In the wake of rising costs, coffee shops and roasters have grappled with a number of challenges over the last few years. Following the pandemic, historically large shocks to food and energy prices forced coffee businesses to rethink their strategies and find new ways to adapt.

Shortly after Russia invaded Ukraine in February 2022, prices began to climb higher. Israel’s invasion of Gaza in October 2023 caused further spikes as cargo was rerouted from the Red Sea to avoid conflict.

To add to this interconnected web of logistical issues, coffee prices have also reached near-record highs in recent months. In early September 2024, the main ICE contract for robusta closed at US $5,077/tonne, while ICE arabica December contracts ended at a two-week high of US 249.40 cents/lb.

Faced with price increases across the supply chain, roasters and coffee shops must decide how they can absorb some of the rising costs to avoid passing too many onto consumers.

I spoke to Chris Deferio, founder of Keys to the Shop, to find out how coffee businesses can be strategic with their menu prices.

You may also like our article on why roasters can’t rely on coffee price drops.

Why managing business costs is harder than ever

The pandemic sent shockwaves through many global industries, including coffee. A staggering number of cafés and roasters temporarily closed their doors at the height of lockdown. To adapt to a vastly different market, many focused on their ecommerce and subscription services.

As stay-at-home orders gradually lifted throughout 2021 and 2022, supply and demand increased to pre-pandemic levels. When the economy bounced back, businesses rushed to replenish stock levels, so container space on cargo ships became more competitive and expensive. Shipping delays then became more frequent, which raised roasters’ concerns about how to maintain green coffee quality and manage their inventories.

A number of other complex issues have contributed to shipping delays and price rises in the last two years. The start of the Russia-Ukraine war in early 2022 prompted a significant drop in grain and natural gas exports, which led to a sharp increase in global food and energy prices. More recently, the Israel-Gaza war has disrupted key shipping routes; major carriers like Maersk, Hapag-Lloyd, and MSC halted or rerouted their vessels to avoid attacks in the Red Sea.

Coffee prices have also been climbing over the past few years, adding to an already tumultuous period for cafés and roasters. Following a severe frost that hit some of Brazil’s key growing areas in July 2021, arabica prices reached their highest levels in ten years, and have since continued to remain above the US 240 cents/lb mark. Robusta prices also soared to record levels of over US $5,000/tonne over the last few weeks, as Brazil and Vietnam face supply shortages and unfavourable weather conditions.

All in all, the perfect storm of high coffee prices, interest rates, and energy and food costs is squeezing roasters’ and cafés’ margins more than ever before.

How to manage margins effectively

Coffee shop and roastery operators have to make endless decisions about how to run their businesses, but managing margins (i.e. the difference between the price that a product sells for and the costs associated with making and selling it) is one of the most important. This process involves measuring and increasing profit margins to control cash flow and plan for future growth.

Business owners can manage margins in several ways. Proper inventory management, sales data analysis, staying on top of market trends, and competitive pricing are some of the most effective.

Chris Deferio is the founder of Keys to the Shop – a podcast and coffee consultancy for café owners. He breaks down the basics of developing a profitable coffee business.

“Labour costs should be at 25% to 30%, the average costs of goods sold should be between 15% and 25%, rent needs to be 10% or less than monthly revenue, and you need a steady increase of foot traffic and average ticket totals to amount to at least a 20% increase in annual sales,” he says. “But the path to profitability is not linear and is different for every coffee shop.

“The first year of business requires a lot of investment, and should be seen as an extended opening phase rather than a true indicator of how well the business will succeed,” he adds. “The second year allows you to make educated decisions to adjust your pricing, but if you can net 10% to 15% profit at the end of the year then your business is doing well. A sustainable café is one that pays the owners and the staff, and then has enough left over to refine and respond well to the needs of its customers.”

Key considerations for setting menu prices

When it comes to deciding on menu prices specifically, Chris recommends following a four-step strategy:

1. Account for the cost of every ingredient in a single menu item in ounces or grams
2. Consider the labour costs that go into preparing the menu item
3. Know what the current average market price is for that item
4. Set the price slightly higher than the market average so you can reinvest in your business and staff, as well as to cover expenses

He adds that accounting for labour costs is one of the biggest considerations when setting prices.

“For instance, if you pay a base wage of US $15/hour and it takes two minutes to make a mocha, then your labour cost for that drink is about US 50 cents,” he says. “So once you have factored labour costs in, you can find ways to cut down on that time, but keep the conservative estimate of labour cost in place as a way to derive higher margins for future investment.”

Another often overlooked – but equally important – factor is the cost of waste.

“You should always account for waste, especially with espresso and milk-based beverages,” Chris explains. “Proper training and systems can help to mitigate, but there can be other factors that contribute, such as machine malfunctions, customer ordering errors, and morning dial ins. Your margins need to be large enough to absorb these costs.

“You can have ideal pricing with optimal margins at the edge of what customers are willing to pay and still not be profitable if you don’t control other factors such as waste and labour,” he adds.

Why communicating with customers about price rises is key

Consumers understandably expect coffee shops and roasters to charge “fair” prices for their menu offerings, and put their trust in business owners to adhere to this practice.

Chris points out, however, that consumer awareness of what constitutes a “fair” price is usually limited.

“A fair menu price might seem high until you understand why coffee shops need a large markup,” he adds. “When managed right, strategic menu prices allow for a modest profit that is often reinvested back into the business. There is no right price without considering the present and future needs of your business.”

To account for future growth and unforeseen expenses, there will come a time when coffee shops and roasters need to implement menu price increases. Moreover, given the ongoing market volatility that shows no signs of slowing down anytime soon, price hikes are inevitable if businesses want to stay in operation. 

“Nearly all of my clients end up raising their prices based on increasing cost of goods sold,” Chris says.

But with news outlets like the BBC reporting that £5 or US $7 cups of coffee may soon be a reality, addressing customer concerns is important.

Chris highlights that baristas are often the subject of questions about menu prices, but don’t typically have the knowledge to answer in the best possible way.

“Historically, baristas were kept in the dark about the basic mechanisms of running a coffee shop,” he says. “If you have done your due diligence to understand costs and prices for a healthy margin then you should educate your staff so they are better equipped to respond to customers in an honest and simple way that is centred around the health of your business.”

Knowing what works for your business

Not all coffee shops operate in the same way, so menu prices that help one café stay profitable may not work for another.

“Economic sustainability means different things to different businesses,” Chris tells me. “Some operations reach a certain point of profitability and are fine to remain at that level. You may be a tiny café with five staff and an owner who also operates as a manager, and be very content to sustain that. 

“Profit allows you to choose where you stay and where you go based on what your mission and vision is for the business,” he adds. “Profitability is just as much of a responsibility as hospitality for coffee shops and roasters because it ensures you can continue to meet the needs of your customers.”

In the wake of market volatility, it’s more important than ever for roasters and coffee shops to be strategic with their menu prices. To stay competitive and profitable, businesses will inevitably need to pass some of the additional costs onto consumers.

Many people are prepared – and willing – to pay more, but café and roastery operators must ensure they are transparent about any price hikes to maintain consumer loyalty and trust.

Enjoyed this? Then read our article on whether it will become more acceptable to buy in cherry while coffee prices remain high.

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