Six important trends shaping Australian coffee.

We can only roll over the new year by looking back at how we think our industry changed in 2017 and where we see our Australian coffee market heading.

Medal & awards - the great authenticity deception

Consumers love winners, and there is an undeniable attraction to medals, awards and declarations of greatness. 

It's true. Nothing sells like a good story.

In the last few years, it had become obvious that many competitors in the coffee roasting events would submit "chequebook coffees" (hideously expensive, rare, exotic micro lots) as competition entries. 

Then, upon winning a medal, that medal would be transferred to entirely different coffees sold as their everyday offerings. 

In effect, a consumer buys products marketed with allegedly deep levels of deception - is it a medal winner they have purchased?

Yet again, we witness tell-tale signs. 

The gold medal-winning coffee was only available for sale for two weeks before the competition and just one week after. 

That's not a retail market product but a publicity stunt to maximize leverage from the award.

During 2016 and again in 2017, we sensed a growing groundswell of discontent within the ranks of the industry's coffee roasters. 

Many of our colleagues and peers, frustrated at the habitual "bait & switch" routine in the competitions, have had enough. 

Experienced and mature coffee companies will likely turn their backs on the competition circuit and the heavily flawed processes.

You see, there is no checking or validation on ingredients or preparation, and the examination, testing and evaluation scoring of the product takes place inside a closed room using blind, coded samples (apparently). 

We know of competitors winning medals using coffees roasted on another company's roasting systems. 

How is that fair to consumers?

A company that wins a medal for a coffee roasted on someone else's platform will not be capable of reproducing that medal-winning coffee on its systems.

It's nothing but a bait-and-switch mentality.

Calls have become louder for changing competitions to use control or blind coffees as a true skill test. 

It might level the playing field on skills and techniques rather than sourcing and substitution. 

And finally, another humorous point to note. 

There are five coffee competition events annually in Australia, all claiming to award "Australia's best coffee".

2017 will become the high-tide mark for competition as many experienced companies decline or limit future involvement.

Micro-Roasters struggling

The second half of 2017 signaled an interesting era in the evolution of the Australian coffee market. 

For almost ten years, the explosive growth in new, small/micro roasters entering the market continued to defy all reasonable sense of belief. 

Within just seven years, the Australian coffee market has created an estimated 650 new coffee brands in what has been called the "micro-roaster" bubble, often compared to a gold rush.

With this quadrupling of players fighting for a slice of a pie that only grows by a modest 4% a year, it's obvious why some industry participants might be heading towards a bad ending.

New coffee brands still enter the market at frenetic rates with no signs of slowing down. 

Many of these new coffee brands are created without a normal business plan, as the industry remains fuelled by dreams and passion, not financial metrics. 

As even more new brands emerge in the future, particularly when the pathways become a lot easier with more readily available access to time-share roasting facilities, the important point to note is that we saw a lot leaving the market. 

Those leaving the industry did so quietly in 2017, closing up and moving on to something different.

Before the sharing economy extended to roasting facilities, establishing a roastery was a high-barrier entry to the market. 

Plant and equipment, marketing, and incentives require significant capital before generating returns. 

Infrastructure sharing changed the game, and many microroasters are operating from their home or some other small, low-cost base.

This market exit statistic is rarely captured or reported, but we know first-hand from some coffee brokers. 

They see micro-roasters finding the going tough, and after a couple of years of working for basically nothing, some of the micro-roasters are calling it a day. 

If they don't have the safety net of vertical integrations, such as a cafe with cash flow to leverage, then it is a tough market to enter.

Interestingly, coffee roasting equipment suppliers hold contrary views. 

They claim they have never been busier, and roaster sales are booming. As is their interest in such optimistic thinking. 

One thing's for sure: there are a lot of expensive infrastructure and assets that are not exactly sweating in the factory. 

Roasting systems idle for five times more working day hours than running and producing revenue-generating products.

There is still a major shakeup that is yet to hit our coffee industry. It may be somewhere other than 2018. 

Raw coffee prices have been treading water at relatively stable rates for nearly two years, which signals that there will be plenty of volatility ahead. 

New brands, not accustomed to operating in extreme commodity price cycles, may need help if raw coffee prices escalate and remain at high levels for a significant period. 

