Coffee is one of the most popular drinks in the world, with 2.3 million cups consumed globally per minute. But at the same time, new roasters and boutique coffee cafes are popping up all the time making competition fierce - and constraints in the supply chain caused by Covid-19 haven’t helped. So what are profit margins like in the coffee industry right now, where are those costs going, and how do you improve them with the right coffee software and sales strategies?
How have cofee roasters, exporters and retailers held up in the past year?Coffee profit margins around the world
Australia
Revenue: AU$2.3 billion
Coffee distributors took in AU$2.3 billion in revenue in the past year, with an annual growth (2015-2020) of -1.0%. However, in 2020 alone revenues dropped 15.8% - a sign of the times, unfortunately. For coffee manufacturers, the story is slightly different. While overall revenue was lower (AU$1.6 billion), growth is in the positives - 0.5% (2015-20) and 2.7% (2019-20). However, we should note that the data on manufacturers also includes tea products, which represent about 17% of the sector.
Profit margins: 3.1%
Despite a shrink in revenue growth, profit margins are still in the positives at 3.1%, shrinking only marginally since 2015 (-0.2%). Manufacturers are once again in a healthier position, showing an 8.6% margin - but buoyed by -1.6% growth.
Top product: Instant coffee
Arabica is the most popular type of bean in Australia, holding over half of the market. Blends are next most popular at just over one-third, with Robusta in third at just 10%. Instant coffee leads in terms of retailed products, with 44.5% market share. Coffee beans and grounds came in second, with coffee capsules in third.
Consumption: 1.91 kg per person
Australia is one of the top nations for coffee consumption around the world, with each person consuming an average of 1.91 kg of coffee in 2019. Sources: IBIS World Coffee Bean Distributors in Australia July 2020 IBIS World Tea and Coffee Manufacturing in Australia November 2020 Statista 
United Kingdom
Revenue: £1.1 billion
While demand from British cafes and coffee shops dropped in the past five years, the country’s coffee manufacturers still took in £1.1 billion (-0.6% growth) last year and are projected to grow said revenue 4.3% in the coming five years. Wholesalers had an even better year, with £2.9 billion in revenue and 0.6% growth (2016-21).
Profit margins: 7.2%
Profit margins were stronger for coffee manufacturers over wholesalers, at 7.2% versus 4.3%. However, both were in the negatives in terms of five-year growth, at -2.9% and -5% respectively. Both sectors are also predicting a downturn as we approach 2026.
Top product: Instant coffee
Looking at coffee specifically, Britons love instant coffee the most, as the product type has taken a strong 43.6% of the market. Coffee pods and capsules came in second, followed by coffee extracts, syrups and concentrates. Ground coffee, despite its popularity elsewhere in the world, only holds a 15.7% share - although it’s on the rise. Looking at coffee versus other related products, coffee is sold wholesale more widely than tea. Indeed, tea consumption has declined within the last five years as people of the UK move to coffee, leading to coffee holding nearly 50% of the wholesale market while tea sits at just 13.7%. At the moment, coffee is providing the UK wholesale sector with the greatest profit and most opportunities for growth.
Consumption: 1.81 kilograms per person
Coffee consumption may be growing in the UK, but the nation is still far behind its European counterparts (and also Australia). For context, Fins consume about 9.32 kilograms per person, while the Dutch consume 8.72 kg. Sources: IBIS World Coffee Processing in the UK June 2020 IBIS World Coffee, Tea & Spices Wholesaling in the UK November 2020 Statista
United States
Revenue: US$11 billion
The US is a nation of coffee drinkers, and it shows in the size of the coffee production industry. While coffee consumption per capita here may be lower than other countries (see below), the sheer scale of the industry far eclipses these other nations at US$11 billion - although it shrank 2.8% in the last five years.
Top product: Gourmet coffee (premium beans)
Nearly 60% of all coffee served in the US is brewed from premium beans. In addition, espresso-based beverages have grown by 50% in the past five years, while consumption of traditional coffee is down 10%. At-home coffee machines are proving popular with Americans, with single-cup brewers found in as many as 41% of households. Automatic drip machines are the most popular type of machine taking up just over half of the market. Single-cup and French press machines come in second and third respectively.
