Monday, July 15, 2024

Ultra-premium coffees: Does demand drop during economic downturns?

It’s fair to say that many countries across the world have been – and are still – experiencing various levels of economic downturn over the last few years. According to the World Bank, Covid-19 “triggered the largest global economic crisis in more than a century”, and that recovery from this will be “as uneven as its initial economic impacts”.

Following the pandemic – and as the result of conflict in Ukraine – inflation rates have been rising around the world, driven largely by increases in the cost of food and energy. In turn, both businesses and consumers have been hit hard by a sharp increase in prices.

Despite these challenges, the coffee industry has preserved. During lockdowns, at-home consumption soared, while coffee shops and roasters found new ways to adapt to uncertain conditions. Producers, meanwhile, seemingly struggled the most as a result of shipping delays, late payments, and volatile coffee prices.

Given that consumer demand for coffee has remained stable since the start of the pandemic, we must also consider how different market segments have been affected – including ultra-premium coffees which fetch much higher prices.

To learn more, I spoke to Charles Fleer, founder of La Boheme Café, Darrin Daniel, Partnership Manager at Enveritas, and Ryan Noh, CEO of Ryans Coffee Roasters.

You may also like our article on premiumisation in the East Asian coffee market.

People prepare cupping bowls for a coffee sensory analysis session.

How big is the demand for ultra-premium coffee in the first place?

The global coffee market is huge. In its 2021/22 annual review, the International Coffee Organisation found that global coffee consumption increased by 3.3% to 170.3 million 60kg bags.

In simple terms, we can split the overall coffee market into commodity and specialty grades. Looking at specialty coffee specifically, although it has a much smaller market share than commodity-grade coffee, it’s clear that the sector is growing.

As just one example, in 2022, the National Coffee Association announced that US consumption of specialty coffee had reached an all-time high. Across the world, meanwhile, sales of roasted coffee are likely to reach over US $192 billion by the end of 2023 – with 52% of this growth attributed to premiumisation.

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This is the process by which roasters sell more exclusive, rare, and superior quality coffee to drive brand appeal and increase prices. Ultimately, this adds a greater sense of value for the buyer, and makes them more willing to pay higher prices. This type of growth typically occurs in more mature markets – such as Western Europe, the US, Australia, and East Asia.

Undoubtedly, this has pushed more and more roasters to start sourcing specialty-grade coffee – which also includes more high-end premium beans like micro lots and competition coffees.

Ryan Noh is the CEO of Ryans Coffee Roasters in Seoul, Korea. As well as roasting coffee, the company also imports and sells green coffee.

He tells me that while the market for these ultra-premium or rare coffees remains small – even within the specialty coffee sector – these coffees have become unique selling points for certain roasters.

“Selling super-exclusive coffees is one of the marketing methods roasters use to promote themselves,” he says.

The influence of competitions and auctions

There are many competitions and auctions in the coffee industry. But when it comes to green coffee, none are quite as influential as Cup of Excellence and Best of Panama, which both showcase some of the best coffees in their respective countries.

Ryan believes that green coffee competitions and auctions have helped to transform the specialty coffee industry – highlighting unique varieties and allowing these coffees to become more accessible to consumers.

Charles Fleer is the founder of La Boheme Café – a specialty coffee roaster with a number of coffee shops in Prague, Czech Republic. He explains how competitions and auctions like CoE and BoP serve a dual purpose.

“Auction organisers were not only successful in accomplishing what they initially intended to do – which is to reward farmers for their dedication to produce excellent coffee – but now also offer a sense of continuity, stability, and security to both producers and roasters,” he says.

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“As for consumers and connoisseurs who buy these coffees, it’s more about an opportunity to appreciate something really special,” he adds.

A barista prepares premium coffees at a café in Portland, Oregon.

Looking at the impact of Covid-19 and rising inflation

It’s been hard for many of us to ignore the sharp price increases for a number of goods and services over the past few years – especially for food and fuel. While the reasons are somewhat complicated, we can largely attribute them to the lingering effects of the pandemic and Russia’s invasion of Ukraine, which began in February 2022.

As a result of this increased pressure, coffee shops and roasters have been dealing with a sharp rise in prices. While some try to absorb as much of the costs as possible, it’s inevitable that a portion needs to be passed onto the end consumer.

“Across the supply chain, the impact of the pandemic and its associated challenges were hard to swallow,” Charles tells me. “Then came sudden frosts in Brazil in July 2021 which massively increased coffee prices regardless of quality.” 

Over the ensuing months, the unprecedented weather in Brazil caused the C price to reach a ten-year high – although it has since stabilised. 

Did demand for high-scoring coffees shift?

So given that ultra-premium coffees already fetched higher prices, has demand for these lots dropped due to economic downturns?

Darrin Daniel is the former Executive Director of the Alliance for Coffee Excellence and Cup of Excellence. He weighs in on how the pandemic impacted the market.

“In 2018, we definitely saw more and more auctions starting, with more producers coming to us to say they were ready for their own platform,” he says. “By 2019, it was evident that the market for these coffees was growing. But growth and sales are not necessarily the same thing. 

“So I think what we saw happen in 2020, and then throughout the pandemic, was that there was more demand for coffee of that quality – to the surprise of many industry professionals,” he adds. “There were, however, limitations on what buyers could do to source micro-lots, so auctions became another way for buyers to safely cup samples and buy coffee.”

A customer holds a small cup with their left hand.

So are some consumers still willing to pay high prices?

The market for ultra-premium coffees is likely to remain small for decades to come. But with rising rates of inflation, are more consumers starting to shift towards more affordable options?

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Charles doesn’t necessarily think so. He tells me that when the pandemic hit, many of his wholesale customers closed. In order to support both the producers and his business, he bid for the first time on a coffee at the 2020 Cup of Excellence Ethiopia auction. In collaboration with Geoff Watts at Intelligentsia Coffee in the US, La Boheme bid US $108/lb for the second highest-scoring coffee – a 90.98 washed lot from Sidamo produced by Rumudamo Coffee Industry Trade PLC.

“It definitely sold slower than other coffees, but our customers loved it,” he says. “For our customers who had the financial means to buy it, they brewed it at home. For those who didn’t, they enjoyed a cup in one of our coffee shops.”

Limitations associated with certain markets

It goes without saying that not all roasters and consumers can afford to buy ultra-premium and rare coffees – and not all of them even want to. But for those that do, evidence seems to suggest that economic downturns haven’t deterred them from spending more money on high-scoring coffees.

“Some coffee consumers still seem willing to pay for the experience,” Ryan tells me – adding that he believes consumption of these coffees will continue to grow in the future.

This growth, however, is likely to remain confined within particular regions – especially in East Asia, the US, Western Europe, and Australasia where the market for these coffees is already more developed.

A barista brews coffee for café customers using the pour over method.

While Covid-19 and rising inflation rates have changed coffee consumer behaviour, they don’t appear to have halted the growth of the market. In fact, specialty coffee consumption has never been higher in some of the more established markets – and this includes the ultra-premium coffee sector.

We must bear in mind, however, that the market for high-scoring and rare micro lots will always remain small – and that those who can afford these coffees will continue to buy them for the experience.

Enjoyed this? Then read our article on whether consumers will keep paying higher prices for coffee.

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