Today's major challenges are real estate, logistics, energy and labour. 

Throw a raw coffee price hand grenade into the mix, and the supply side of our industry will likely become nuclear (and feral).

I want more forward-thinking business leaders to consolidate this fragmented and unstructured market in 2018. 

Smart players might finally realize that joining forces will give them scale efficiencies. 

Consolidation has proven over centuries in every other industry and market to generate superior efficiency and returns. 

Today, there remains too much ego and emotion among the coffee-roasting fraternity to contemplate the benefits of merger synergies.

Everyone wants a medal to pin on their chest or a thousand Facebook likes to feel good about their product.

We've been looking for growth and synergy amongst our peers, but the asking multiples are jaw-dropping with unrealistic returns. 

Of course, we are talking about the dream and the passion. That's worth a multiple.

Retail - a brutal and ugly turning point

For most of 2017, we banged on over and over (along with the media) about the rapidly changing retail landscape. 

It's here already. 

The wrecking ball is swinging, and I'm not talking about the underwhelming whimper of Amazon Australia's soft launch at the end of 2017.

Shoppers bypass traditional brick-and-mortar retail faster than the stats can be collected and reported. 

Who can trust the stats? 

News of record Boxing Day sales are just maligned numbers taken from a momentary snapshot. 

Missing from the headlines were the horrible, uncomfortable truths that consumers spent nothing in the lead-up to Xmas. 

They were saving their money for when the deep discounts were on offer.

We live around the corner from a Melbourne suburban strip that has long been a busy, vibrant shopping destination for locals. 

With multiple butchers, bakers, fruit veggies, takeaway chicken, fish, pizza, noodles, cafes, banks, chemists, doctors, dentists, hairdressers, and bottle shops, we are spoilt for convenience.   

Over the last year, many traders have shown signs of struggle. 80% of the dozen-odd cafes have been up for sale, and for the first time in 20 years, we see numerous vacant shop fronts. 

You can see the signs of stress and worry on the faces of the owners. These are people we have looked in the eye for a long time.

The bike shop has been an institution in the neighbourhood and is now in the process of closing down. 

People were happy to come into the store for all the great free advice. 

They touch, try, and feel the bikes. 

Then, they use their phone to research where they can buy it cheaper online. 

Even if the prices were just a fraction lower or the model on sale was different. 

The pre-sales service provided by the store was not appreciated or supported by customers intent on saving a few bucks. 

Unfortunately, the bike store owner probably did not transform his business to adapt to the changing customer needs. 

Sure, he could have run an online store from the rear of his premises. 

It's a shame the escalating rent from Australia's never-ending property boom is astronomical. 

Retail stores that cannot survive on the reduced patronage of local customers may end up being replaced by high-density apartments. 

That, in turn, will make traffic congestion around the area even worse, downgrading the amenity of the neighbourhood.

This same disruption is occurring across many retail areas in locations around Melbourne, Sydney, and Brisbane. 

Stores need help to provide display products, inventory, and pre-sales service when customers are increasingly switching to purchasing online.

Applying more pressure from the other side are landlords crunching numbers on flipping their properties for a tidy profit to developers. 

Wily developers are skilled at deceiving incompetent or corrupt councils into re-zoning.

We are sometimes in disbelief at building permits for dozens of high-density apartments without public spaces. 

Residential apartments are rapidly replacing original commercial or business zones. 

However, these apartments need more parking, and they need to be supplied by the deficient planning schemes allowing developers to get away with buildings having inadequate parking due to a loophole of being located near a train station.

So we end up with nearby streets clogged with extra vehicles.

Mega shopping centres continue to expand and bolt on more tenants and services whilst parking capacity barely increases. 

Shopping centres need to deal with the incredible frustrations involved in entering and exiting these concrete jungles. 

It has the effect of pushing more people to avoid the hassles of having to shop physically. 

Instead, they order online and have the products delivered to them.

Department stores have lost their way and are in the stages of irreversible decline.

Logistics - expectation gaps widen

Fast and free! 

The growth of e-commerce is outpacing the capacity of the parcel networks by a factor of 300%. 

I'm not talking about just in the last year. 

This growth has been compounding annually for at least four years. 

That's right; adding capacity to freight networks is a slow, expensive process, and most freight providers are not interested in investing in capacity. 

