{"id":4592,"date":"2024-10-07T21:48:46","date_gmt":"2024-10-07T19:48:46","guid":{"rendered":"https:\/\/www.rivistaeco.com\/?p=4592"},"modified":"2024-10-07T21:48:46","modified_gmt":"2024-10-07T19:48:46","slug":"why-does-coffee-cost-so-much","status":"publish","type":"post","link":"https:\/\/www.rivistaeco.com\/en\/2024\/10\/07\/why-does-coffee-cost-so-much\/","title":{"rendered":"Why Does Coffee Cost So Much?"},"content":{"rendered":"<p><i><span style=\"font-weight: 400;\">Lavazza has always been a single-product multinational with a fully-integrated production process: a rare model that has evolved through a precise sequence of innovations. Over 120 years ago, Luigi Lavazza in his shop in Turin was the first to invent, propose, and commercialise the concept of blending different qualities and origins of coffee, which still distinguishes all the company&#8217;s products today. This model continues to hold up despite diversification, a winning factor for the Piedmontese group that last year acquired MaxiCoffee in the French market and about a month ago launched a takeover bid for IVS Vending. The group&#8217;s long history of innovation, along with market and channel diversification, are the company&#8217;s strengths, ensuring a significant presence in various geographical areas and sectors. With exports to over 140 markets and eight production plants in five countries, CEO Antonio Baravalle shares his vision with Eco on the current geopolitical challenges affecting the coffee world.<\/span><\/i><\/p>\n<p><b>Antonio Baravalle, how is the cost of coffee in this first part of 2024?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The coffee sector is experiencing an unprecedented situation in terms of duration and scale, with the price of Arabica rising by 75% since 2021, including a 60% increase in 2023 alone. Additionally, the price of Robusta has skyrocketed by 200% compared to its historical average, a phenomenon that has coincided with a significant surge in demand. Additionally, the 10% increase in the dollar has led to an overwhelming accumulation of costs in the category.<\/span><\/p>\n<p><b>You sounded the alarm months ago.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Indeed, I anticipated that climate change, production crises, and increasingly prohibitive transportation costs for raw materials would trigger a &#8220;perfect storm.&#8221; In the first four months of 2024, green coffee prices reached unprecedented levels: for the first time, there were substantial increases in both market values (exceeding $4200 per ton) and differentials (surpassing $1000 per ton), nearly doubling the raw coffee material cost.<\/span><\/p>\n<p><b>The situation is always evolving, especially looking at Suez. How do you navigate such constant changes?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">For the coffee world, Suez transits don&#8217;t just mean challenges in importing from Vietnam (the second-largest coffee producer globally and the top producer of Robusta) but also from many other important origins like Indonesia, India, Uganda, Ethiopia, and all other producers east and south of the Red Sea. We are trying to tackle this difficult situation by diversifying our supplies, but the unpredictability of the moment makes it challenging to make medium\/long-term plans.<\/span><\/p>\n<p><b>A while ago, you mentioned fearing a recession due to the Middle East situation. Is that still the case?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The scenario remains complicated for the entire European industry. Although the latest data shows the Eurozone to be out of recession with a slight GDP increase (+0.3%), we remain cautious. There&#8217;s still a fear that Italian ports might be sidelined in favour of Northern European ones. For our sector in particular, the consequences could be severe.<\/span><\/p>\n<p><b>Italy&#8217;s food sector buys everything abroad. Has inflation in the sector started to show signs of slowing down?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Inflation in the food sector remains a widespread problem across all European markets. In the first months of 2024, consumption continued to slow down. According to Istat data, in April, inflation dropped to an annual rate of 0.9% from +1.2% the previous month: the monthly increase was 0.2%. The slight deceleration highlighted the ongoing trend of falling non-regulated energy prices (-13.9%) and the deceleration of transport services prices (from +4.5% to +2.9%), various services (from +2.3% to +1.8%), and unprocessed food (from +2.6% to +2.2%). Despite a food industry with a turnover of 180 billion euros, Italy still buys most of its raw materials abroad for processing, making it particularly vulnerable to crises like the one in the Red Sea.<\/span><\/p>\n<p><b>The cost mechanisms of cocoa are very similar to those of coffee. Where do you see the price of coffee by the end of 2024?