Now, not everyone feels this way,
but it's not uncommon for me to hear from people
that coffee has gotten pretty expensive.
And to be fair to them,
it did used to be much cheaper to buy a cup of coffee.
That's changed as the coffee boom has happened
in cities around the world.
And at a time when there are increasing numbers of articles
highlighting the fact that coffee growers
aren't getting paid the cost of production for their coffee,
that it's become unsustainable,
well, this rising price of coffee
leaves many people with questions that should be answered.
So that's what we're gonna do today.
We're going to talk about where your money goes
when you spend it on a cup of coffee in a specialty cafe.
To do that, we're gonna have to talk in generalities.
We're gonna have to talk about the business model of cafes,
and it's impossible to be completely accurate
because every business is a little bit different.
And also to begin with, we're just gonna talk about the UK,
which is obviously different in some ways than other places.
You go and you spend three pounds
on a cup of coffee in a good cafe.
Well, where does that money go?
Well, in the UK, the VAT, the tax rate, on coffee is 20%.
So 50p of your three pounds goes straight to the government.
The net revenue for the cafe is only two pounds 50.
So, let's divide that two pounds 50.
In a cafe, about 30% of the money that our cafe takes in
goes back out to product cost, cost of buying the things
that you ultimately end up selling.
About 35% of its money goes to pay staff.
15% of its revenue will go towards paying the rent
and associated location costs.
Maybe 10% will go towards general overheads,
from lighting to heating to administration,
leaving 10%, on a good day, as profit for the owner.
That's 25 pence on a three pound cup of coffee,
which means you've gotta make a lot of cups of coffee
to really make any money.
I should also add, that around the world,
those models will vary.
In some places, let's say Shanghai,
you might have a very high rent and a much lower staff cost,
but, by and large, around the world,
the net profit remains the same.
It's not uncommon to be making 10 to 12% profit
and doing better than that these days
is really pretty unusual.
As I said, this is the typical kind of business model
for a specialty cafe.
There will be some variants.
Some cafes will pay more to staff, some pay less.
Some will pay more rent, some will pay less.
Wait, wait, wait, you might say,
if I go to a nice cafe
and I buy a four pound cup of filter coffee,
there's no way that there's one pound of product cost,
even if they're using good quality coffee
and paying a sustainable price.
And you're right, that 30% of product cost
is the average across the board.
A cup of filter coffee, you may make a much higher margin,
compared to, say, a pastry that you might buy with it
that has a much, much, much lower margin,
a much higher cost associated with it.
So once we break apart the costs of a cafe,
you can see what's really driving the increase
in a price of a cup of coffee.
The cost of hiring and retaining staff
has really increased a lot in the last few years,
especially as coffee cultures
have become increasingly competitive.
The more cafes that open, the more baristas are needed,
the more demand the market sees,
and that drives up the prices for skilled, capable baristas.
This has meant that the staff cost for cafes
has constantly crept up and up and up and up and up.
When I first got into the business, it was only down at 25%.
Now it's easily 35% plus, that really has changed.
And I think anyone in any city in the world
knows that landlords have been greedy
and continue to be greedy.
But let's talk a little bit more about the coffee
that goes into each cup.
As I said before,
the actual cost of the coffee is surprisingly low.
It's a very small part of the total cost for a cafe.
This means that if a cafe's buying really good coffee,
it doesn't actually drive their price up all that much.
If you took a cafe serving a really great espresso blend,
full of coffees bought ethically and sustainably,
and that cafe switched to something really cheap,
really commoditized, and very low quality,
that cafe may save 15, maybe 20 pence of cost.
That's it, that's all the saving there is to be made.
It doesn't really make sense to cut those corners.
It makes sense to ask the right price
for something delicious, but for 20p more, for 30p more,
you can have something incredible.
Great coffee is actually incredibly cheap for what it is,
even when you're drinking in a cafe
with all the associated costs.
So if you're angry at the price of a cup of coffee,
that's okay, but don't be angry at the cafe.
They're not exploiting you.
Cafe owners are not rolling around in piles of money.
If you want to be angry, be angry at landlords being greedy
and driving up the cost of doing business
in cities around the world.
Be angry at governments,
whose failure to address housing crises
have driven up the cost of living
in so many parts of the world too.
But don't be angry at the cafe,
especially if they're buying something high quality,
something traded sustainably.
As always, I'd love to hear your thoughts
in the comments down below.
Thank you so much for watching,
and I hope you have a great day.