They focus on profits, which means sweating every drop from their infrastructure. 

So, if it's under-sized, they think that's the right size to make their optimal profit.

For a large enterprise like AusPost, they don't just tip money into buying more vans and hiring more drivers. 

It's quite the opposite. 

AusPost is constantly looking for ways to save money or operate more efficiently. 

They call this "optimization", the same way every large organization reduces costs to improve profits. 

Sure, AusPost will happily roll out the PR machine with statements about millions of dollars invested in their parcel systems.

Or how they are crying poor, losing money on delivering letters. 

But most of this investment is in the core hubs of the parcel network, or it's replacing assets that are run-down or unfit for purpose. 

Most investments by AusPost are for increasing automation and reducing staff.

Capacity is always added afterwards in catch-up mode rather than to get ahead.

We lodge our parcels at one of the larger AusPost business hubs, and to be honest, we get good service from our friends in the business hub. 

However, for the last 12 months, we have repeatedly asked for larger vehicles to collect our parcels or two separate collections on Mondays when we have too much to fit into one car.

Each time we have asked, the response has resulted in nothing. 

Yet, they continue to perform "time in motion" studies for drivers to validate whether everything is optimal at a hub that has 40+ vans at their disposal. 

You see, despite AusPost's fleet of planes, 1000s of large trucks, and tens of thousands of vans, it's more important inside AusPost to satisfy the accountants instead of listening to genuine customer concerns. 

It could be the survival instinct inside large organizations: play the self-protection game.

Our solution to overloaded conditions was to divert freight onto other providers to relieve the pressure points on our peak days. 

It's mind-boggling in today's competitive economy that we willingly want to give AusPost a lot more revenue, but they cannot get their minds around how to service it. 

They don't even think in those terms. 

That's ironic when you see so many empty vans driving around on the roads during the day.

In 2018, watch carefully as AusPost's parcel network takes some big steps towards making changes to be more like its smaller sibling at StarTrack. 

It's been five years, and 2018 will be the biggest nudge towards a "merge". 

Star-Track's former operations guru, now with his hands on the big red wheel, there will be more blue practices.

Route sharing between AusPost and StarTrack increased during 2017. While there may be a few benefits from consolidating operations, there will also be some nasty surprises like retrospectively applied fuel surcharges and additional fees for futile delivery attempts. 

It will only increase the shipping price as freight companies make tons of "cream" from unnecessary charges. 

Imagine charging a customer a weekly fee to have an account. 

They get away with it because of monopoly conditions.

The AusPost parcel network will transition to an operating mode that is more like a traditional business freight service, and that means the price or cost of freight will rise accordingly. 

AusPost has recently flagged fuel surcharges as a possibility for implementation during 2018. 

They have already changed their invoicing to accommodate the additional fee.

Regarding widening expectation gaps, freight will continue to get slower due to congestion. 

Not only will this congestion be caused by increased parcel volumes but also the increased difficulties of moving about on our busy roads. 

That means it will likely become more expensive. 

Our goal is to find solutions that improve upon both of these trends. 

Whilst we have spent much time developing these concepts in the last couple of years, there are many trade-offs and compromises when managing product quality (freshness) versus immediacy and cost.

Direct trade coffee still needs to disrupt traditional supply chains.

5 years ago, direct trade sourcing of raw coffee would disrupt the 150-year tradition. 

That is, export and import brokers supply commodities to value-adding manufacturers like coffee roasting companies.

The internet was rapidly reaching remote areas, and email and web communications made it easier for farmers to connect with roasters.

Fuelling the Direct Trade hype were savvy coffee companies keen to exploit what they promoted as distinctive points of difference between their ordinary self and the rest of the industry. 

They were promising their coffee was so carefully selected and, of course, having the sole and exclusive rights of supply.

Much, if not all, of it was just marketing exaggeration and rubbish. 

It was building up a concept to be much bigger than it was. 

The truth is, only a few companies could afford the risk, time and cost involved in travelling to the origin, and mostly, it was more about photo opportunities as PR stunts than actual "business transactions". 

Even today, most origin trips undertaken by coffee companies are about individuals experiencing the life-cycle of coffee, not trading greens. 

You see, sourcing coffee directly from plantations is far more complex than the beautiful vistas of coffee farms portray. 

