COFFEE MEMO: It's Been an Espresso Drink Recession
Mike Ferguson, Fresh Ground Consulting
The coffee industry has long considered itself recession proof and economists, to the degree that they believe coffee to be a cousin to vice, agree. They consider demand for coffee in general (caffeine more specifically) as “inelastic,” meaning consumers are reluctant to substitute another product regardless of a rise in price or, similarly, a decrease in their ability to pay. And despite several significant economic downturns within the 30- to 40-year lifespan of the specialty coffee industry, quality coffee has demonstrated inelasticity. Retailers and their suppliers and manufacturers have not only survived difficult economic environments, they’ve even prospered.
But the current economic downturn has seen the limits of inelasticity for prepared specialty coffee, if not coffee in general. Across the board, coffee retailers report drops in beverage sales. This is an important point and bears repeating because it holds clues to the future. “Elasticity” is being experienced in the marketplace for “prepared” beverages, the coffee drinks we have others make for us. Consumers are substituting, not another base product, but another preparation and finished product, opting for a less expensive method at retail (i.e. drip coffee) or making it themselves.
In a recent survey conducted by the Specialty Coffee Association of America, among retail respondents that had whole bean and ground coffee sales in 2007, 67 percent report an increase in sales for this category in 2008, roughly the same number (62%) reporting an increase in beverage sales. However, while 20 percent of retailers report a decrease in beverage sales, only 12 percent report a loss in whole bean and ground coffee sales. While not one respondent reported a loss of more than 15 percent in whole bean and ground coffee sales, one out of four respondents reporting a loss in beverage sales indicated a decrease in excess of 15 percent. And finally, while 16 percent of respondents report a drop in drip coffee sales, 24 percent report a drop in sales of espresso-based beverages.
Like all numbers, these are open to many interpretations. What I see is that milk and sugar, true to their commodity status, are demonstrating their elasticity. When push comes to shove, consumers can do without them, thank you very much. But when it comes to quality coffee, consumers are less likely to compromise.
At the end of the day, the economic viability of the specialty coffee retail sector as it has evolved is dependent on more than coffee alone. I believe that consumers will return to their sugar and milk when they can, though I suspect, and even hope, that a large percentage might just stick to drinking more black drip brewed coffee and, perhaps, brewing it themselves with a new respect for that process.
How many coffeehouses remain to greet the sugar and milk refugees when they return may depend more on the inelasticity of everything they sell that isn’t coffee, all the products that consumers can find elsewhere for less. If you have been known for your coffee above all else, I’ll put my money on you. If you have been known for sandwiches, smoothies, CD’s, ceramic this-and-that, open mic night, or anything other than coffee, I can only wish you the best of luck.
This piece by Mike Ferguson originally appeared in Specialty Coffee Retailer Magazine