Part 1: The Lull

This is the first of three parts, covering how I see the current state of the speciality coffee industry around the world. I’ve spent the last year thinking about this, and have had the chance to talk to people in the industry in cities around the world. I believe that much of what I’ll discuss has a global implication – even if not all of it is applicable to any one particular local market.

I’m aware that these posts come at strange time, as sentiment in the industry is generally incredibly positive. The SCAE recently ran a survey 1, and as part asked people about their feelings on the speciality market. 93.85% of those who responded felt positive about the current state, and 96.19% felt positive about the future. I sit in that very small minority on the latter, and I want to explain why. To do so I want to try and put my thinking into some sort of context covering how we got to where we are. This will, inevitably, be a little simplistic in places but I want to show my train of thought, see if you follow along and if we all end up in the same place.

The Rise of Speciality

I’m not going to talk in waves (because I believe it to be a good analogy, but US specific), so when talking about speciality in these posts I want to talk about the phase of modern coffee 2 that started in the early 2000s. Defined by a focus on the specific tastes of coffee, aiming to highlight the taste of terroir from which it came as well as the work of those who grew it.

This movement also drove a number of technological advancements in espresso and drip brewing (a sector of the industry that could be considered to be in a period of stagnation before this).

The goal was to produce the best tasting cup of coffee, the most transparent cup of coffee, and to share that with the consumer. The desire to surprise and delight them through the taste of the coffee was largely driven by the fact that those working in the industry had had revelatory moments: A cup of coffee that was shocking in its uniqueness and its taste. I think we believed that if we could only get consumers to taste really great coffee then they too would have a revelation, then they too would care deeply about the coffee they drink each day and ultimately would reward quality focused businesses with their loyal custom from that point onwards.

The rise of experimental coffee

I think this idea, this aspiration of selling revelation, can be seen throughout the tropes of the industry. Dairy and sugar became the enemy, as they would obscure the very thing we were so desperate to showcase and we quickly developed a reputation as condescending. Our clear frustration at people’s lack of interest in engaging intellectually with their coffee leaked out, coupled with our earnest desire to serve something truly unique, and slowly we became the new snobbery/hipster joke industry.

We designed and created businesses to try and showcase coffee in a new way. We built brew bars, we experimented with cafe layouts, we tried a raft of new things to try and build appreciation for great coffee.

We experimented with technology, chasing a cup of coffee that would somehow yield instant conversion. Pressure profiling, temperature profiling, unimodal grinding or unusual brewing technologies were all chased down and all had high hopes for producing something undeniably, irrefutably better. That search continues today.

You could well argue that, as an industry, we’ve been hugely successful. Speciality coffee has grown, in terms of total dollar value, at a startling rate. There isn’t a major city in the world lacking a cafe working hard to serve unique, traceable and interesting coffees. However, along with that there has been a phenomenon creeping in around the world that I think worthy of discussion…

The Lull

I don’t think I’m alone in feeling that the industry has begun to stagnate. The number of experimental, innovative or unusual coffee businesses opening has undeniably decreased dramatically. I also think that the general level of excitement about coffee is dropping.

When great coffee was rare, the knowledge of where to find it was valuable. It was prized. When travelling it seemed that when asking for recommendations you would get a few places repeatedly and emphatically suggested to you: “Going to New York? You have to go to Cafe Grumpy, or Ninth Street or RBC.”

There weren’t many places, but now that has changed. There is great coffee being served in lots of places, and even more aspiring to serve great coffee. As such giving and getting recommendations has actually gotten a lot harder. I travel, and ask, a lot and people seem increasingly reluctant to give a strong recommendation. Usually the first response I get is someone asking which neighbourhood of a city I’m giong to be in, followed by a local recommendation. Once again convenience rears its ugly head – the idea of a destination cafe seemed to burn brightly, but has perhaps sputtered out.

The knowledge of where to get great coffee is no longer valuable, because it is so readily available. Available as books, apps or maps. A higher standard of coffee is sufficiently easy to access that it could be considered, to some extent, normal. The problem with normal is that it isn’t exciting. It isn’t, and I hate to bring this up, particularly cool either.

Along the way we also did something important, but without the consequence we hoped for: we served some really, truly, great cups of coffee. The problem is that people simply enjoyed them and moved on. They were happy with their purchase, happy to be caffeinated, and happy to have paid what they did. The earth didn’t move, the sky didn’t part, they didn’t hear a choir of angels. I don’t believe coffee cannot, or should not be, improved; it can and should always get better. I think we just need to readjust our expectations of what an isolated sensory experience can do. Yes, sometimes it can change someone’s life. However, it can’t do it every time or even most of the time.

