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March 2024

mycuppa March 2024 Newsletter

"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man."- Ronald Reagan

mycuppa March 2024 Newsletter

Welcome to our subscriber newsletter.

Just when we thought weather forecasters got it so wrong this year, summer arrives late for us Southerners as we sweat through hot Autumn days. It's nice to see that awful humidity disappears after hanging around forever.

March's Secret Label is a zinger.

It sure is different, and I'm still trying to decide whether that huge difference is good.

On a scale of 1 to 10, where 10 is the limit of how far you might safely push in coffee, this wild child is at least a 12.

You only live once, and maybe I might get called into HR at the end of the month for a "please explain" or put on "short-term objectives".

Now that Taylor Swift has left the country, the press has nothing to publish until the US elections ramp up any day soon.

So they are scaremongering $6 cups of coffee, recycling the cost of living crisis outrage playbook.

We deeply dive into why cafes lift their prices for coffee beverages and discover, "There's nothing to see here, folks; move on". 

 

mycuppa March 2024 Secret Label

 

Secret Label

March's Secret Label is a wild child with powerful black currant, cocoa, lime and nectarine notes.

With Mike Tyson's punching ability, the juicy acidity slices through almost anything, leaving you guessing at every sip.

Black Currant has always been the Darth Vader of my coffee universe - never a fan, but always deeply respected.

Yes, this is one wild and whacky ride.

Secret Label is about being different, walking on ground others fear to tread.

For a distinctly unique coffee experience, try this month's Secret Label.

 

mycuppa March 2024 Blog article

 

 

$6 Cups of Coffee

It was just a normal kind of Friday last week, like any other, except for my good friend Bruno calling after lunch to tell me he was on his way for a visit as the competition season had finished.

Bruno and I go way back; he is a coffee roaster just like me and happens to be the President of the Australian Specialty Coffee Association, working tirelessly as the critical "coordinator" for all those baristas, brewers, cup tasters and roaster competition events over the last decade.

He ensures our Australian coffee events are run professionally and successfully for all involved - competitors, sponsors, stakeholders and spectators- lifting the standard to world-class levels. All done as an unpaid volunteer.

As we chatted about non-coffee topics, his phone was binging in the background with text messages that caused his attention to randomly glance at the handset.

"Oh, for god's sake", he grimaces after skimreading several messages.

"Bloody journalists wanting a comment or snippet about $6 cups of coffee", he exclaims. It must be a slow news day.

He ignored the text messages and continued with our discussion.

So we then change the topic to speculate what's behind the latest story of $6 coffees and whether it has anything to do with the Australian coffee roasting companies.

As cafes around the nation prepare (or let's call it softening up) consumers to accept the next round of price rises, it's a fascinating event to watch, far more exciting than attending a Taylor Swift concert.

Cafes operate within the "wholesale" segment of the coffee market.

That means they enjoy the opportunity to play games, negotiate, extort and extract the best value they possibly can from coffee brands desperate or foolish enough to engage; trust me, plenty of those brands are willing to participate in an endless race to the bottom.

I say foolishly because coffee brands can do little to win these stakes except for bragging rights. Loading up with debt is never a great idea in a fast market of short-term prospects.

Providing cafes with products is a rollercoaster not only for your finances but sometimes also for your mental health. That's not intended to be disrespectful to cafe owners, having met many wonderful people who remain great friends.

Cafes enjoy generous benefits from hundreds of suppliers, all clamouring over themselves for the privilege to supply. Imagine shopping for a new car; you are the only buyer in town, and all the car companies are clamouring over to get your business.

It may be surprising to hear that choosing a coffee supplier concerns everything besides the best-tasting coffee.

The decisions are heavily biased towards a complex intersection of relationships and financial incentives - who you know and, more importantly, the upfront commercial benefits available to dispense.

In other words, all those freebies and trinkets are essential for sealing the deal. It sounds emotional, and it most definitely is.

Sadly, a shameful cloud hangs over cafe supply when a relationship has little to do with "product quality" and instead whether a new $17K shiny machine with a pair of $3K grinders is available.

That $20+K upfront offer is only the entry ticket to pre-game entertainment, not the main gig. It enables an aspiring coffee supplier the right to keep on talking, but the deal still needs to be finished.

Whenever I tell people how this game plays out, the best part is watching their faces when they are shocked and amazed. Seriously, how can it be true - shouldn't cafes strive for the best-tasting coffee they ask?

Nope, it stopped working that way in 2009.

With excessive supply against limited demand, you can easily see how a cafe owner can score big time in the "jackpot" of the open market.

After opening bids at $20K worth of newly installed and fully maintained equipment, you won't believe the best part - all packaged as a "free on-loan entitlement". Imagine being given a new Ferrari and allowed to drive it everywhere without paying for the servicing.

Where do I sign?

After a coffee supplier stumps all that capital for the privilege of supply, there's a never-ending demand for training as cafes churn staff more often than people change their undies.

As a deal inches closer to the line, the pricing of coffee and other incentives are horse-traded. A few months of free coffee in exchange for a multi-year contract or some trips to the Gold Coast, all expenses paid, or how about some new signs and LED screens in the cafe; the list of incentives seemingly has no bounds.

Some cafe owners don't care about the coffee they serve or whether they are paying heavily loaded prices per kilo - easily blinded by free umbrellas, wind barriers and crockery offers.

