While coffee and tea as commodities are likely to see lower prices than they did in 2022 this year, consumers should not expect to start paying less at the grocery store or coffee shop anytime soon. Commodity prices are just one of many factors that feed into the final retail price of hot drinks, and even if the price of coffee and tea at origin falls significantly, the wider environment makes it highly likely that retail prices will remain well above their historical norms.
Hot drinks, like all CPG industries, has been affected by a wide range of inflationary factors, including the rising costs of energy, packaging, transportation, and labour. Many of these remain high and inflation projections for 2023 are still well above the historic average. Euromonitor International forecasts inflation should be 4.6% in developed economies this year and 8.0% in emerging ones.
More specific to the industry, major industry players like Nestlé have signalled their intentions to hold prices where they are for now; this is a reflection of the wider CPG landscape.
Many companies are using value-led strategies that favour keeping prices high and protecting margins even at risk to volumes
Source: Euromonitor International
Coffee: Moderating commodity pricing, limited impact to consumers
Coffee prices tended to rise faster than overall grocery inflation during 2022 thanks to increases in prices for coffee at the commodity level, particularly owing to a poor harvest in Brazil. At the retail level, this meant that beans and standard ground coffee tended to rise in price the most because they have the most coffee content. Pods, in contrast, generally stayed the most stable in price because they are sold at a much higher price point and coffee as an input represents a smaller portion of the retail cost.
The outlook for coffee production has improved for 2023 and, barring any unforeseen weather-related disruptions, commodity prices should fall. The combination of value-led pricing strategies, persistently high prices for other inputs, the role of long-term supply contracts, and other factors though means that consumers are unlikely to notice. Instead, they will continue to try to save money by spending less at restaurants, shopping at discount retail channels, and practising other forms of value-seeking behaviour to cope with high prices.
Tea: Up in price, but less than most food and beverage categories
Tea has, in general, been growing in price but at a lesser rate than other grocery products. This is because while it is subject to the same general price pressures as any category of CPG, it has few unique ones. No major producer country had an especially bad harvest in 2022 and Russia and Ukraine are major consumers of tea, not producers (the exact opposite of the situation in categories like bread and cooking oil) so the impact of war was relatively moderate.
2023 promises more of the same. Economic and political woes continue to beset many major consumers like Russia, Iran and Turkey, likely tamping down demand, while harvests are on track to be, in general, strong. As with coffee, that should mean moderate commodity prices but no dramatic falls in what consumers are paying.
Is moderate inflation here to stay?
The world in general faces many challenges in the 2020s: the impacts of climate change, ageing populations, and a shifting geopolitical order. All these make it unlikely that the economic situation of the mid-2010s, with low inflation rates in major economies and ever-expanding global trade networks, can return. Coffee and tea, as industries with long global supply chains, will be more exposed to this than most.
Supply chain issues and rising prices may well prove to be the major challenge facing the industry for the 2020s as a whole
For more ways inflation is affecting the future of the drinks industry, listen to our podcast Stay Home or Go Out? Can the New Roaring 20s Survive Soaring Inflation?