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  • QA 045
    Question:
    Do retail price reductions for roasted coffee hurt growers?
    Background:
    When roasters compete amongst each other (price wars) are they in fact not depressing the market for us growers? We have seen that when the market rises just a little, as in 2004, then roasters push consumer prices up blaming supply, i.e. us the growers. Now the market seems to be falling and the roasters are pushing it even further?
    Asked by:
    Grower - Indonesia
     
    Answer:

    The easy answer is that the mainstream coffee business is very competitive, especially in a falling market…

    However, one should differentiate between the two consumer markets: mainstream (perhaps as much as 90% of total consumption) and specialty
    .

    In the specialty segment retail prices and margins are very much higher than in the mainstream market. One could argue that some specialty retail prices are based more on what the consumer is believed to be able to afford, rather than on the actual cost of the green coffee. However, the entry of mainstream roasters into the specialty business, sometimes using alternative brands, may over time impact on this.

    In the mainstream business competition is fierce: the established markets are mostly mature and, realistically, meaningful growth can only be achieved by gaining market share at the expense of others. Price wars are but one aspect of this and in the last few decades occurred mostly in Europe, not in the US. Another aspect is that some supermarket chains, again mostly in Europe, use coffee as a promotion tool: that is they offer low prices to entice people into their shops in the expectation that purchases of other goods will follow. Of course this practice places pressure on the prices they are willing to pay to the roaster.

    In this price-driven market scenario it is more difficult for the mainstream roasters to maintain their margins. Hence when green coffee prices move up this has an immediate effect on their bottom line and, yes, consumer price increases follow. However, it is no secret that falling green coffee prices offer an opportunity to gain margin. At least for a while until one or other large roaster cuts prices - then everyone tends to follow. It is worth noting though that the price of green coffee today represents a much smaller proportion of the total retail product cost than in the past.

    This is not to say that the raw material cost is not important: price will always be part of the effort to gain market share, usually though in combination with other marketing initiatives aimed at increasing consumption as a whole.

    It is perhaps interesting to note that the weaker US dollar of recent years did not benefit US roasters in any way, unlike in Europe for example. Thus the impact of the higher green coffee prices of the last few years was felt in full by US roasters and so we are not surprised US consumer prices went up as well. Recent price reductions in the US are of course as a result of weaker green coffee prices, but no doubt also represent an attempt to reverse the impact of earlier price hikes. This because affordability does play a role and it is worth noting that, generally, consumers in the United States are more price-sensitive than those in Europe. For more on factors influencing demand see section 02.09 of the Guide.

    Mainstream or industrial type coffees are always the first to take strain, for example when the market perceives the likelihood of a potential future supply surplus. But, usually, any subsequent price changes are led by developments on the futures markets, not by retail pricing actions on he part of roasters.

    Posted 15 September 2005

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