Dubai – Qahwa World
Leading coffee companies are encountering a slowdown in consumer demand. Poor harvests, trade tariffs, and rising costs have weakened coffee consumption in Western markets, slowing sales growth and putting pressure on company valuations in the $400 billion industry. Expansion into emerging markets like China is seen as the next step, but it will likely be a costly and complex effort.
The modern coffee surge began in the late 1990s, peaking just before the pandemic. Major chains like Starbucks spread rapidly through Western cities, followed by the emergence of numerous specialty coffee shops. Companies such as Nestlé expanded their coffee lines to capitalize on growing demand for a high-margin beverage.
In 2018, Nestlé acquired the rights to sell Starbucks-branded products outside the U.S. for $7 billion. That same year, JAB, owner of JDE Peets, invested $2 billion to acquire a controlling stake in Pret A Manger. Coca-Cola also purchased Costa for $5 billion, describing the chain as a platform to broaden coffee sales from supermarkets to automated vending.
Yet, recent years have seen challenges mount. Coffee prices have surged, making popular drinks like cappuccinos and lattes more expensive for consumers, particularly in inflation-affected regions. In the U.S., ground coffee reached a record $9 per pound, double the price from 2021, and coffee prices increased 9% in the past year, well above overall inflation.
Future production faces risks from extreme weather events—droughts, floods, and frost—in key coffee-growing countries such as Brazil, Indonesia, and Vietnam. Rising labor costs and other operational expenses now make up roughly 90% of the cost of a cup of coffee. Tariffs on countries producing coffee pods, including Switzerland and Brazil, further strain margins, though recent U.S. agreements with Argentina, Ecuador, Guatemala, and El Salvador may ease some pressures.
The sector is seeing major shifts. Starbucks, valued at $100 billion, has faced profit warnings and is closing about 1% of its stores under CEO Brian Niccol. Keurig Dr Pepper’s $18 billion purchase of JDE Peets is designed to separate higher-margin beverage sales from lower-margin coffee operations. Pret A Manger also recorded a significant write-down, and Coca-Cola has considered divesting Costa due to underperformance.
Nestlé, whose at-home coffee products tend to be smaller and lower in caffeine content, appears better positioned against inflation. Still, the bigger challenge is sustaining growth in already crowded markets. In the U.S., Starbucks and Dunkin’ Donuts operate nearly 30,000 stores combined, while in the U.K., 98 million cups of coffee are consumed daily, with almost one in five people visiting a coffee shop each day.
To find growth, companies are increasingly turning to China and Latin America. Nestlé’s new CEO, Philipp Navratil, plans to introduce products in these regions, and Starbucks recently announced 145 new stores across Latin America and the Caribbean. However, income levels remain modest in these markets, competition is intense, and marketing costs will likely rise, limiting profitability. Starbucks’ experience in China demonstrates the difficulty of competing with local operators and imitations.
Expanding beyond saturated Western markets is logical, but the path forward may mean slower growth and smaller margins for the coffee industry.
