the ambience that accompanies it.

The discerning consumer looks for an experience that may be relaxing, fun, lavish or pampering. One look around the décor, the lighting, and the ambience in specialty retail outlets like Starbucks, The Hard Rock Cafe, FAO Schwarz, Niketown, and The Geek Squad will give an thought about the manner in which experiential marketing is taking the world by storm.

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