Do consumers have a price threshold for coffee?

Shopping for groceries these days is like playing an unenjoyable and often shocking ‘food and beverage quiz game’ — one in which consumers are guessing just how much prices have increased since their last shopping trip. Coffee is no exception. In fact, data shows that coffee prices increased earlier than prices in most other beverage categories. This has been attributed to green coffee prices rising more, and earlier, than most other beverages did — up 20.2% in November 2022 alone per IRI/Rabobank data. Within coffee, whole bean/roast and ground coffee are seeing the biggest increases in pricing, because green coffee is a higher percentage of total cost than in other coffee categories. (Rabobank did note that CO2 prices are now starting to put more pressure on other categories, especially the carbonated soft drinks segment.)

With further cost and price increases expected in 2023, how will consumers react?

In a new report, “Coffee and Other Things,” Jim Watson, executive director of beverages, Rabobank, says that regarding price, coffee is among the least elastic beverages, meaning that coffee volume is holding up rather well to all of the price increases. Referring to IRI data, Watson explains that coffee volume for the last three months of 2022 is only down mid-single digits versus the same period last year, while price increases were in double digits. It is the lowest-priced (entry level/bottom tier) whole bean/roast and ground brands (in the United States but is likely the same in many other countries as well) that are being hit the hardest, which he says doesn’t come as any surprise. “What is surprising is the absolutely massive price increases that Folgers is making.” The IRI/Rabobank data reveals Folgers prices surging 50% higher.

Beverage Pricing (Source: IRI/Rabobank)

Noting the exorbitant increases, Watson writes, “I have been a beverage analyst for 16 years and have never seen price increases this large. The huge price increase for Folgers has caused a significant volume decline (-17% in the last quarter) but that still results in a massive increases in dollar sales, well-above their long-term trend.”

Maxwell House, according to Watson, “‘only’ took a 35% price increase, and is likely benefitting from a smaller price gap with Folgers. Maxwell House roast and ground coffee has lost about one-third of its sales in grocery over the last four years but is suddenly on pace to see value grow almost 20% in 2022.”

Rabobank does not foresee cost pressures improving any time soon, noting that its green coffee forecasts show a slight decline from current prices, which are below 2022 levels, but well-above the previous 10 years.

Rabobank, along with economists, financial experts and market research firms, all see labour, energy and packaging cost pressures remaining high. Watson further explains that there are several competing narratives in which coffee segments will likely be hit hardest in a downturn. “Typically, the mid-tier would be most impacted, given the ease of trading down to value brands. However, in the current context, the fact that green beans are such a large percentage of cost of goods sold (COGS) for lower-priced roast and ground coffee, will likely mean that the lower tier of coffee will be hit the worst in the US,” he says.

Watson further explains that this potential recession is different (for now) from previous downturns, in that we are still in a relatively tight labour market with notable wage inflation and layoffs in generally higher-paying jobs. “In this scenario, the roast and ground coffee segment may have more room to increase prices than we would normally see. Overall, the consumer has proven resilient so far, but the higher input prices are taking a toll. We see margins coming down in the US – though the data is rather messy and impact varies widely from company to company.”

Rabobank reports that generally, top-line growth has been strong, but projects cost pressures to continue next year, hence, many companies that are taking margin hits so far this year will likely face more pricing pressures next year.

“We are seeing wage growth and employment figures rebound to above pre-pandemic levels. However, consumer confidence (Conference board survey) shows wide disparity, where consumers have positive views of their ‘present situation’ versus more negative future expectations (that approach levels normally seen before a recession),” says Watson in the report. “It feels as if the consumer is healthy for now, but we are all waiting for the other shoe to drop.”

Rabobank finds that as there are margins to protect, it expects further price increases at levels well-above historical norms in 2023. “The positive performance of Folgers and Maxwell House speak to the resiliency of the value consumer. Perhaps we are learning that there is more latent brand value in these companies than we expected,” Watson explains. “Coffee price increases have long lagged other beverage categories, and a big increase in prices for value brands could be the impetus to push away from that status quo.”

However, there could be a threshold for how much consumers are willing to spend on their ‘daily indulgence’. In supermarkets, consumers may start trading down, in which case, as Watson mentioned, the lower-priced/tier brands may be impacted. Using the ‘Great Recession’ as an example (in the U.S. only), those lower-tier brands that consumers were not familiar with as they did not enjoy the recognition multinational and/or national brands had (across a broad range of grocery categories, not coffee specific), suffered as consumers purchased the ‘house brands’ of stores they liked and trusted (from Walmart, to Target, to Kroger, to Whole Foods, etc.) instead. Many of the lower-tier brands never recovered and private label brands from ‘favourite’ retailers have continued to flourish.

It would not surprise me if this happened with coffee as grocery retailers continue to invest in and upgrade their private label coffee assortments. Of course, we should not underestimate coffee lovers — they may be willing to continue to pay higher prices for their preferred coffee brands. We’ll just have to wait and see…

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