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Both the coffee and cocoa sectors are experiencing rising costs, although the dynamics are not always the same. The coffee market volatility is unprecedented: in recent years, there have been constant average increases reaching record prices in the early months of 2024. However, in early May, the market suddenly lost value while remaining at high prices, with Robusta dropping from over $4200 per ton to below $3400 in a few days. Previously, the demand\/supply ratio was the basis; today, we witness extreme volatility. Unfortunately, making medium- to long-term forecasts is very difficult as unpredictability and the need to be reactive and adaptable to change have become intrinsic aspects of doing business.<\/span><\/p>\n<p><b>Among EU environmental policies, environmental factors, and issues in coffee-producing countries, what is the number one problem?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">I would talk about a confluence of factors, but those related to climate change have significantly impacted recent price trends. Robusta coffee is at historic highs for various reasons: fluctuations in coffee futures at Wall Street, the impact of extreme weather events like drought in Brazil or rains in Vietnam, and unfavourable dollar quotations.<\/span><\/p>\n<p><b>Lavazza buys coffee worth one billion dollars annually for a turnover of three billion. Can a group like yours absorb the cost increase?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">That&#8217;s the point. For us, a one-cent change in the dollar means an additional cost of 10 million dollars. To give an idea: in a packet of ground coffee, the raw material accounts for 75% of the total cost.<\/span><\/p>\n<p><b>Can you tell us what worries you the most in your sector at the moment?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Two things: the cost of raw materials, which significantly affects the final product, and the substantial impact that EU regulations can have on the Italian coffee sector.<\/span><\/p>\n<p><b>Can you clarify?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">We all support more sustainable business practices, and as a group, we already have many projects and investments in this direction. The EU, with the Green Deal, is introducing very stringent and difficult-to-apply regulations for the sector. For example, the Packaging and Packaging Waste Regulation (PPWR) affects the coffee capsule sector.<\/span><\/p>\n<p><b>It&#8217;s often said that the US innovates, China copies, and Europe regulates.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The macroeconomic context is already challenging, and the two new regulations adopted by the EU risk further complicating the economies of coffee roasters. The EUDR (Deforestation Regulation) will come into force in early 2025, banning the import and export into the European Union of products that have caused deforestation after December 31, 2020, requiring the tracking of the entire supply chain: only 20% of the world&#8217;s coffee growers will be able to comply immediately. This means countries like Kenya, Uganda, Tanzania, and Ethiopia could be excluded.<\/span><\/p>\n<p><b>As we wrote in the first issue of Eco, the weakest farmers are the ones who suffer. The last link in the chain.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Out of 125 million coffee growers, 8 million will struggle to sell their products in the EU, which accounts for 30% of global purchases. That&#8217;s why many industry associations urgently appeal to the Commission to realise that this regulation cannot be applied wholesale and would create extraordinary discrimination since the US and China would not be affected by the rules, causing a distortion of competition. The regulation is compounded by the Packaging and Packaging Waste Regulation (PPWR) approved by the European Parliament for capsules and pods, allowing member states to require that packaging placed on the market, if made of non-metallic materials, be available on their market only if compostable. For years, we have been working on sustainable packaging solutions and have developed our technologies with significant investments. Therefore, the market should be left to self-regulate, and producers should evaluate the material choice to meet recyclability requirements without rendering all the investments made by companies over the years futile.<\/span><\/p>\n<p><b>And where do you see the opportunities?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Despite a complex macroeconomic moment, we are a solid reality with a medium- to long-term vision. We will continue to look at the international market and evaluate strategic and synergistic investments that can contribute to our development, enhancing our competitive capacity and consolidating our presence in global markets.<\/span><\/p>\n<p><b>How can a multinational like Lavazza react to uncertainty? Have you ever considered diversifying production or establishing alternative value chains?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">In nearly 130 years of history, the company has experienced many challenging moments and always emerged successfully growing. Despite raw material prices reaching historic highs, there have always been cycles and significant fluctuations, but we hope to return to normal prices soon. We have all the risk management systems in place, and even though we are a single-product company, we have diversified our offerings geographically and multibrand, covering every consumption channel from home to vending.