Logistics in most coffee-growing origins is essentially nonexistent. 

We are talking about remote, mountainous regions that may have just one dirt road for access, sometimes washed out from rain and often ambushed by dangerous bandits holding up vehicles for ransom or theft. 

Then, of course, it's not easy to arrange connections at the port, often delayed for more "important" cargo like corn or essential food crops. 

Often, moving cargo deliberately held required greasy palms swiped with brown paper bags full of cash to encourage clearance.

Once the manifest arrives, you discover that it's different from the pre-shipment samples, and the dance of negotiations begins around acceptance, rejection, and adjusted differentials. 

If you are lucky, there will be a 5 - 10 % deterioration from what you were expecting, and that's the exception rather than the norm. 

Often, you aren't lucky, and that means you're stuck with this bulk pile of raw material that really can't sell in the way originally intended. 

Think of it as buying six months' worth of food that tastes terrible, yet forced to eat it or go broke.

It's not about trust in these transactions. 

Changes often occur at the origin, and these changes, even if they're as subtle as a rainy day during the drying period, end up as a complete surprise on arrival from a distinct lack of communication. 

Many farmers are just farmers - they are poor and in dire need of cash, having tended to these crops for six months and now want them sold and moved off their estate. 

Many coffee farmers need more understanding or context as to the impact of variable quality upon roasters attempting to retail the finished product.

They never get to visit roasters or even consume the toils of their labour as we do - in a cafe. 

We see it all the time with forward commitments on existing local Australian brokers, sequential lots that arrive different to what we had expected.

These have the QA controls of the exporting and importing brokers, but they still differ. 

Remove those layers, and it's a game of Russian roulette.

The compounded risks rapidly dissolve the romance of direct trade.

Hence, smart operators leave it to the brokers as experts and focus on the core competency of perfecting roast and managing the all-important customer experience.

Unfortunately, many coffee companies continue to play the angle that they have travelled the world to find the best and pretend they have something worthy of your custom - the truth is that most are telling rather exaggerated stories and claiming exclusivity without true authenticity.

Coffee is a diverse industry in terms of products and realities.

Scale and consistency versus hand-crafted artisan

The fascination with "hand-roasted" coffee has become boring and tiring. 

It's no longer new and exciting, and after thousands of images depicting small, soho-designer boutique coffee roasting setups, hipster baristas sporting tatts, skinny jeans and beanies in summer, now that's normal, boring. 

This heavily stylized Instagram-worthy photo frenzy is a staged play to garnish more likes and has little to do with any substance in the cup.

Consumers are lamenting the whole hipster micro-roaster movement as tired and ho-hum. 

They want coffee that tastes like coffee and not some uber-expensive, under-roasted, lemony acid fruit bomb that curdles milk. 

You see, hipster-style coffee is a movement to an imaginary premium level. 

In their minds, this brand believes what they do is better than everyone else because they have "passion" and "self-belief". 

More importantly, they think they can and are doing it differently; hence, it must be better.

The truth is, they are doing the same. 

Every roaster has to arrive at roughly the same destination to produce a product that has a definable balance of flavour, sweetness, body and finish. 

It's just that some have different interpretations, that's all.

Traditional coffee companies don't have passion, or because they have been doing it for a while, they have lost that original startup passion. 

So, the new micro-roaster justifies an over-priced, haphazard experiment unable to achieve consistency from one batch to the next as a premium offering.

Consistency is critical in our market, and only industrial-grade systems can achieve this goal. 

I've visited so many crafty/boutique roasteries over the last decade, and I'm still shocked at the cavalier approach to production (if you could call it that). 

They need more essential infrastructure and processes. 

As recently as November last year, I was at a popular specialty roaster's warehouse. 

I was surprised at how they had set up their facility or how they had not set up their facility properly.

In 2018, we are doubling our scale by installing the most advanced systems available. 

The investments are not for show-pony Instagram or Facebook posts; they are for boring and tough shit. 

For things like consistency and quality, we target the next realm of true industrial precision.

Small-scale roasting operations will feel the pinch as more competitive pressure builds. 

Half the roasting platforms installed in Australia need to be bigger to support a viable business in the long term. 

When price and margin come under attack, it's the small players that will feel it most as labour costs eat away at profits.