Charge $7 for a coffee? Some stressed-out cafe owners would rather shut down

If you’re paying anything less than $5.50 for a small cappuccino in Australia, coffee roaster Pablo & Rusty’s chief executive Abdullah Ramay reckons you’re getting a great deal.

“The cost of this thing should’ve been $7-plus. If you’ve been buying coffee for $4.50 … the cafe’s been subsidising,” he said. “You should thank your cafe owner and barista; you’ve been getting the bargain of the century.”

Specialty roaster Pablo & Rusty’s chief executive officer Abdullah Ramay.

A coffee, made to order using skilled equipment, special beans, and a trained barista, is not a commodity, Ramay insisted. “I want to shout this from the rooftop: cafes are not selling a product, they’re selling a service.”

Over the past 18 months, price inflation from virtually every direction has pushed the cost of coffee higher and into the headlines. As consumers pull back their spending to deal with cost-of-living pressures, cafes have faced a double whammy as average order sizes shrink while the cost of doing business has swelled due to higher expenses including rent, energy, wages, equipment and packaging.

That’s without factoring in the rising cost of coffee itself, which only comprises 56¢ – or 11.5 per cent – of a cup that costs $4.88, according to Pablo & Rusty’s calculations. The price of a cup in Australia, at an average of $4.83, is notably lower than what you’ll find in other countries such as the UK ($6.31) or the US ($7.41), data from payment business Square shows.

Ramay believes cafes have been shouldering rising input costs for nearly a decade, but the pandemic’s flow-on effects have pushed these pressures past a tipping point.

“What’s forced the issue is that it’s just no longer sustainable. A lot of cafe owners are afraid, they’re petrified,” he said. “They don’t want to disappoint their customers. They also don’t want their customers to leave: ‘What if I put my prices up, and the person next to me doesn’t?’

“It’s like a Mexican stand-off.”

For the first time, Ramay is hearing of operators of successful cafes deciding to deal with another rent increase by handing the keys back to their landlords.

“They’re not insolvent,” he said. “They’re like, ‘this is too hard … I can’t make this work, here’s your lease back’.”

What’s pushing up coffee prices?

The global commodity price of arabica coffee broke all-time highs in mid-December, hitting nearly $US3.50 a pound ($5.62 per 456 grams) to its highest level since 1972. Unfavourable weather conditions in Brazil and Vietnam – which together make up about half the world’s coffee production – over consecutive years have resulted in a global shortfall.

An extended drought in Brazil, which produces half of the world’s arabica beans, means the South American country is now expected to produce 34.4 million bags of arabica beans, 11 million lower than September forecasts, making it the fifth year in a row that production has lagged demand. Meanwhile, Vietnam – the world’s largest robusta coffee exporter – has also had disruption caused by heavy rain and farmers who are hoarding beans.

As the popularity of coffee grows in Asian countries, the outstripping of demand against supply has forced global giants Nestle (which owns Nescafe and Nespresso) to shrink pack sizes and raise prices. Italian company Lavazza raised prices across 2024 and doesn’t expect prices to fall until mid-2025 at the earliest.

“When Brazil and Vietnam sneeze, the rest of the world gets the coffee deprivation jitters,” said ANZ agribusiness insights executive director Michael Whitehead.

“The big companies need to be making sure that they will have supplies to keep going in the months ahead, just in case some of the crops come off even worse than forecast.

“We’re not going to run out – we didn’t run out of chocolate on supermarket shelves when cocoa went to record highs. However, you did go in and find it was more expensive.”

Australia-based coffee roaster Toby’s Estate, which sources 80 per cent of its coffee beans directly from growers, is seeing climate change affecting where farmers are planting coffee trees. Every year, a small team visits the suppliers, spending hours in a truck to visit coffee farms where they taste hundreds of coffees a day.

Toby’s Estate uses coffee cards to achieve a certain flavour profile.

“[It] might be in the middle of the mountain where all their coffee used to come from and [now] they’re going to the next level up because they need to maintain a certain climate for the coffee trees to produce what they needed to produce,” said Toby Estate’s head of coffee Nicholas Rae.

“You’re seeing regions that historically weren’t applicable for coffee because it was too cold are now really good for growing coffee … whereas some of the more classic regions that were really renowned for producing high-quality coffee [are] becoming too hot and it’s not viable,” he added. “For [the farmers] over there, that’s a really big shift.”

Toby’s Estate maintains the consistency of their blends and single origin coffees through “coffee cards” that break down the flavour profile, decoupling it from specific regions. “[Growers] select coffees from their farm and then build that profile and then give it to us. It’s not like we’ve had a really bad season, we can’t sell anything,” said Rae. “They can mix and match to give the profiles that they need customers.”

Long-standing supplier relationships and higher-than-market rates ensures specialty roasters such as Toby’s are at the top of the pyramid.

Toby’s Estate roasts their coffee beans inside their flagship Chippendale store.

“[When] there’s not enough coffee to go around, we’re going to get priority because we’ve been around forever. We’ve worked with these guys and paid the rates that we’ve been paying all along, which is above commercial grade coffee levels,” said Toby’s Estate general manager, Jody Leslie.

‘People are walking away’

Cafe industry insiders, and those close to them, often hear of a similar pattern: regular customers are ordering one coffee instead of two, or two instead of their usual three.

The rate of business failure in the food and beverage industry was 8.9 per cent in November, and it is forecast to rise to nearly 10 per cent in the next 12 months, according to CreditorWatch data, a level “high and above” the average of 5.6 per cent across all industries.

Credit: Matt Golding

“Hospitality in general is being almost attacked from multiple directions. They feel the reduction in discretionary spend more than any other industry, they are constantly dealing with rising costs they can’t pass on in the same way that business services, or construction, or most other industries can,” said CreditorWatch chief executive Patrick Coghlan.

“There’s only so much a consumer will pay for a cup of coffee or a sandwich, right?” he added. “That just puts a huge amount of pressure on their margins.”

Like Ramay, Coghlan has heard anecdotes of cafe operators who aren’t deep in the red or are in debt opting to close their doors.

“People are walking away from not necessarily profitable businesses, but maybe break-even businesses. They’re just working so, so bloody hard to make ends meet that they would rather shut that down and actually go get a full-time job somewhere with a lot less pressure and stress.”

Interest rate cuts – which economists are expecting in the first half of 2025 – should provide some relief and improve consumer sentiment, he said.

“Hospitality typically bounces back faster than most other industries.”

Pablo & Rusty’s Ramay expects further price increases over the next six months to at least $5 for a small milk coffee, and he believes those who value a high-quality cup will continue to purchase it.

The price of coffee beans has surged amid unfavourable weather conditions in major producers Brazil and Vietnam.Credit: Wolter Peeters

“We know a lot of people are struggling … but that’s not the cafe customer to start off with. So if they can’t afford a $5 coffee, they probably can’t afford a $4.50 coffee,” he said.

“It’s not about making things more expensive for the customer. This is actually giving customers more choice, to say, hey, you have 7-Eleven at $2; your instant coffee is cheaper than that.”

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