I believe we have made a grave mistake by allowing an idea to take root. We’ve sowed the seeds of an idea, the idea that: if you serve great coffee then that’s all you’ll need to be successful. I think we’ve stopped experimenting and attempting to innovate because we’ve worked out this truth – though we’re rarely at the point of discussing it openly.

Conversations in the industry are starting to change. The more experienced owners in coffee businesses have moved their focus away from how they can serve coffee that would delight their peers in the industry, into how they can run sustainable businesses. Conversations around equipment are clearly evident of this – people are interested in efficient, less wasteful technology and the idea of having to swallow high levels of coffee waste in order to achieve the best possible quality is dying a death.

I cannot attribute these changes in focus, this renewed interest in financial modelling, to just The Lull. There have been other important changes in the market that are having a much larger impact on the way people are thinking about their businesses, and this is what I’m going to address in the second part of this series tomorrow.

Part 2: The Bubble
The growth in speciality coffee shops in the last decade has been astonishing. While different markets have grown at different rates , the patterns and trends of growth have been very similar.

Pioneers open a speciality coffee business in a city, serving something genuinely new and substantially better than the rest of the market. These coffee businesses are usually run by people with a burning passion for great coffee, who would be opening their business regardless of economic climate – in many cases cities saw a boom in the coffee cultures during the recessions brought on by the global financial crisis in 2008.

The success of these pioneers gives reassurrance to another tier of entrepreneurs, who also want to open a cafe, who have been hesitant, and who are encouraged by what looks like healthy customer demand for a better product.

In turn, this increase in growth in coffee shops spurs a new tier – those who think the coffee business is clearly the business to be in, and who decide to enter the market too. Typically there are more well funded businesses in this category (though they’re not absent from the first two). I’m not trying to cast aspersions at anyone here, and I’m not claiming that this is as clear cut as presented. In most cities all three types of entrepreneur are opening coffee businesses at the present.

Growth Vs Competition

Taking London as a case study does come with certain drawbacks: it is an unusually dense city, concentrating both people and money. As such it has been able to foster a rate of growth in coffee that would not be possible in most other places. However, I think that concentration simply speeds up a process that will be seen in many other cities around the world. It is, in a way, a canary in a coalmine.

The rate of openings in London and the UK only continues to increase. The last data I saw on speciality businesses in the UK showed that around half of the speciality coffee shops and coffee roasting companies in the UK are less than 2 years old. 1 That is incredible to me, to see growth like this at the moment. It is also extremely disconcerting.

I’ve often used Kevin Kelly’s idea of “1,000 true fans” to talk about the necessary audience for a successful business. What concerns me is that every time a new cafe opens it needs 1,000 customers (who won’t come every day, but will identify as being a regular) to be sustainably successful (certainly in London). This isn’t a perfect number, in other cities it could be smaller. However, it does illustrate what isn’t happening: Every time a new cafe opens 1,000 new customers don’t just magically appear. Yes, new speciality coffee customers are generated by every business that opens – but not enough.

As such we’re entering a pretty typical economic scenario: there is more supply than there is demand, and supply is increasing rapidly.

What we’re seeing now is every business have to fight a little harder for every customer. We’re seeing established businesses suffer, for the first time, a decrease in year on year sales (in terms of checks/customers processed).

The growth has not been in independent businesses alone. Let’s take London as an example. Here are two maps, showing the same rough area of central London. One is from the Telegraph’s interactive map of branded coffee shops in the UK, the other from 100 Cups – a blog detailing the best speciality coffee shops in London.



You can dismiss chain coffee businesses if you like, but you should know that the typical UK chain coffee business process nearly 2.5x the number of customers per day as the typical UK independent coffee shop. That’s a staggering number, mostly because it shows that many UK independents are struggling to gain real traction when it comes to growing retained customers. Remember also that these chains have grown substantially in the last decade – it isn’t just independents that have boomed.

Access to finance

Post global financial crisis was a difficult time for businesses lookin to expand. Banks weren’t lending and as such single unit operators were slow to expand. That has changed recently, and crowdfunding (either through a bond or through selling equity) is becoming increasingly commonplace. In some ways I’m surprised at the willingness of people to invest but then the same Fear Of Missing Out could be said to be driving the absurd investments and valuations seen in the tech world. I believe now to be a golden time to raise this way (I’m not, however, saying people therefor should) because the are likely to be some pretty spectacular failures which may cause sufficient consumer outrage to provoke changes in regulation around it. I read all the financials I can from companies in a variety of fields including coffee and some projections simply appear so unlikely as to be impossible.

