Why is a cup of coffee so expensive?

Why is a cup of coffee so expensive?

[Music] [Applause] [Music] now not everyone feels this way but it’s not uncommon for me to hear from people that coffee has gotten pretty expensive and to be fair to them it did used to be much cheaper to buy a cup of coffee that’s changed as the coffee boom has happened in cities around the world and at a time when there are increasing numbers of articles highlighting the fact that coffee growers aren’t getting paid the cost of production for their coffee that has become unsustainable well this rising price of coffee leaves many people with questions that should be answered so that’s what we’re gonna do today we’re going to talk about where your money goes when you spend it on a cup of coffee in a specialty cafe to do that we’re gonna have to talk in generalities we’re gonna have to talk about the business model of cafes and it’s impossible to be completely accurate because every business is a little bit different and also to begin with we’re just going to talk about the UK which is obviously different in some ways than other places you go and you spend three pounds on a cup of coffee in a good cafe well where does that money go well in the UK the v80 that the tax rate on coffee is 20% so 50 P of your 3 pounds go straight to the government the net revenue for the cafe is only 2 pounds 50 so let’s divide that 2 pounds 50 in a cafe about 30% of the money that a cafe takes in goes back out to product costs cost of buying the things that you ultimately end up selling about 35% of its money goes to pay staff 15% of its revenue will go towards paying the rent and associated location costs maybe 10% will go towards general overheads from lighting to heating administration leaving 10% on a good day there’s profit for the owner that’s 25 pence on a three pound cup of coffee which means you’ve got to make a lot of cups of coffee to really make any money I should also add that around the world those models will vary in some places let’s say Shanghai you might have a very high rent and a much lower staff cost but by and large around the world the net profit remains the same it’s not uncommon to be making 10 to 12 percent profit and do better than that these days is really pretty unusual as I said this is the typical kind of business model for a specialty cafe there will be some variants some cafes will pay more to staff some pay less and will pay more rent some will pay less wait wait wait you might say if I go to a nice cafe and I buy a four pound cup of filter coffee there’s no way that there’s one pound of product cost even if they’re using good quality coffee and paying a sustainable price and you’re right that 30% of product cost is the average across the board a cup of filter coffee you may make a much higher margin compared to say a pastry that you might buy with it that has a much much much lower margin a much higher cost associated with it so once we break apart the costs of a cafe you can see what’s really driving the increase in a price of a cup of coffee the cost of hiring and retaining staff has really increased a lot in the last few years especially as coffee cultures have become increasingly competitive the more cafes that open the more baristas are needed the more demand the market sees and that drives up the prices for skilled capable baristas this has meant that the staff cost for cafes has constantly crept up and up and up and up and up when I first got into the business it was only down at 25 percent now it’s easily 35 percent plus that really has changed and I think anyone in any city in the world knows that landlords have been greedy and continues to be greedy but let’s talk a little bit more about the coffee that goes into each cup as I said before the actual cost of the coffee is surprisingly low it’s a very small part of the total cost for a cafe this means that if a cafe is buying really good coffee it doesn’t actually drive their price up all that much if you took a cafe serving a really great espresso blend full of coffees bought ethically and sustainably and that cafe switched to something really cheap really commoditized and very low quality that cafe may save fifteen maybe twenty pence of cost that’s it that’s all the saving there is to be made it doesn’t really make sense to cut those corners it makes sense to ask the right price for something delicious but for 20p more for 30p more you can have something incredible great coffee is actually incredibly cheap for what it is even when you’re drinking in a cafe with all the associated costs so if you’re angry at the price of a cup of coffee that’s okay but don’t be angry at the cafe they’re not exploiting you cafe owners are not rolling around in piles of money if you want to be angry be angry at at landlords being greedy and driving up the cost of doing business in cities around the world be angry at governments whose failure to address housing crises have driven up the cost of living in so many parts of the world too but don’t be angry at the cafe especially if they’re buying something high-quality something traded sustainably as always I’d love to hear your thoughts in the comments down below thank you so much for watching and I hope you have a great day [Applause] [Music] you [Music]

100 thoughts on “Why is a cup of coffee so expensive?

