Dubai – Qahwa World
Investor interest in some of the world’s largest coffee companies is declining after weak crop harvests, U.S. tariffs, and rising prices led to reduced coffee demand among Western consumers. This has resulted in slower sales and weaker valuations in a global market valued at more than $400 billion. Meanwhile, achieving success in China and other developing countries now requires long-term and costly efforts.
The coffee boom began in the late 1990s and peaked in the years preceding the pandemic, with the first wave marked by the spread of chains like Starbucks across major Western cities, followed by a wave of small, cozy cafés. At the same time, major consumer companies such as Nestlé expanded their coffee offerings to benefit from growing demand for a product with higher profit margins compared to other food commodities.
In 2018, Nestlé paid $7 billion for the rights to market Starbucks-branded products outside the U.S. chain’s stores. That same year, the investment fund JAB heavily invested to acquire a majority stake in the British chain Pret A Manger for $2 billion, while Coca-Cola spent $5 billion to acquire Costa.
However, the expected returns from these large caffeine investments did not materialize. Rising crop prices increased the cost of drinks like cappuccinos and lattes, affecting demand amid inflationary pressures. In the United States, the price of a pound of ground coffee reached a record $9—double its 2021 price. Coffee prices rose 9% last year alone, far outpacing general inflation levels.
This price increase may continue, as future crops are threatened by extreme weather-related agricultural challenges in Brazil, Indonesia, and Vietnam. Coffee preparation costs have also risen, affecting profit margins. Analysts at ING Bank estimate that labor, raw materials, rent, taxes, and other expenses account for around 90% of the price of a cup of coffee.
Profit margins are expected to shrink further amid heavy tariffs on countries such as Brazil and Switzerland, the latter being a major producer of Nespresso capsules. The only positive sign is that U.S. President Donald Trump appears keen on limiting the impact of tariffs on food prices, based on recent framework agreements with Argentina, Ecuador, Guatemala, and El Salvador.
Struggles of Major Companies
Starbucks, with a market value exceeding $100 billion, has suffered a sharp decline in profits in recent years and is undergoing a costly transformation that will include closing 1% of its stores. Coca-Cola is exploring opportunities to sell Costa, with CEO James Quincey stating that the investment has “not performed at the level we had hoped from an investment perspective.” Meanwhile, Nestlé appears more resilient due to its limited reliance on coffee sales.
Market Saturation
The key question facing the industry is how to boost sales in what seems to be a saturated market. Starbucks and Dunkin’ Donuts alone operate nearly 30,000 stores in the United States. In the United Kingdom, 98 million cups of coffee are consumed daily, and nearly one-fifth of the population visits cafés every day, according to the British Coffee Association. Significant increases in consumption appear unlikely.
Given this challenge in Western markets, companies are shifting toward China and South America. Nestlé’s new CEO, Philippe Navratil, announced the launch of new products in these regions. Last month, Starbucks revealed plans to expand its presence in Latin America and the Caribbean by opening 145 new stores from Mexico to Chile, and it also sold its retail-operations franchise rights in China.
However, expansion in these regions is difficult. Low average incomes in South America mean slim profit margins for coffee chains and roasters, while meaningful growth requires major marketing investments. Starbucks’ experience in China highlights the challenge of competing with numerous low-cost local imitators.
Amy Donnellan, a retail specialist at Reuters, notes that major coffee companies must find an innovative solution to re-market their products in a saturated Western market, adding that if they fail to do so, they may have to settle for a weaker presence.
The post Unprecedented Saturation Indicators Disrupt the Global Coffee Market appeared first on Qahwa World.