It's a dance that will never be organised or scheduled openly, like a house auction. Instead, deals are done quietly, secretly and deceptively behind the backs of the existing supplier for no other reason than a fresh round of new incentives (and, of course, receiving some new loving attention) despite the existing supplier maintaining a perfect track record in supply and still striving to achieve their basic ROI on the initial supply incentives.

Cafes often change hands suddenly, without notice. The new owners have pre-existing loyalties (a term used loosely) or prejudices towards a different coffee brand. Or they have a friend or relative who works for another coffee company (almost a given these days), feeling pressured to use that brand due to an existing connection or relationship.

Unfortunately, new owners often turn their noses up at the current supplier when a cafe changes hands for no apparent reason. Sadly, this cycle of restaurant flipping with increased frequency means that multi-year deals are often worthless, blowing a hole in the business model where upfront incentives are amortised over the originally agreed timeframes.

It is common to see equipment barely used or less than 12 months old having to find a new home as fussy cafe owners accept only the brand-spanking new gear.

You can't blame the cafe owners; after all, they are only human and succumb to the weakness of temptations that are part of a daily routine. When someone throws incentives at you, you easily lose your head.

Think about it for a moment - almost every day, one or many coffee brand reps make a pitch like those unsolicited phone calls we hate to receive, except cafe owners can't hang up as the agent is right there in their faces!

So, let's get back to those $6 coffees.

Watching cafes prepare to raise the "cost per cup" benchmark for coffee at this time has my head scratching for answers, other than it must be non-coffee cost pressures.

For the record, we are not arguing or disputing their justification for raising those prices.

Historically, cafes tend to exist in a perennial state of fear (or doubt) that a nearby competitor might drop the price of coffee and risk losing all their "regulars".

Changing the price of a coffee in a cafe can be more difficult than deciding to divorce an unloved partner; such are the stakes on this one-way street.

Since the pandemic, there have been a few rises in the price of a coffee beverage, and that's entirely explainable due to all other parts of the supply chain imposing similar increases.

Raw coffee prices have almost doubled in the last three years due to ongoing shortages and global prices that remain at a 20-year high, but those price increases were already applied to the market over 12 months ago.

Roasted coffee represents only a part of the overall price formula required to make that beverage in a cafe. There are equally significant cost elements such as rent, labour, energy, insurance, compliance, milk or dairy alternatives and packaging.

Depending upon the venue, roasted coffee beans may be cheaper than rent, labour or milk for their coffee beverages.

In this latest round of proposed cafe price rises, the actual costs of roasted coffee have effectively zero influence on the cafe's decision to increase its price per cup.

Why coffee brands are not to blame this time

Let's take a look at the record.

We have supplied wholesale clients for 17 years.

In the last ten years, our wholesale price has stayed relatively similar or the same against the backdrop of more than doubling our input costs.

That means we, as the supplier, have been squeezed - not by just a little bit, but we think it's a "big squeeze" and a deep concern shared by the industry.

Wholesale clients enjoy lower prices than 18 months ago. In that same period, energy costs doubled, raw coffee prices remain 35% higher, packaging climbed 20%, and logistics was up 15%.

This type of excessive competition and pressure on the supply side means we must either provide competitive prices at the market or lose. A few bucks are better than zero, and we keep our staff employed, which is our most important concern.

As the wholesale price of roasted coffee has stayed the same in cafes over the last 12 months, we can safely assume that venues are raising the price of their beverage in response to pressures on all other cost elements in their business.

Make no mistake: cafes purchase coffee at exceptional discounts due to excessive competition on the supply side. The ROI on their coffee beverages are healthy. If they are indeed paying higher prices for coffee, it may be due to a negotiated "loaded" deal such as equipment and other contract-based incentives. It will be those loaded components that have skyrocketed in cost the most, like machine servicing.

Cafes can only continue to trade if they act in a climate of rising costs. Escalating labour and rent costs, pushing them to make these changes to their products to remain viable.

Too many cafes, not enough customers, profit per cup plumments.

A few weeks ago, one of Queensland's more prominent coffee identities proclaimed that significant growth in the number of new cafes opening in Brisbane (and QLD in general) since the pandemic has become unsustainable. According to this QLD coffee industry veteran, all these new cafes need to fill their venues with consumers, and the outlets are at risk of not being viable operations because there are not enough customers going into those venues.

The blind obsession with opening cafes without regard to competitive profile means these outlets will continue to suffer from reduced patronage as the nearby competitive forces ultimately result in the pie cut into increasingly smaller pieces.

The comments about Brisbane are no surprise to us here in Melbourne - we have seen saturation since 2012.

The smart cafe operates in search of islands with less competition.

According to statistics, Australians consume, on average, 4.5 kilos of coffee per year, spending around $42 per week or $2,200 per year on this liquid brown stuff.

Academics argue a cup of coffee should rise by around $1 every three years. Whether or not that's justified, we can't comment, but it does seem on the higher side of reality.

It's hard to compare the last three years with any other period before the pandemic, as many cost increases have affected business models in extreme ways.

Ultimately, we dearly hope our hospitality industry can weather the current storm relating to the ongoing difficulties of rising costs and competition, as cafe patronage remains an important feature in our Australian culture.

9 minute read