  1. In my opinion, landlords are not especially greedy. Landlords are almost always price takers; they collect rent equivalent to the market rate and cannot charge higher because tenants usually do not require a very specific location. Even publicly listed billion dollar/pound property funds are price takers. If you look at the financials of a public passive property fund, they do not generate significant positive cash flows after accounting for capital costs (assuming no capital growth of the properties).

    In my opinion, it comes back to what the consumer is willing to pay and efficiency.

    A 3 pound coffee means 3 pounds (+ business owners' contributions) for the entire supply chain for that coffee.

    Also my opinion, James, you are the best!

  2. Coffee should be VAT free!! Especially as its also a medication for liver as per my surgeon instructions, did try for beans on prescription but no joy 😀

  3. I just wanted to add my perspective as a consumer that drinks a lot of "third wave" teas. Tea like coffee is extremely cheap considering the product and the labor involved. A premium young tea usually goes for 1.5 to 3 times the price per gram as a coffee comparable in quality. There are very expensive teas but these are usually aged 5+ years and come from popular runs which leads me to suspect the price jump comes from the storage aspect which is taken on by retailers, not farmers. I have not insight into the industry but I find the difference in pricing between tea and coffee very interesting. It seems to me that tea consumers spend more on tea per gram. At the same time, tea is a very different product. If you brew using the western method you use about 3-4 grams per cup(~250ml) which is a lot less product than coffee uses. Even gong fu brewing, the preferred method for fine tea, uses around 6-8 grams per ~150ml. Gong fu brewing, however, uses many consecutive short steeps meaning a tea session can last about an hour. Personally, I have used the same 8 grams of tea for 10ish steepings meaning a high-quality tea is worthwhile to drink for about 1.5 liters. So although on the surface tea is more expensive per gram it is actually ridiculously cheap per brewed ml.

  4. Wondering what your view is on the price of the beans they sell, I get all the overhead costs, but for beans that should be less, right? In London it would cost me about £10 for a 250gr bag and in most places in Europe (even here in Riga, Latvia) it's up to €15, that's more than €1 per cup making it yourself. If the cost of the coffee doesn't figure into it that much, how do you explain the high whole bean prices?

  5. It’s cheaper for me to have bought my Breville Barista Express for 600$ and make all the drinks at home then spend $4-5 a drink sometimes more than 5 times a week. It will have paid for itself in 6 months and I can really customize everything every drink I make. So now the cafe is a special trip once a week or every so often. But this really sheds light on why that cup of roasty, foamy heaven in a cup costs what costs. I like to support my local cafes and roasters and will never go to a chain cafe. I like putting money in the pockets of my community small business owners.

  6. Amazes me when people think things like that in the first place. If all cafes were gouging huge margins, someone would have already swept up the market by being more competitive. Then the price is so similar across the board for a ubiquitous item like that, you know that battle was long since fought and everyone is on the base amount they can charge to balance profit and remain competitive. You don't need to know a damned thing about the cost of making it to realise that when there are so very many players in the game.

  7. 1st of all I would like to say sorry about my English.
    I have been watching yours content for a few months and have to say. I really like yours content and appreciate yours effort to help coffee lover to understand more about coffee.
    As a new comer in Coffee industry (I just start agriculture Arabica coffee for about 2 years so my coffee still not ready to be sold but I was in my country specialty coffee community for a while now) I can say that in one ton of coffee Cherry there will only be around 100-200 Kilo of good quality green bean after all the process. While the world demand is so high the price on demand is very low for producer like me (due to most customers have no idea what is high quality coffee). So what happened? We sell low-quality (Deflect) to mass market and hog all high quality one for niche market we have (Mostly auction or face to face deal). Not to mention middle man. XD

    I hope someday you will go more in-dept in region/species taste profile and what coffee deflect look like.

    Have a good day

  8. As a pivotal part of capitalist systems, land rent is unavoidable though absolutely ridiculous. It is not as if a landlord is ever going to take the burden of a property tax increase upon their own shoulders if they have the ability to shift it to those renting land. This kind of practice puts screws on already low margin industry to perform exceedingly well without much room for error, and further do so with increasing pressure in years to come given increasing tax/inflation. This is also assuming that the landlord doesn't just get into a mood in which they desire more money for whatever reason and increase rent for no reason other than greed. I know this seems a bit silly, what would we do without land ownership, etc. etc., but seriously, the history of how land ownership was instated and continues to be justified is extremely flawed. The fact that land owners can consistently extract value from renters through a piece of property which they often do little towards adding value on aside from their initial investment is remarkable.