<\/span><\/p>\n<p><b>Do you have financial tools that allow you to protect yourself?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">It has never been a problem because we have always financed ourselves easily. We also had a shareholder who has left more than half of the profits within the company for at least thirty years. This allows us to face the year serenely, always monitoring cash flows. One of my former bosses told me, &#8220;You have to do things when they are going well and not wait to do them when things go wrong. Because then they cost more and take much longer to repair.&#8221;<\/span><\/p>\n<p><b>What are the differences in coffee prices between Italian regions and countries?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The final price of a cup of coffee is not determined by the producers but by the individual business that serves food and beverages to the public, whether it&#8217;s a bar, restaurant, or other establishment. However, if we want to analyse this, the price depends on many factors, just like other food items: the geographical location (north or south), whether the establishment is in central areas or not, and whether it is in tourist locations or not. Certainly, the blend affects the price, as does staff training, the commercial positioning of the establishment, and many other factors. The price of coffee in Italy is significantly lower than in the rest of the world, despite us being considered the inventors and biggest consumers of the beverage.<\/span><\/p>\n<p><b>How has the transition to capsules favored you?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Lavazza has been a precursor in the portioned coffee market: one of the most dynamic trends in the coffee world for its ability to achieve a good result in the cup, with coffee very similar to that of a bar. In recent years, we have also invested in sustainable solutions such as compostable capsules. The advantage lies in the product&#8217;s convenience, while the disadvantage is the high competition with companies that, like ours, have a proprietary capsule system.<\/span><\/p>\n<p><b>Advertising: you were pioneers with Paulista. How do you do advertising today? Only on social media?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Today, it&#8217;s necessary to make the brand come alive for the consumer. We use different platforms to stimulate dialogue among the new generations on cultural and social issues relevant to the community\u2014like the Basement Caf\u00e9 format on YouTube, a real TV show made for young people and fresher and more accessible on social media with many views. I also think of the Good Morning Humanity campaign in 2020 during the pandemic when we were all overwhelmed and caught off guard by something unfamilair and bigger than us: Lavazza chose a positive message taken from the past, words of rebirth, universal values perfectly told in Charlie Chaplin&#8217;s famous speech from &#8220;The Great Dictator&#8221; in 1940.<\/span><\/p>\n<p><b>So you take digital and tailor it to yourself practically as if it were a way of thinking?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Of course, because it <\/span><i><span style=\"font-weight: 400;\">is <\/span><\/i><span style=\"font-weight: 400;\">a way of thinking and seeing the world. It will increasingly be part of our lives, becoming indistinguishable from what we can define as &#8220;real.&#8221; In this sense, Lavazza speaks of on-life, thus surpassing online and offline, with the ambition of being inside people&#8217;s lives in all its dimensions. Abroad, we are in a slightly different phase where we need to give substance and credibility to our premium positioning. There, we must tell the Italian lifestyle in a non-stereotypical and fresh way: we must give solid roots to a global brand without drawing it into an ethnic dimension that would hinder our growth.<\/span><\/p>\n<p><b>In the Gattinara plant in Vercelli, a three-year experiment of the &#8220;short Friday&#8221; is about to begin, reducing Friday&#8217;s workday to four hours for higher performance on Saturdays when needed at certain times of the year. Why this decision?<\/b><\/p>\n<p><span style=\"font-weight: 400;\">We are committed to achieving business results while ensuring the well-being of our people. Through flexible working hours, short Fridays, and additional leave for paternity, caregiving, corporate volunteering, and other proposed novelties, we want to involve and include our employees as much as possible. We have also introduced interesting opportunities in terms of work-life balance with the supplementary contract at the Gattinara plant. For example, the short Friday started with great appreciation at the Group&#8217;s headquarters in 2023, and we decided to extend it, albeit with different mechanisms but guided by the same philosophy, to a production reality as well.<\/span><\/p>\n<p><b>Bio<\/b><\/p>\n<p><em><span style=\"font-weight: 400;\">Mariangela Pira is a journalist for Sky TG24.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Lavazza has always been a single-product multinational with a fully-integrated production process: a rare model that has evolved through a precise sequence of innovations. 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