Coffee, Commodities and Pricing Shenanigans

After yesterday’s link from the Seattle Times, I got an interesting comment from Luke about coffee and commodities.

The majority, if not all, of these roasters do not purchase coffee from the commodity market. Many of the roasters (notably Stumptown and Intelligentsia) on this list pay the highest (far beyond commodity prices) on average for exceptionally great coffees. They pay a higher price for quality directly to farmers. Intelligentsia also directly imports their coffees so what you are drinking was actually on a tree within the past couple months.

After reviewing my post and the Seattle Times article, I realized that I wasn’t being clear and that is my fault. By commodities, I didn’t specifically mean coffee commodities, but the basket of commodities that influence all food pricing.

Oil is the primary driver of all commodity pricing. After the run-up of oil last summer, food prices spiked. Corn, wheat, soy, etc. Because we need to move the food across far distances, higher oil prices will put upward pricing pressure on all food, even things purchased Farm Direct.

Last summer oil was $140/bbl. Today it is $70/bbl. There are several financial news stories out this week that discuss how food prices are falling. It only makes sense. Food prices move with oil, with a slight delayed effect due to futures contracts. From the post Queen of Coupons Feeds Family for $10 a Week; Grocery Price Wars Intensify; Paperless Coupons by Mish:

Grocery price wars are heating up. Jewel, Dominicks, Safeway, Sam’s Club, Meijer, Walmart, Vons, and Ralphs are all in on the action.

He also quotes The LA Times:

Already having cut prices for much of 2009, Vons, Ralphs and Southern California’s other big chains are gearing up for a new round of reductions as they seek to win back shoppers and market share.

The region’s big grocers, already having trimmed prices for much of the year, are gearing up for a new round as they seek to win back budget-minded customers who have migrated to discounters such as Wal-Mart Stores Inc. and Target Corp.

Vons will announce today that it is lowering the prices of about 5,000 items — about 15% of the store — at its 274 stores in the region.

For upper end coffee to still be increasing in price as food and every other asset class declines strikes me as difficult to comprehend. With high unemployment, labor costs are flat at best. Energy costs are lower than last year. Commercial real estate is flat if you are stuck in a long term lease, but lower in many cases. I’ve already covered oil. And although the US Dollar has depreciated against the YEN and EURO, it has more buying power in many coffee growing regions.

All this should translate to flat or even lower costs to the consumer. Yet, I’m seeing 10% increases in many cases since last year, yet I see no justification for it. Just where are the cost price increases? Perhaps I’m missing something. I do know 2 things.

  1. One Seattle roaster saw my May 2009 Espresso price list and then raised his whole bean price 50 cents a pound, because he was priced lower.
  2. Zoka switched from a 16oz pound to a 12oz “bag” which they stated was “a pound”.

There are two ways to put more cash in the register. You either increase your customer base through competition and marketing or you squeeze the customers you already have a little bit more. Sadly, I am seeing more evidence of the later.

UPDATE: Sep 10, 2009 – I have learned from Seattle Coffee Works that African coffee went up in price last year, which is often a significant component to espresso blends.

UPDATE 2: Sep 11, 2009 – Zoka has updated their website with accurate packaging size information.

Sources:

Seattle Whole Bean Espresso Prices – May 2009 – A post I now regret, as it signaled a few price increases.

I Call Coffee Shenanigans -The 12 Ounce Pound – How Zoka slipped in a price increase by redefining the ounces in a pound.

Queen of Coupons Feeds Family for $10 a Week; Grocery Price Wars Intensify; Paperless Coupons – Mish’s Global Economic Trend Analysis

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MAS

Critical MAS is the blog for Michael Allen Smith of Seattle, Washington. My interests include traditional food, fitness, economics, and web development.

3 thoughts on “Coffee, Commodities and Pricing Shenanigans”

  1. Commodities. Inflation. Asset class. Oil, corn, wheat, and soy. Energy costs. Unemployment. Commercial real estate. Yen. Euro.

    Michael, I hear what you’re saying, but you’re apples-to-orangesing (to coin a verb). You’re mixing macro- with microeconomics.

    The segment of the coffee industry that you’re focused on is representative of the highest-end of the broader specialty-coffee industry, and the value to the consumer has little to do with those macro-economic issues you’re focused on.

    A specialty good like the coffees you’re looking at shouldn’t be priced based on “cost-plus,” should it? More appropriate would be value-based pricing, don’t you think?

    You’re asking good questions though!

  2. I brought up commodities originally, because it was used as an excuse for the 2008 price increases. It was valid then, but not valid today.

    When I moved from San Diego to Seattle, there was a huge jump in the quality of cafes and roasters. It was enough of a benefit for me to go from being a home roaster to a customer of these 3rd Wave businesses. My expenses went up, but it was worth it.

    As the price increases continued, it was enough to drive me (partially) back to home roasting. Can I roast better or pull better espresso shots than the top shops here in Seattle? Of course not. However, at a certain price point, the differential is too great to be justified.

  3. Thank you so much for posting this. I dislike ability-to-bear pricing in all of the products I buy.

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