Coffee: from value to values

Ric Rhinehart was until recently Executive Director and CEO of the SCA, the Specialty Coffee Association. I asked him if he was worried about current coffee demand with cafés closed and a sharp increase in unemployed.

The price elasticity of coffee is low. If you are a coffee drinker, coffee is a relatively high priority at a relatively low-price basis, so you’re willing to defer other expenses in order to continue to drink coffee. Conversely, if coffee was suddenly free you wouldn’t increase your consumption to say nine or ten cups a day. You’d still maintain your three or four cups.

Coffee has also been very resilient in economic downturns. That was true in the global recession in 2008 when coffee consumption stayed relatively strong. What shifts is the venue of consumption. When you’re in an economic downturn people tend to return to drinking more coffee at home and drinking less coffee out of home.

In the current scenario it’s quite different in that the cafés were literally forced to close because of social distancing. I suspect that a lot of marginal operations will disappear.

It seems to be the specialty sector that’s been driving the demand growth in the US. Is that correct?

Absolutely. In mature markets, particularly in the US, coffee consumption had peaked in the early to mid 1960’s and was in decline until the mid-90s when the speciality coffee movement began, and people started returning to coffee.

With the growth of coffee bars and shops there was also a new venue of consumption. People began drinking coffee outside of their home and their workplace. That really changed the market.

And is that demand growth continuing in the US?

Yes, coffee consumers in the US now drink on average three cups per day, and that’s back up to practically to where it was at its peak. Consumption continues to be on the rise, and it continues to be driven largely by the specialty sector.

Coffee consumption in kilos is still just a little less than 70 percent in home, but in dollar value it’s probably 55 percent outside the home now. A lot of that has to do with the price point of a cup versus a price point of a kilo.

I have heard talk of a price crisis in coffee. Is there a crisis?

Coffee farmers, small holders in particular around the world, frequently produce and sell coffee at below their cost of production. They don’t have a lot of other options. For many smallholders, coffee is a cash crop that augments subsistence farming at the same time.

The board of the SCA asked me to spend my terminal year focusing on that price crisis. We launched a price crisis response within the organization to try to understand what drives the cyclical low prices in coffee and what we might do about it.

What’s the solution?

Unfortunately, I know more about the drivers of the problem than I know about the solutions.

I believe that the problem’s biggest driver has been the shift in the approach to economic activity from pre-Friedman capitalism to a post-Friedman capitalism. Instead of Ten Commandments there were two: first, that the market shall be unrestrained; second, that shareholder value should be paramount. That became the religion of economics worldwide.

It seems that the pendulum is swinging back towards stakeholder rather than shareholder capitalism.

That’s very good news for the coffee industry and for all of the farmers around the world. It’s a belief that you’ve got to look after your stakeholders.

And in economic terms that suggests that you have to price in all the externalities. You can’t let the market force out the externalities.

The most important is to reassess how we form our values as a separate issue from how we assign value.

What is your favorite coffee and your favorite way of preparing it?

That’s like asking me which out of my four children is my favorite. I don’t have a favorite, but I love Ethiopian coffees. Ethiopia is the birthplace of coffee. There’s more diversity in flavor and style in coffee in Ethiopia than anywhere else on Earth.

It is generally true that the way you’ve come to coffee is the way you stay with coffee. I grew up as a drip coffee drinker, and I am a drip coffee drinker today.

© Commodity Conversations ® 2020

This is a brief extract of an interview that will be published in my upcoming book “Merchants & Roasters – Conversations over Coffee”

Leave a Reply

Your email address will not be published. Required fields are marked *