Consumption: 3.56 kilograms per person
Despite its reputation as a nation of coffee lovers, consumption of the drink is lower here per person than many other nations (mostly European). In fact, the US is in about 21st place, compared to Brazil in 14th and Canada in 8th. Sources: IBIS World Coffee Production in the US October 2020 Mordor Intelligence National Coffee Association
New Zealand
Revenue: NZ$2.8 billion
When examining NZ’s coffee industry, we were only able to gather statistics on the tea, coffee and other food manufacturers industry, which have been collected together into one set of data. The total revenue sits at NZ$2.8 billion, having grown 1.1% since 2016. After the NZ government ran a successful campaign against Covid-19 keeping the country open, growth is expected to continue at a similar rate through to 2025 - at an annualised rate of 1.8%. While we can't isolate the coffee industry in New Zealand, Euromonitor reports that Covid-19 and lockdowns drove greater demand for coffee, especially fresh ground coffee pods. They remained the strongest performer in terms of retail volume sales growth in 2020. Coffee pod machine sales were also up 77% year-on-year.
Profit margins: 6.8%
New Zealand is currently experiencing relatively high profit compared to the manufacturing sector average, taking in NZ$192.5 million in profit with a 6.8% margin. This margin has grown 0.6% in the past five years. Source: IBIS World Tea, Coffee and Other Food Manufacturing in New Zealand November 2020
From coffee plantation to your cup, there are many costs that go into your daily joe. Where do those coffee costs go?
From grower to customer, there are many costs in the coffee supply chain. Dan Cox, the owner of Coffee Enterprises, offered this breakdown of the cost of a bag of coffee for Investopedia. If we were to purchase a $15 per-pound bag of whole-bean coffee (in US dollars) and then break down how it got to that price, this is what we might see... It will cost around $4 per pound of raw beans to acquire them from the initial grower. Then, transporting the raw produce from this remote area to a place where it can be exported costs another $1. From here it can be exported and transported to the roaster, adding $1.50 per pound. Then the roaster gets to work, adding $2. Of course, roasting the beans removes their moisture (as much as 22%) which in turn shrinks their weight. Depending on how much is lost, this can add up to $2.50 to the cost. After roasting, the beans can be shipped to retailers, who will in turn take in about $4. All totalled, that brings us to $15 per pound.
Profit margin on coffee beans
Roasters can pay $3.24/lb for green coffee beans but that's not all. After factoring in import and shipping fees, labour costs and losses, they make a profit margin of 7.1%.
But can we break that down further?
Thanks to the World Economic Forum’s excellent infographic, we can also look to break down each stage of the coffee supply chain into its detailed parts, and see where some of those costs are going. In this case, we are examining it at a per-cup basis, rather than per pound.
Breakdown of a coffee exporter
After an exporter purchases the raw beans from a grower, first they have to add their shipping and handling fees (including customs), as well as their warehouse and logistics operations. On top of that are their finance and storage costs, as well as their exporter markup (and importer margin). Total cost: $0.16 per cup
Breakdown of a coffee roaster
We start to see more costs occurring at the roasting stage. First, roasters have to have their required certifications. Then there’s shipping and distribution to consider, packaging, direct labour costs, and one of the biggest chunks: sales, administrative and general costs. Of course, roasters must also factor in their lease, interest and depreciation, as well as leave room for product shrinkage - which is always a risk. Total cost: $0.35 per cup
Breakdown of a coffee retailer
When we arrive at the retail end (cafes and coffee shops specifically), those big costs hit. First there are all the costs associated with running such a business, like lease, utilities, maintenance, the different products required to sell coffee (lids, stirring sticks, condiments, etc.), and of course labour hire. Then there are the general and administrative costs, marketing and social media budgets, and finally any applicable markup. Total cost: $2.17 per cup Adding it all up, and factoring in $0.07 for growers, we get a total of about US$2.80 per cup of coffee.
- Read more: "The remarkable supply chain of the coffee bean"
Impact of Covid-19 on coffee costs
The outbreak of Covid-19 has stymied a lot of coffee’s strong growth around the world, as the production and shipping of coffee products has decreased. As a result, the global price of coffee has taken a downturn. At the consumer end, demand is also lower in some areas. In the UK for example, demand from cafes and restaurants shrank 4.3%. New Zealand also saw a loss in downstream demand, leading to a 5.5% reduction in revenue in the past 12 months. That said, supermarkets have been clamoring for more given the increases in household demand.
