In recent weeks, there has been multiple media headlines from journalists explaining why they will never pay $7 for a cup of coffee. An example was recently in The Age by journalist Julian Virgona, who wrote ‘Melbourne’s coffee culture is overrated, but this is the nail in the coffin’.
While TR Consulting is industry agnostic, we work with a number of humble hospitality providers and it is hard not to see the battling café as a representation of the average small business in Australia. As such, reading these subscriber grabbing headlines causes a level of frustration - evidently enough to warrant a response, i.e., this piece!
So firstly, in this case, the writer lost me when he advised that for the last year, he had not purchased a coffee since receiving a Nespresso Machine (“why pay for anything else when I can have a quick, tasty coffee at home for about 80 cents a pod?”) So, to be direct, you are not the coffee connoisseur you claim to be if you are seriously comparing a Nespresso coffee to a trained barista made coffee on a shiny La Marzocco coffee machine. The Nespresso milk frother does not have the barista’s touch of feeling the right temperature for the milk or the early morning dedication of dialling in their machine.
While we could debate and digress forever, the point of the observations is that a home prepped 80 cent coffee does not include the cost of milk or the fun of doing the dishes (particularly cleaning the burnt milk off that milk frother). Additionally, unless you are one of the last remaining climate change deniers, these pods are awful for the environment. According to a post last year in the New York Times, “recent research conducted by a UK-based coffee brand found that, of the 39,000 capsules produced worldwide every minute, 29,000 of them end up in the landfills.” To any fellow number cruncher out there, that’s a lot of rubbish hidden away in poor Mother Earth. Comparatively, most cafes currently send their used ground beans to companies such as Reground who will put it to good use.
Back in 2018, we conducted the Café Owners Industry Sentiment Report and then revisited our findings by contacting our sample of respondents (café owners). The report highlighted the paper-thin margins owners operated in, and that cafes were in fact not passing on the full CPI increase. The average Melbourne latte cost $3.94 in 2018, and in 2021 that same latte cost $4.07 (3.3% over 3 years). However, consumers have to accept inflation has and always will exist and impact the price of all goods.
Now, to get back to why the price of coffee needs to increase. Currently, as found in IBIS World’s Cafes and Coffee Shops in Australia (2021) industry research report, the average café in Australia was making a net profit of only 2%. Most café owners pay themselves through profits of business, so for the average café turning over between $500,000 - $1,000,000 that’s $10,000 to $20,000 based on current industry performance. Remembering that small business owners are the only ones not restricted by minimum pay and hours worked, such remuneration is clearly not sustainable. Over the three years we completed our Café Owners Industry Sentiment Report, we found 19% of all establishments surveyed ceased trading.
So, why should we all care? Well, it’s important to remember that small business really does underpin the health of our economy. There are 2.1 million actively trading businesses (97% are small business) and they employ 5 million people (44% of all people employed in the private sector). So, if the balance of the economy is not right, there will be flow on effects that impact all of us.
Hopefully with this knowledge, you will be less concerned about your $5 latte and more understanding of the labour, rent, milk, cup, utilities, dishwashing, equipment and beans that went into your humble cup of coffee.
Remember - you are not paying for the coffee; you are paying for the convenience or the experience, whether that be 10 minutes of peace or just a friendly chat with your hipster barista!