BeanScene Magazine

As the Australian coffee industry continues to mature and surge ahead, our ability to discern emerging trends is becoming increasingly accurate. BeanScene has canvassed industry leaders with the core questions that will shape the country’s coffee landscape in the coming months. Their views come amid the highest prices for coffee seen in New York trade since 1997 and a 28-month high on the London trading market. Expected unfavourable weather conditions in critical supply markets are expected to keep prices higher in the longer term. With demand likely to keep outstripping supply, we asked the domestic industry what this means for the consumer. We also canvassed views on where the specialty industry is heading, whether supply and demand issues would affect quality, where the barista trade is heading and how smaller businesses will fare in the face of larger corporate staying power.

STEPHEN HURST
Mercanta the Coffee Hunters

I believe the big feature of the coming months and years in the specialty coffee industry will be the growing gulf between the commercial commodity business and the artisan specialty business. The interesting thing is that both may actually do well, or even thrive, but the specialised segment of the coffee business will draw away from the commercial/industrial business at a quickening pace.

This is a phenomenon that we already see in other food and beverage sectors. Micro-breweries thrive while giant multinational brewers buy up global brands and get bigger and bigger. Industrialised food companies pump out ever more products. Meanwhile, artisan market, garden-type of growers/producers are also doing well. While the water aisle in the supermarket takes up more space than the coffee section, this coffee industry will have much work to do.

The price difference of various coffee ‘“products’’ has never been wider – and the gap is getting bigger all the time. Commodity, Robusta typically costs less than $1 a pound, while Cup of Excellence average price is over $10, with the top price over $25 a pound.

I believe genuine 80+ Best of Harvest specialty coffee to still be considerably undervalued and only the pace of change (not the actual outright price value) is a difficult factor as roasters now struggle to adapt to much higher coffee prices – even if, in fact, these prices are still too low.

Genuine specialty coffee has been considerably undervalued for decades, and now the finest coffees will travel to those markets (such as Asia) willing to pay the best prices for the best of crop beans. Artisan specialty roasters in Europe, North America and Australia/New Zealand will have to compete for the finest raw beans with the booming Asian consumer markets.

Unfortunately, there is a supply/demand imbalance in the coffee world – supply is booming, buoyant in coffees like Robusta that are in less demand, while soaring prices for finest award-winning beans such as we see at Cup of Excellence indicate a shortage both at this level and slightly lower. Colombia’s significant loss of crop has led to worldwide Arabica shortages and blend/recipe alterations among the larger roasters.

Risk management has not featured on the radar of the specialty coffee industry. Some less experienced, small niche roasters prefer to rely on pure happenstance and luck for the fulfillment of their contracts – failing to understand that cash buyers in the internal markets at origin will buy the very same coffees at the farm gate for more than the earlier negotiated prices on a FOB Cash against documents basis. Some ethical buying programs will also suffer a significant non-fulfillment problem, since this is already happening. Minimum support prices are a noble and worthy effort in a depressed commodity market, but have far less relevance in a booming market.

We at Mercanta have always felt that a direct trade relationship-based model will survive all climates and recent events have proven this to be correct. The price matters. The relationship matters more.

DEAN MERLO
Merlo Coffee

Firstly, I believe we will see really creative and fun retailing. I can see loyalty programs expand and relationship marketing increase. I see the café becoming more of a social hub and happy hours becoming popular. We do a “toss the boss” or “flip for free” at a down part of the day, say 2 to 3pm where we flip a coin and if the customer wins their coffee is free, and if we win, its regular price, effectively making it half price. It has proven to be very popular.

The demographics of increasing market share are under 25 and over 60, so there may need to be a two-pronged approach to market to these increasing groups. Certainly, our main focus will be online sales for 2011, as we see this market as unlimited as general buying online continues to become more accepted. It is said to be growing at 30 per cent a year.

I am seeing a trend towards healthier alternatives with less full cream milk and sugar, whether it is being replaced by skim milk, soy milk, or just shortened to a mezzo mezzo (piccolo latte) or espresso. I am seeing much more artificial sweetener and raw sugar consumed. I am seeing round cakes replaced by bar cakes, slices and biscotti. The sweets are being homemade to stand out as people will continue to look for something special. I am also seeing a massive increase in demand for gluten free goodies.

ANDREW FORD
MTC Group

What we’ll likely see this year are reduced supplies, and certainty, of green coffee, tighter credit through the entire coffee chain and continued global demand at the macro level and in the fast growing specialty coffee sector. Global coffee production is not keeping pace with demand and the 2011 crops in Colombian, Costa Rica and Guatemala have all been affected by disease, flood and ultimately reduced yields, with Brazil due for its biennial “off-year” with reduced production.