  9. And ironically enough some of those landlords stash their money in fiscal paradises while asking you to take the brunt of tax increases.

  10. As with anything in the world you are not paying for the product. You are paying for the time that product uses up to create it.

    Net profit is huge in your numbers. In the US for food service it is unusual to have greater than a 3% profit margin.

  11. Spot on, being a coffee shop owner once the bills are paid I’m really not rolling in it 😭
    I love the industry, I love the knowledge I’ve built up and ultimately love my customers we serve every day.

  12. It would be great to watch another video on this subject, but focused on the the roasters' and green buyers perspective. I think there's a lot to talk about when it comes to green coffee, and the profitability of growing, not 90+ scoring coffee, but average coffee.

  13. To me the price is just nice for specialty coffee. But at some point, the price is just gonna looks extra expensive if you're in a country or region with bad economy and having lower quality/price options as your competitors. Haha

    But I feel like it's a good challenge for the barista to learn more on how to educate people to appreciate specialty coffee.

    Always hope for the best for all of us! Cheers! 😁☕💕

  14. Thank you for addressing this issue. It helps me to feel not as alone as it was as a café owner trying to explain this. I love your videos. Thank you for existing. Hugs from Indonesia. 🤗

  15. Thank you for your video! Sharing this on our café FB page. Hopefully all the incredulous customers have their eyes opened and refrain from abusing us about a $4.00 (AUD) cup of coffee, haha

  16. If you're interested in more precise rates I could try to dig out some. Mother is owner of a "café" that's been running for 100+ years. So she could probably get the history profit per cup, prices etc.

  17. It's the same when I tell people how much a high-end guitar costs. They think it's absurd that it could cost anywhere between £1000-3000 when you could get one for £300 that's perfectly fine. But if you look at the profit margins on the £300 and the £3000 guitar, the £300 guitars are cumulatively more. Per guitar it's very little, but they're sold in such vast quantities that they become big earners for major companies like Fender. The boutique company owned by one person with eight staff members often has to charge £3000 to earn a living, but they'll only sell one hundred instruments per year, while the £300 guitar will sell one hundred per day. Again, these builders are not rolling around in cash, but the executives at Fender are. Many of these boutique companies grow only to a certain point. They hit twenty staff members and that's it. The market beyond that is far too competitive and they would need a loan of a few million pounds to crack into it. People argue that if they reduced their prices then they'd sell more, but that requires warehouses of space, huge CNC machines that cost £100k, more staff members, all of which would take millions to invest into.

  18. Hello, great channel! I am from Colombia and right now everybody with a farm is starting to sell coffee with terms like "organic" "specialty" "Single origin" which is great but, are there any tips to separate those who are trying to sell normal coffee in beautiful envelopes from really good coffee? because they will obviously charge you more. Would be an interesting topic.

  19. it's really not that expensive at all in comparison to other beverages if u aware of the journey from cherries to the beans u see in a bag

  20. This is very true, and applied to my cafe in Poland twenty years ago just as much as it does to cafes around the world today. Add to that seasonal variations in business traffic (which I'm not sure the pie chart adjusts for) and you can have many days during the year when you operate at a loss. Scary stuff.

    It also is a good illustration of how vulnerable privately owned coffee shops are against companies like Starbucks where, even if margins are similar, daily turnover is not (many Starbucks here in the US with both counter and drive thru service are seeing turnover of more than $60,000 per day).

  21. Hmmmmmm…………..Make your own for a few cents on the dollar, OR pay out your nose. Being a coffee snob can get expensive.

  22. Very interesting! I was a barista is San Diego for a little and I became infatuated with the coffee culture and the whole world behind it, especially in terms of business and quality. I observed the cafe I worked at and saw that unless you have a very high volume of customers, it’s extremely difficult to turn a consistent profit. A great espresso and cup of coffee will make regulars (besides the normal customer service and atmosphere in the shop). Didn’t realize that a high quality versus low quality coffee would be almost insignificant to the cost of running a cafe! Our espresso was okay… but that is something to think about! Quality in the long run. *Side note, the cafe unfortunately closed down a couple weeks after I left and was only open for about 9 months… so this video helped clear up some of my financial questions!