Looking to Australia as an example of the changing industry
What we’re seeing is a changing industry. Australia is a good example of how the coffee market has adjusted to Covid-19. The country’s lockdowns created volatility in its hospitality sector which prevented strong growth despite the country having a powerful coffee culture. Meanwhile retail demand, as we’ve seen elsewhere, has been sky high - but constrained household incomes mean Australian people haven’t been able to purchase premium products as readily as they may once have. So, low-cost coffee has become popular, providing fewer benefits for the industry as a whole. As Australia moves on from the pandemic in the coming five years, IBIS World predicts that retail sales of premium blends, as well as revenue in the hospitality sector, will grow again, subject to pressures from global coffee prices and intense competition.
- Read more: "The Key Coffee Industry Trends for 2021 and Beyond"
How to improve your coffee profits
1. Get a handle on your cash flow
Coffee might flow through your veins but cash keeps it pumping. You might be surprised by the number of organisations who don’t have a grasp of their incomings and outgoings, as it’s so easy to miss little problems on the balance sheet when a business grows. But these little problems mount up. If you can put together an automated system that accurately tracks all of your expenses and all of your income, you’ll be able to very quickly see which aspects of the business are costing too much, what products aren’t generating enough sales, and other potential red flags that could be easily remedied.
But how do you get such a grasp on cash flow?
That old Excel spreadsheet won’t take you far. A modern coffee business needs modern coffee software, designed to work for your industry. Look for an inventory management system that can capture all of your costs, easily track which products came from which supplier or were sold to whom, and stores it all in an easy-to-use user interface.
2. Put a stop to shrinkage
Shrinkage is a fact of life for any company working with food and drink products. However, the amount of shrinkage can be managed with the same inventory management software we talked about above. Imagine if every time you order a new batch of coffee beans, the system tracks precisely who sent them, when they were harvested, and how long they’ve been in your warehouse. You can track their freshness to the date and put together accurate forecasts of how much product you need at a given time, helping to avoid stockouts. Got multiple warehouses? Selling direct to consumers? All of the necessary systems for these functions should be able to plug right into your coffee software.
3. Try to make more sales
When they want to increase cash flow, many business owners think that the key is to only cut waste. While cutting waste and getting a handle on your cash is definitely valuable, it’s only one half of the puzzle — the other is making more sales. Sit down to brainstorm, either by yourself or with your team members, and think about ways you could potentially increase sales. For example, cafes would look to upsell customers into larger drink sizes or by purchasing additional products to sell (i.e. pastries). But what about, say, roasters? Could you offer some kind of loyalty programme to regular buyers to increase their value? Are there new deals you can make with new retailers? You’ll know what’s right for your business. Sit down, have a think, and put together some ideas.
Apps like Instagram are a low-cost way of connecting with a larger audience 4. Get comfortable with social media
Our world is digital now and that means marketing is, too. Social media is a fast, low-cost way to reach out to and connect with more potential customers. As you likely already know, coffee isn’t just a drink to many people, it’s a way of life. And the way people share their way of life these days is through social media. If you can generate a following on social media, you have instant access to a group of potential, valuable customers. This is absolutely necessary for any company looking to sell direct to consumers, but could also be used to prove your ‘popularity’ when signing a new deal with distributors, wholesalers and so forth. If you’re already popular, it might make your brand a better prospect. But what to post? Instagram is a popular place for cafes and coffee producers, given its image-first nature. People like to feel like they are getting a behind the scenes glance into the world of coffee when they follow the brands they like, as well as gain inspiration. Many of the top coffee social media stars also post facts and tips to do with coffee, so their audience learns something from their feed.
Some accounts to inspire you:
Here Kyoto: @here.kyoto Scott Rao: @whereisscottrao Barista Daily: @baristadaily Koppi Fine Coffee Roasters: @koppi_roasters
Additional sources
- Per-capita volume sales in the coffee market worldwide, by country in 2017
- Coffee Production in the US
The Retail Market for Coffee in the US
- United States Coffee Market
- NCA releases Atlas of American Coffee
- Coffee: The Cost Of A Cup
- From plant to paper cup: The economics of coffee in one chart
- Global Coffee Market Forecasts with Potential Impact of COVID-19 (2020-2024)
- A 3-step approach to boosting café profits
- How to Start Selling Wholesale Coffee to Grocery Stores