This will lead to higher green coffee prices and will in turn mean greater demand for credit to fund coffee globally. The price of coffee is already double what it was in June 2010 and everyone in the supply chain will need twice the credit to run their businesses in 2011. This could be tricky in a global economy where credit is already tight.
I see higher prices and the credit squeeze directly affecting any business without cash, making it especially difficult for smaller and newer players competing with multinationals.

A potential flow-on effect of higher green coffee prices and tighter credit is for roasters to downgrade the quality of the coffee they purchase, ultimately resulting in a poorer consumer experience. 

Finally, as green coffee prices rise, there becomes less incentives for farmers to produce specialty coffee; for example, a 10 cents a pound premium over a $1 a pound farm gate price is a big incentive for a farmer. The same 10 cents a pound on top of a $2 a pound farm gate price becomes less incentive. This will ultimately have a flow-on effect to the production of specialty and micro-lot coffees. I definitely see green coffee prices continuing this upward trend for several years to come.

TOBY SMITH
Toby’s Estate

In Australia we’re definitely going to see a more underground push for delivering black coffee in a different brewing method than espresso. There is also an increasing number of people who want to drink coffee without milk and a larger percentage who are sharing that general consensus. Over the past few years we’ve seen a stronger inclination to consume espresso at home with fresh beans and so, we’re seeing an increasing number of grinders at home. Gone are the days when people would go out and buy an espresso machine without a quality grinder.
There are so many cafés on the streets now, it’s easy to get an espresso. So, what we’re seeing is the increasing popularity of brewing methods, such as filter, aeropress, syphon and plungers. I think it’s now time that people will start experimenting with these different methods. With brewing, equipment and transportation is cheaper. And, espresso machines take a lot of space on the counters of tiny city kitchens. These sorts of brewing methods can best display top quality coffee beans when being drunk black. 

BILL COMLEY
President AASCA

I see the specialty coffee industry playing a more important role in the overall industry in driving trends and development. It’s like the Grand Prix. Even if not everyone wants to drive a formula one car, they have certainly helped develop better brakes. The mainstream companies are starting to pay attention to what speciality coffee is doing. For instance, we see Douwe Egberts now offering seasonal coffee and Lavazza making coffee pods. It is quite interesting to see companies focusing more on freshness, styles and trends.

As coffee prices increase, we are also seeing more people dealing with direct trade. For example, McDonald’s is now using their Rainforest Alliance coffee as a major promotional tool. We’re also seeing more small to mid-sized companies looking at direct trade as a way to lower their costs while continuing to provide quality.
I think we may see more cooperatives among small roasters. It’s becoming more challenging for smaller and medium sized businesses and they’re going to suffer because they don’t have national coverage and the same support as multinationals. It will certainly be quite interesting to see the way things go.

From a technological point of view, we’ll see more high technology machines and multi-boiler machines. I could even see there being too much reliance on equipment and less emphasis on staff. Instead, there should be a greater emphasis on training. What I’d really like to see is coffee developing into a recognised trade, where a person would be trained right through from barista to roaster. It would be wonderful to see, but I think it’s more pie in the sky.

PHILIP DIBELLA
Di Bella Coffee

Some of the key trends we’ll see in 2011 will be related to the fact that green bean coffee prices are the highest they’ve ever been.

The negative effect from this is we’ll see lower quality coffee being sold by companies that are reluctant to increase their prices. Companies will downgrade to cheaper equipment, cheaper cups, and so on.

Good companies will continue business as usual, but prices will be dearer. There will be those companies that try and take some new business by keeping their prices down.
The price of milk will also likely increase and I think we’ll see more black coffee being drunk. It doesn’t make sense to charge the same prices for an espresso as it does for a flat white and I think a lot of businesses will see this. Because of this, I think we’ll see a lot more espresso being drunk, as the prices will push people to make the change.
I think we’ll also see a lot of boutique coffee companies being sold to big multinationals in the next 12 months. Companies that are doing well will cash in their chips and those on the downward slope will look to get out.

At Di Bella Coffee we’ll be introducing an alternative to instant coffee and that’s a natural instant espresso. We’ve also noticed at Di Bella Coffee a shift to convenient online shopping, which is getting stronger not only by the week, but by the day. There are a few other companies now doing business online.