  23. When profits are slim, small changes to input costs make a big difference. Think about it: if 25 pence is the margin with good coffee, with a lesser coffee it could be 30, 40 or even 50 pence total, as all of those savings flow right to the bottom line. Assuming similar numbers of customers come through the door, that's the cafe owner doubling her yearly salary.

  24. Depends on what kind of coffee you get and where. A 12oz cup of locally roasted coffee is $1.50 US at the cafe where I work while bottomless coffee is 95 cents at a local diner.

  25. This video was in my Youtube recommended page…

    I don’t care about or like coffee. The worse it is, by grade, the better I like it. Good coffee tastes like burnt wood shavings. Bad coffee tastes like flavored water.

    The main reason for high coffee costs, is the growing, sorting, and storage of the actual beans, and the costs of shipping it anywhere except where it is grown. Almost none of it is grown in the US. And then, we get to ancillary costs in the US, like restaurant costs, from employee costs, to taxes; and everything between.

    You could have said this stuff, in about a minute….

  26. Great video. Your point relative raw product costs vs markup is interesting to me – so you're suggesting that markup on different items (ie, your example of filter beans vs pastries) should be varied in order to attain some sort of 'reasonable' price across the board? Why not put the same markup on everything? Lower that filter price and jack up the pastry price? Or am I misunderstanding what you said there?

  27. Indonesian takes around 40-50% for profit as rent might be the only costly things for us. Although most cafes only sells around 70-90 cups a day.

  28. That graph is incorrect,as a coffee shop owner in Australia now retired,stock should be 33%,rent-staff-other expenses 33%,and the balance profit 33%,anything less = your paying to much in rent or stock or wages then you will be going backwards fast as rents,stock and wages increase every year.

  29. I wouldn't blame greedy landlords either. The real estate market has incredibly high demand and very low supply. Everyone wants to be at a good location and a lot of businesses are willing to pay big to stay in a good spot. It wouldn't be fair to ask a landlord to keep rent low out of the goodness of his/her heart if they're getting offers from dozens of other businesses for twice as much rent. In fact, doing so would be unfairly undercutting other landlords, no different than how big businesses put little businesses out of business by cutting prices below market rates.
    business business business business

  30. Same comment as all the rest of the smart people making comments. I buy 2 lbs of beans for $11 and make it at home. I can get 62 Espressos from the bag and even more cups of coffee I'm not cheap, but cafes don't make it better than I do and there are a lot of idiots in a cafe that just want to be seen using their Macbooks.

    You pay more for the service and sometimes inferior coffee based drinks, at a cafe.

  31. Some specialty coffe that you can buy for home usage can cost more for cup then more regualar one in cafe.

  32. Angry at the landlord? It's supply and demand. Cafes can move to other cheaper retail store or rent a smaller store. Don't blame anyone. The only people to blame are the consumer that don't reuse and reduce plastic usage and waste. Most business go out of business are those that don't manage cost well. Why would you rent a huge store that just pays the landlord. As a consumer, you are the one paying the rent. You want a comfortable place, you pay for it.

  33. Thanks James. This video really informative. Rent really make or break businesses around the world especially at urban city environment.

  34. i worked for 7-11 for 10 years as a manager, if it weren't for coffee in NY they would shut their doors. the coffee margins are so high they rely on it in their business model. they pay minimum wage for labor i think its $11.00hr now for multi purpose employees, and only pay $21.00 for 21lbs of coffee. and have virtually no waste because of the volume they push. my particular store was selling 800-1100 cups of coffee a day and all self serve. At a cost of $2.00 USD (average) for a cup. this was before the coffee boom in NY when 7-11 dominated everything coffee related, now Starbucks has hurt them big time.

  35. Then mcdonald sells coffee for like 40p each on mondays and coffee in home is dirtcheap even if you buy premium coffee

  36. VAT tax is a scam. Sales taxes are a waste. Just stay home and make your own if you don’t like it. Land owners, property owners have some pay property taxes also. They can only charge rent what the market will bear otherwise it sits vacant.

