The Price of Vigilance

I have a caffiene addiction. It's addiction just as surely as if I were laying in the gutter in a pool of vomit. Except that I'm a blithering, slurring drone who can't walk straight when I haven't had a coffee, rather than after I've had a few.

Being both an addict and a bit of a snob (which is to say, instant coffee makes me feel like my gut is rotting, so I only use it for emergencies), coffee forms an important part of my budget. To date I have managed to avoid the need to break into any houses or mug any little old ladies to feed the habit, but all of these articles in the Age suggests I might need to reconsider my position on that.

So, what's going on with coffee prices? Well, judging by the following graph of arabica prices (arabica is the standard cafe bean) prices are indeed heading north.

Check out that positive gradient! Looking at this chart, the price of beans has increased by over a third in the past two years. If I take a cursory look at this chart and combine it with the broad media coverage, I would be starting to think that I was going to have to commence drastic austerity measures to keep up my consumption (in my world, this might mean ironing my own shirts).

However, there is more to think about here. Consider that the pointy end of this chart is suggesting a coffee price of around US$4.665 per kilogram of coffee. If you assume, generously, that each cup has 15g of coffee, this means the price per cup of coffee has soared from around 4.5c per cup to a whopping 7c per cup. Even assuming that wholesaler costs add 100% to this price, we're talking an increase in the price per cup of 5c.

When I moved from Perth to Melborne around 10 years ago, the difference in coffee prices was remarkable. In Perth, a coffee costing up to around $4 was reasonable. $3.80 was about the benchmark for a standard coffee from a standard coffee shop. In Melbourne, anything over $3 was expensive.

The difference between Perth and Melbourne wasn't driven by input costs, like a 5c differential in coffee prices. It was driven by greater levels of competition. Coffee shops in Melbourne had to take a hit to margins to get people through the door - I suspect that some Melbournce cafes sell at very low margins just to get customers in to buy high-margin items (eg, muffins). In Perth, lower competition meant that consumers would pay a bit more. This little allegory points to the fact that prices aren't always driven by input costs - sometimes they're driven by customers' sensitivity to price movements (ie, their elasticity).

However, the story about a West Australians moving to Melbourne 10 years ago perhaps points to the bigger issues here. A sandgroper (West Australian) can still show up in Melbourne and be surprised by getting a coffee for $3 when they have to pay about $4 back home. Over a period where inflation has pushed average prices up by more than a third, coffee prices have moved by only around 5%. Perhaps the level of competition has pushed margins down so far that everyone is feeling the squeeze more than they'd like to, but cafes are too worried about losing market share if they increase prices.

Price fixing and collusion are illegal. Sending a signal out through the media that "we should all lift our prices now while we can blame it one the commodity price" may not be.

Now, if only I could get my salary to keep pace with inflation, I might be able to afford it.