We are also seeing baristas get stronger, as the battle to work in the best companies and cafés has begun. There used to be a national shortage, but companies have been doing some great training and as a result we’re seeing some great baristas. This has meant more competition. Baristas are no longer ruling the world, and to get the good jobs they’ll have to settle for the amount of money that’s on offer.

As far as machinery is concerned, I think we’ll see a move away from brand names and a switch to choosing what’s operational instead of only the biggest names.

CRAIG DICKSON
Veneziano Coffee

You will continue to see the increase in specialty coffee on a multinational scale. We’ll also see a continuous influx of micro-roasters. It is a trend definitely happening in Melbourne and we’ll probably see it continuing to push into the rest of the states.

We’ll certainly see some awesome single origins coming to the country and they will push into cafés. Different brewing methods are also starting to peak out a bit. I’m not sure how far they’ll go, but there are a lot of these single origins that are roasting better as filter coffee than espresso. 

This year the biggest challenge will be the high cost of green coffee. Roasters will have two choices. The first will be to downgrade the quality of their product. However, since we’re seeing a trend of the whole market upgrading, I think the second choice will be for roasters sourcing directly their own quality beans. By going direct to the origin, they’ll make deals with the growers to secure a supply of quality beans and be less influenced by coffee brokers.

A big challenge will be how to lead with the price increase, with costs of green beans up 30 to 40 per cent. The big question is: How to put that onto the consumer? I think that by educating consumers this will help them understand why prices have to increase to maintain that pride in quality beans.

Fingers crossed, the bubble will hopefully burst, but I don’t see that happening any time soon. Global demand is outstripping supply in the specialty market, which is around 15 per cent of the market. Growers understand this, but it will take them a few years to catch up. I think educating the customer about this will be a real challenge. Café owners don’t want to cop it, but the consumers are going to have to pay and I think we’ll see the $4 cup of coffee.

ANDY SIMPKIN
Belaroma Coffee

Where is the bench mark NY “C” going ? This really is the billion dollar question that many in the coffee industry are currently struggling with.

At this time last year with the “C” at 132 US cents a pound, and with the Australian dollar at 88 cents to the US dollar, things were pretty comfortable. Prices were close to production costs and we seemed to have come (as an industry) through the global financial crisis fairly well. But, storm clouds were starting to form even back then.

From the producer’s perspective, prices have been marginal for the last few years and input costs – fertiliser and oil – have increased. Where local currencies are linked to the US dollar, Vietnam and Central America in particular, the situation was exacerbated. As local currency prices for green beans were falling, this has made planting and production less attractive.

Add to this a short term fall in production from Colombia, the world’s third largest producer after Brazil and Vietnam, as well as an off year of the biennial cycle in Brazil and toss in low stocks in exporting countries and prices naturally tighten.

Add to this cocktail a general strength in world commodities with the overall index raising by 35 per cent since June 2010, with food shortages adding to the background perception and then toss in large amounts of speculative money betting that commodities are a safer place than the US dollar (threatened with further quantitate easing) or equities and you have an 85 per cent increase in the coffee market Arabica index in 12 months. 

So where to go from here? I would recommend to the seriously interested an article from The Economist, “Material Concerns,” by Buttonwood in which the Commodities issue is succinctly discussed.

The bottom line on where the Commodity market goes now is, from The Economist’s perspective, that the bubble may burst or we are experiencing a “commodity supercycle, a long term surge in prices that might last for 15 to 20 years”. My current view is that the market will top out fairly soon and that prices will ease, but not back to the 130/140 US cents a pound we had become accustomed to. As countries such as China, India, Vietnam, Indonesia and Brazil all become greater consumers of commodities generally, we will see ongoing growth in demand for coffee and it will take the producing countries three to five years to start to react in a meaningful way. With coffee prices at their current level, more coffee will be produced as bushes are picked within an inch of their wellbeing and this will, in classic commodities terms, slowly ease the supply/demand situation.

Will there be a reduction in consumption to move the market downwards? Not in my opinion one that will be significant for quality coffee, as nearly 60 per cent of coffee consumption is in developed countries and demand is predicted to stay flat. 
The impact of the 85 per cent increase in green bean price is felt very much on a sliding scale within the coffee industry. For the producers/growers the impact is huge and some would say long overdue. For the brokers and coffee roasters it is significant given that a container of coffee costing $70,000 to $90,000 last year now costs $130,000 to $170,000. But for cafés, a $2 to $3 per kilogram increase on their roasted coffee price equates to 3 to 4 cents per cup, which most café operators are already passing on to the customers.