The Rising Cost of a Daily Ritual
In London’s Kew Bridge, a vintage Italian coffee cart serves an iced latte for £4.50, a 10 oz latte for £4.10, and a 6 oz flat white for £3.90. While these prices might seem steep, they are becoming increasingly common across the UK, with even chains not using the highest-grade beans surpassing the £4 threshold. A large coffee with alternative milk in central London can now approach £5. This trend mirrors sentiments in the US, where Starbucks CEO Brian Niccol faced criticism for describing a $9 (£6.68) experience as “really affordable premium.” Anthony Duckworth, operating the cart, acknowledges the pressure, stating, “We feel super strongly about keeping the price of a flat white under £4 for as long as possible. But it’s becoming increasingly difficult, because every part of the supply chain has become more expensive. We think there’s a really important psychological threshold around that four pound mark.” Coffee, more than just a morning beverage, serves as a microcosm of the global economy, reflecting issues from commodity inflation and trade disruptions to geopolitical tensions and evolving consumer tastes.
A Complex Global Supply Chain
The journey of coffee from bean to cup is a complex one, with its modern iteration beginning in Turin, Italy, in 1895 with the development of steam-powered espresso machines. Giuseppe Lavazza, whose family has been in the coffee business for 131 years, emphasizes the need for adaptability in his industry. He is exploring innovations like a coffee cookie, or “tabli,” to cater to the at-home market without relying on environmentally questionable pods. The coffee industry has faced significant challenges recently, impacting both major types of beans: arabica and robusta. Arabica beans, prized for their sweetness and aroma, are hand-picked at high altitudes in regions like Brazil, Ethiopia, and Kenya, a process akin to harvesting grapes for fine champagne. Robusta beans, known for their higher caffeine content, are machine-harvested and Vietnam has become a dominant player in this market since the 1970s.
Climate and Geopolitical Shocks
In recent years, a confluence of climatic events and geopolitical factors has driven the prices of both arabica and robusta beans to multi-decade highs. In early 2024, Vietnam experienced its worst drought in decades, with rainfall plummeting by 30%, compounded by a typhoon during the harvest season. Brazil, meanwhile, is still recovering from a severe frost in 2021 that damaged its arabica crop. These events led to arabica prices peaking above $4 per pound last year, a significant increase from its historical average of around $1.20, though it has since settled at $3.08. Robusta beans saw an even more dramatic rise, reaching $2.59 before settling at approximately $1.56. Both bean types are now considerably more expensive than they were before 2020. Giuseppe Lavazza describes the past few years as an “unprecedented time in terms of complexity and troubles,” and anticipates that prices will remain elevated for at least a couple of years, requiring substantial new crops from Brazil and Vietnam to stabilize market conditions.
Market Speculation and Farmer Behavior
The coffee market is also influenced by speculation. Vietnamese coffee farmers now routinely check their smartphones at 4:30 AM for real-time and predicted prices of robusta beans. The US government’s Foreign Agricultural Service in Hanoi notes that the easy availability of online price information encourages many farmers to store their beans post-harvest, hoping for future price increases. This behavior effectively turns farmers into market players. All eyes are on Brazil’s July harvest, with some analysts predicting a strong arabica yield that could lower prices. However, the potential for a strong El Niño event this autumn could introduce further volatility.
Trade Wars and Tariff Impacts
Donald Trump’s tariffs, imposed on coffee-producing nations, added another layer of disruption. Vietnam faced a 46% tariff, Indonesia 32%, and Brazil 50% (an increase from 10%). This policy disproportionately affected the “coffee belt,” which also became a “tariff belt.” Brazilian exports to the US plummeted by more than half last summer. Consequently, prices for beans from countries with lower tariffs, such as Colombia, increased as American suppliers sought alternatives. Consumers in the US experienced the impact directly, with roasted coffee prices surging 17% in the year to March, and instant coffee rising by a near-record 25%, outpacing gasoline prices and becoming the fastest-rising item in the inflation basket, excluding fuel oil. A bag of ground roast coffee that cost $4.30 in 2020 now costs $9.61 and is projected to reach $10, disproportionately affecting lower-income consumers who rely on cheaper coffee options.
Policy Revisions and Shipping Disruptions
In response to public pressure and rising prices, Donald Trump signed an executive order in November of the previous year, exempting coffee beans, bananas, and beef from his tariffs. This situation highlighted potential flaws in the White House’s tariff strategy, as Vietnam’s coffee dominance is largely attributed to its comparative advantage—climate and labor costs—rather than unfair practices. The idea that tariffs would reshore industry is also largely inapplicable to coffee, which requires specific subtropical climates. The chaos in global shipping has further exacerbated the situation. Vessels carrying Vietnamese beans to Europe must now take a significantly longer route around the southern tip of Africa to avoid Houthi threats in the Bab al-Mandab Strait, adding approximately 4,000 miles to the journey. Additionally, new EU anti-deforestation regulations, set to take effect in 2026 and 2027, require Vietnamese and Brazilian suppliers to provide GPS coordinates of their plantations. EU officials will use satellite imagery to verify that beans do not originate from land deforested within the last five years. While these policies have been delayed, they are already imposing costs on farmers.
Consumer Resilience and Premiumization
Despite the escalating prices, consumer demand for coffee remains remarkably resilient. This phenomenon, known as inelastic demand, means that consumer behavior is not significantly swayed by price fluctuations. Giuseppe Lavazza notes, “We saw that despite the high prices, people love having coffee. We don’t see any significant decrease in terms of volumes in the most important countries.” In an era of heightened costs, consumers are exploring diverse ways to enjoy coffee, including the growing popularity of cold brews, particularly among younger demographics. This trend aligns with the concept of “premiumization,” where brands enhance their products’ perceived value to justify higher prices. An example is the chain formerly known as Blank Street Coffee, which rebranded and now emphasizes a curated customer experience with elaborate concoctions, positioning its baristas as “brand ambassadors” to support premium pricing. Some establishments have even shifted focus from coffee to other beverages like matcha, appealing to younger, health-conscious consumers with its vibrant color and milder caffeine content.
Technological Adaptation and Cost Control
In China, Luckin Coffee, founded in Beijing, is rapidly expanding and challenging Starbucks’ global dominance. Luckin leverages sophisticated data analytics to understand customer preferences based on time of day and weather conditions, offering personalized options for sugar levels and milk ratios. Their business model prioritizes rapid caffeine delivery through app-ordered services, with cafes designed for efficiency rather than extended stays. Luckin is also expanding into the US market. On the other end of the spectrum, the British chain Greggs maintains low prices, around £2.40 for a regular latte, by utilizing automated Swiss bean-to-cup machines. Greggs has become Britain’s largest coffee provider by outlet numbers, surpassing Costa.
The Future of Coffee Pricing
The current coffee market presents a dichotomy: a supply chain strained by climate issues and geopolitical tensions is driving up prices, while a dedicated consumer base remains willing to absorb these increased costs. While commodity price surges have a significant impact on supermarkets, their effect on cafes, which increasingly focus on selling experiences, is less pronounced. Consequently, coffee prices are expected to remain relatively stable, even if harvests normalize and raw coffee prices decline. The £5 large latte, therefore, may become a permanent fixture in the coffee landscape.