  37. I live in a small poor town in South Kentucky, USA rent here is about $500 per month for a business space.. our local cafe(if you can call it that) sales sweet milk with a hint of "espresso" for $4+ for 476ml(16oz) I can't imagine she's using very high quality coffee and her espresso machine looks old and sad.. I know she pays her workers $7.25-$8 per hour.. I wonder how much is her profit.. I honestly wonder..

  38. What a great video. That said, I think coffee lovers should seriously think of getting their own personal machine at home if they really want to save on costs. A Hario V60 and a decent Lelit should do the trick most days 🙂

  39. So if you go from high quality beans to low quality and still charge the same you are increasing your profit with almost 100%… That is pretty substantial.

  40. Not sure that landlords are to blame either. That is not a fun job and has plenty of taxes involved with it (at least in the US). If you have a lot of capital in land/building you should be able to cover your costs and make money. If landlords could not make money on land it would just go into the stock market. Then what happens? My guess is that infrastructure would get even worse. But I am not an economist.

  41. Thanks for the insight. In your opinion what’s the best cafe USP that drives incremental sales (other than good quality coffee)?

  42. In Belgium the rent is not so high, but staff cost between 40 and 50% of the total cost (if the owner isn't doing bar shifts)!!

  43. Hi. Coffee farmer in Colombia is here.
    Consumers have to pay equivalent price for a coffee. That's everything.
    If the coffee tastes bad, it doesn't deserve high price. But you have to pay good price if the coffee is good.

  44. Great video! What I do consider to be ironic, is that in those countries where great coffee is actually sourced, cafes end up selling the worst quality coffee there is to be served. Most of the grounds harvested goes to exports, leaving the origin countries with the worst. Having said that, we end up paying the cheapest possible coffee but rarely get any quality grounds to consume.

  45. Where I live there is no such a VAT so far, the rents are around £10 per Square Metre, and the staff cost is very cheap due to Foreign labor, but the cub of coffee still costs between £3.5 to £4.
    After owning a Coffee machine and using the most premium beans available in the market, my cup of coffee now costs me less than £1.

  46. For a more complete picture, it would've been nice if you talked about the whole coffee chain, like how, on average, farmers only get 1p from a £2.50 cup of coffee.

  47. Will this calculation work in a small Cafe that is managed by the owner with one staff and the place is belong to the owner? But still they sell coffee quite expensive thou

  48. A latte at Starbucks is now nearly $7.00. No thanks. I can make far superior coffee for 1/10th the price at home, without waiting in line and getting hit with loads of sugary syrup.

    Great video, by the way.

  49. The black beverage they sell in England that vaguely resembles coffee is not worth more than the $1 service station coffee you get in Melbourne

  50. Really like the intro music you use in your videos. Would you perhaps consider sharing a playlist of sorts on Spotify of the songs you use? or perhaps even just listing them in the video description?

  51. In Russia we also pay 2-3£ per cup of coffee. Some cafés cell it for 5-7£. But monthly we earn just about 400£. Don't think someone in UK earns the same)))

  52. Wow, very informative! Thank you for breakdown! It’s good information for someone that’s on the verge of opening a coffee shop to think on. It even makes Starbucks look less guilty of overpricing…oh wait, you were talking about GOOD coffee 😂
    On the point of rent, here in the United States, food trucks are becoming WAY MORE popular. A mobile cafe might be a good way to bring down rent.

  53. That is enlightening – I’m still going nowhere near a coffee shop, but I shall now walk past them with a far smaller degree of inner disgust towards them.

  54. I'm proud to say that I have never in my life set foot in a Star Bucks, nor have I ever purchase a cup of that nasty Star Bucks North Sea Crude Oil!

  55. How can we give more to the grower? They are the craftsmen. Many growers are out of business and the next generation isn't interested. Also land usage some prefer other crops or go into real estate which is profitable and less risky.

  56. It is good to make people aware of the relation between what they consume and the product’s backdrop. Even though it can be considered a marketing strategy, it is also a call for attention i.e. this cup of coffee has a history, specific people has worked to produce it, and this shop is working hard to deliver it the best possible way.

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