Once consumers understand what goes into brewing a cup of coffee, maybe people wouldn’t shy away from paying more.
If the cost of a cup of coffee from your favorite coffee shop seems high, you’re not wrong. But once you understand the math, you’ll find there’s a good reason for it.
According to Toast, which analyzes restaurant industry trends, in the first quarter of 2024 customers paid on average $3.08 for a cup of regular coffee, $5.14 for cold brew and $5.46 for a latte (prices vary in different states — Hawaii and California have the highest prices). Starbucks asks as much as $8 for an airport cold brew.
It’s not just the big cities and chains charging above-average prices for coffee, either: roaster Fretboard Coffee, in Columbia, Missouri, charges $7 for a cup of nitro (down the street, Acola Coffee Company charges $5 for nitro), and First District Cafe in Covington, Kentucky, charges $6 for a cup of cold brew. (On the flip side, the 7-Eleven at the Dallas Fort Worth airport charges $1.50 for a cup of creamy and delicious nitro coffee.)
What gives? How do coffee shops get away with charging customers so much? Once consumers understand what goes into brewing a cup of coffee, maybe people wouldn’t shy away from paying more.
“Cold brew is one of the worst margins for a coffee house in general,” Heather Perry, CEO of the California-based roaster Klatch Coffee, told HuffPost. “Cold brew is one of our most expensive items. It’s the item that’s consistently underpriced, but everything else makes sense from a business perspective.” Klatch charges $5.50 for a cup of cold brew.
Perry explained that coffee shops have to deal with two major costs: the cost of goods — she said it should hover around 36% of their overall costs — and payroll, which averages 30% of overall costs in California.
“If you take up just those two, you’re already at 66% of whatever the menu price says,” she said. Then, a business has to add in the cost of labor, insurance, rent, pest control and laundry, all of which add around 20% more.
“We really don’t position things as, ‘How much does this item cost to make versus what that item costs?’” she said. “It’s looked at overall as the whole business, not on an individual item basis. We’re already at 86% and we don’t really have any forgiving things in there. This is not a great business, but this is a solid business.”
Another issue is the cost of coffee. Perry said a bag of unroasted green coffee costs $10 a pound, but that number fluctuates. From there, a pound of coffee makes around 30 ounces of cold brew concentrate, priced at around 33 cents per ounce. “If you look at something like a 16-ounce cold brew, you’re probably going to put in 6 ounces of cold brew concentrate, which would put you at $2.”
Cold brew is not a moneymaker for coffee shops, but neither are espresso-based drinks. “Your espresso is your biggest cost,” she said. “Espresso is more efficient than pour-over, but still not as efficient as batch brew.” For that, the coffee costs around $4.50 a cup before the markup. A customer also needs to consider the cost of condiments, dairy (in California, a gallon of milk costs $4.25 a gallon), cups, ice and waste prices.
In New York, Cafe Grumpy charges $5 for cold brew and $7 for nitro. Co-founder Caroline Bell explained the cost of nitrogen gas adds to the price. The shops offer seasonal drinks, like coconut water and cold brew, as a means to draw in new customers.
“[Customers] might tell their friends about it or it might introduce them to drinking coffee if they don’t really like coffee,” Bell said. “It’s like an entryway to coffee, and you obviously want people to post about it, share it, and get people excited about it.” They provide a loyalty program and don’t upcharge for nut milk.
“We’re adding value where we can and making things more fair,” she said, and explained that drip coffee tends to have better volume because it takes less time to make and moves the line faster. Overall, she feels the coffee is reasonably priced and it could be higher.
The Difference Between Small Shops And Big Chains
Let’s go back to the beans (which, Perry says, many coffee roasters do buy green, or unroasted). She explained that C Market coffee — which she describes as “nothing that you’d actually ever want to enjoy … it’s what they might use in instant coffee” — affects her as a specialty roaster, because it sets the base price for the base grade of the lowest-quality coffee on the market.
“When coffee prices are really low, I’m able to negotiate lower prices,” she said. “It’s low because there’s an oversupply potentially, so there’s coffee readily available. As a specialty roaster, our average price of green coffee is probably in the $4 per pound range.” Import fees get added, and coffee loses about 15-20% in weight once it’s roasted. Packaging, labor, gas, overhead and shipping build up the price.
“If you look at coffee houses, there’s a lot of them that go out of business,” she said. “Why do they go out of business? I think the reason coffee houses go out of business is the same reason restaurants go out of business. A lot of times it’s a hard business to be successful in. There’s so many chains out there, so many places people just naturally gravitate to. It’s really hard to get the consumer’s attention.” She pointed out that Starbucks and McDonald’s offer lower prices because they have higher buying power and can purchase goods at a cheaper rate.
But the advantage of going to an independently owned coffee shop is the experience.
“If you’re going to come in and pay $6 for a cold brew, we want to make sure you have a great experience,” Perry said. “You have a staff that respects you, that treats you well, that gives you the service that you came in for. The second part of that is obviously making sure we deliver a really good product.”
That entails paying everyone a living wage and offering high-quality drinks.
“Regardless of whether you’re buying coffee by the bag or whether you’re buying a cold brew capsule [to make at home] or whether you’re going into a cafe, really good coffee does not come cheap,” Perry said. “It’s just like how a really good steakhouse isn’t cheap, or a really good bottle of wine isn’t cheap. You want to get value of where you’re spending your money, but if you’re having a good experience and if it hits the spot and gives you that need for the day, then that’s a good value product. But if you walk out saying, ‘Oh, it’s just coffee. It’s not worth six bucks, that’s not a good value.’ Was it the experience? Was it the beverage? What was the miss for you on that? is the bigger question.”
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