Gilkatho managing director Wayne Fowler said that while 63.1% of the coffee shops surveyed for the Gilkatho Cappuccino Price Index™ in 2010-2011 had increased their prices in the past year, price increases were not as high as originally predicted by the wider market.

“Looking at the year in review, 2011 has delivered some of the price increases expected by record increases in coffee futures experienced at the start of 2011, but commercial pressures and the continued evolution of a more discerning café culture in Australia has kept the expected increases in the cost of takeaway and dine-in coffee to less than half the expected price hike of between 30 and 35 cents per cup.

      “Back in January we predicted that the 77% rise in coffee futures in 2010 (their highest level since 1997[2]) would outstrip any gains made by the Aussie dollar. Throughout the year, however, we saw most café operators choosing to absorb these costs, although their ability to continue to do so declined as the year progressed owing to rises in the so-called hidden costs in the price of a cup of coffee such as wages for good baristas and premises, as well as other ingredients like milk, sugar and chocolate, which operators need to recoup.”

In terms of trend data, the September Quarter Gilkatho Cappuccino Price Index™ shows some dramatic impacts on price resulting from varying commercial and competitive pressures in different capital cities. [See Table 2 – 2011 Q3]

Mr Fowler said the unique coffee culture operating in each Australian capital city has an inevitable impact on price beyond just the normal influence of input costs.

“The September Quarter saw many of the market conditions unique to each Australian capital city at work. For instance, the Gilkatho Cappuccino Price Index™ found that 30 café operators in Canberra had closed since the March Quarter – that’s a 21% failure rate over the quarter, which in large part can be explained by the amount of competition, small population of about 350,000 and its irregular urban concentration.

“By way of contrast, Brisbane experienced relative price stability in the September Quarter, with the expected rate of increase being less than other states reflecting the continual maturing of the Brisbane market and an apparent convergence in the price of take away and dine-in coffee in line with consumer expectations.

“The stable, mature markets of Sydney and Melbourne saw minimal upward change in price with café operators being more able to pass through increased business costs in a more sensible and sustainable fashion.

“The most dramatic price change in the September Quarter, a 6 cent fall in the price of dine-in coffee in Perth, was difficult to interpret with no apparent link to historical data and instead appears to be more the result of growing price awareness on the part of Perth coffee drinkers.”


Mr Fowler also drew attention to a new trend for café operators to increase prices of non-core items such espresso shots and cups of tea as a mechanism of recouping higher operating costs and absorbing increased prices for coffee beans.

“This new trend is staggering considering some cafés charge more for a cup of tea (which costs only cents to supply) than a cup of coffee. We will track the development of this trend over the next quarter.”

In looking forward to expected coffee prices in 2012, Mr Fowler warned against using the instability of coffee futures as an accurate predictor of price and instead pointed to continuing pressures resulting from increased business costs for café operators as being more reliable indicators:

• in 2011, heavy rain in South America resulted in Colombia failing to meet its expected 9 million bag production levels. Production will drop to 8 million, compared with 8.9 million bags produced last year[3];
  
• Brazil, the world’s largest supplier, will drop its production from 54.5 million a year earlier to 49.2 million for July 2011-2012[4]; and
  

• after doubling from $1.80 a pound in January 2010 to $3.60 in January 2011, the futures prove unstable as productions around the world look grim: futures jumped from $3 a pound in August 2011 to $3.50 in September to fall to $2.90 in November. This instability is reflected by the change in global production centres: Vietnam increased its production to around 20 million bags from 18.7 million while predictions were not matching reality for producers that dominated the market – i.e. Colombia and Brazil. 
  

“In looking at this data, it should be noted that while increases in coffee futures caused the price of coffee to increase in the first quarter of 2011, towards the end of the year the futures’ price has importantly decreased, but the coffee cup price has been unchanged.

“We need to be careful when associating futures and coffee price at the cup. Only drastic swings over the course of a small bracket can reveal future increases/decreases in prices. Announcements of production data by governments are much more relevant.

“While these global settings are influential, commercial business conditions faced by Australian café operators are really the most important factors in determining the price of a cup of coffee.”


[1] The Gilkatho Cappuccino Price Index™ surveys more than 200 venues in the larger capitals and 120 in the smaller capitals, totaling more than 1,000 venues across the country.
[2] ‘Tight Markets Seen for Coffee, Sugar, Cotton’, Wall Street Journal (1 January 2011) 
<http://online.wsj.com/article/SB10001424052748704543604576054041626394096.html>
[3] http://www.bloomberg.com/news/2011-11-21/colombia-trims-coffee-output-forecast-by-5-9-amid-rainstorms.html

[4] http://www.bloomberg.com/news/2011-11-21/brazil-coffee-crop-to-fall-in-year-started-july-1-usda-says-1-.html