Even though it is far from ubiquitous I think it is having an impact – established businesses are attempting rapid growth and the money being raised is attac in more and more interest and attention in the sector.

Consumption data

With the growth of all these coffee shops you’d think that this would be mirrored in consumption data. That doesn’t seem to be the case. Using ICO figures for net green coffee imports (total imports, less re-exports), against accurate historical population, the per capita consumption hasn’t shifted much. In the UK in 2005 the per capita consumption was 2.56kg, and in 2013 it was 2.64kg (a 3.2% growth). This is somewhat mirrored in the USA also – consumption increasing only 10% in the last decade. The UK data is particularly surprising, and I think speaks to a shift in the type of coffee consumed. Instant coffee sales are on the decline, I believe an indicator of a slight move of the needle on base expectations of coffee quality.

While the ICO figures seem so contrary to what we are seeing that I want to investigate them further, I don’t want them to detract from the key idea. We appear to have too many coffee shops for the market to be sustainable. This alone would be an issue but I believe that problem is being further compounded by other factors:

Staff Costs

Typically those who open coffee businesses because they see an apparent opportunity don’t already have an indepth knowledge of coffee. As such there has been a dramatic rise in the number of businesses trying to hire experienced baristas to guide them through opening and to manage coffee quality. Never before have there been so many opportunities in the coffee industry, but never before has demand for staff been higher. This does something that most would consider positive – it drives up wages and pay for baristas and for knowledgeable coffee people. Just watching the jobs go up on Coffee Jobs Board in London has shown the rate of growth and the shift in the type of staff that coffee businesses (especially new ones) are looking for. The advertised rates of pay have noticeably trended upwards in the last two years.

For a cafe this is difficult. Labour costs are often the biggest cost for a cafe, with the typical cafe in most markets now running a labour cost in the range of 30–40% of net revenue (not all are here, but a large number are). The exception to this would be in countries with strong tipping cultures, whose lower wages look better on paper. (One reason there will be strong resistance to change). However, they are by no means immune to change – notable increases in minimum wage in many US states being an example. The increased challenge in finding staff, coupled with the increased costs of hiring and training are applying huge pressure to existing coffee businesses. It is also feels much harder to use a price increase on food and drink to cover the additional cost in a market place with increasing competition – if anything that competition will push coffee business to decrease their margins, or offer better deals, to try to win more business.

If you look at the two maps from earlier a little closer you’ll see something interesting. You can pretty clearly see which streets in London cost more – they’re full of the chain coffee shops, and almost empty of independents. The Strand or St James’ are two good examples.

Rents in London, and in many cities around the world, have played something of a cruel joke on coffee businesses. Many coffee shops chose to open in up and coming neighbourhoods, gambling by taking a lower rent in an area that traditionally didn’t have the type of consumer base they’d need. However, as cities are changing rapidly at the moment we are seeing gentrification spread at a surprising rate. Many up and coming neighbourhoods have quickly become more expensive places to do businesses, and one of the business types considered essential to the gentrification of an area is a coffee shop. By helping make those neighbourhoods more attractive, many coffee shops are being repaid with higher rents.

Rent is an increasing pressure, and as more and more businesses come to the rent reviews in their lease agreements I think more and more are likely to be shocked by the shortsightedness and greed of their landlords.


This is, again, by no means unique to London – even if the particular set of circumstances driving London property market may be unique. New York, San Francisco, Seoul, Melbourne, Tokyo and many other cities are seeing a dramatic impact of rapidly increasing rents of the long term viability of a number of coffee businesses throughout those cities.

What Bursts The Bubble?

So, I’d argue we are in something of a bubble and I think I’ve laid out the main pressures in the market that could cause it to burst. I don’t think calling it a bubble is completely accurate because of what I think comes next. However, I have not discussed something of importance and potentially significant impact: the price and availability of high quality green coffee in the future.

The global supply of coffee, as a generic product, is obviously not considered threatened – as the low C-market price clearly shows. However, we’re discussing speciality coffee and the outlook there is worse. The amount of washed arabica coffee (as a percentage of total production) is in steady decline. There is also an increasing demand for high quality washed arabica, and I think that is showing the prices roasters are paying at the moment. I think if you asked roasters whether the prices they are paying now are similar to the prices they were paying the last time the C-market was in the same place (implying some level of relatively fixed quality-derived differential) then they would say “No, coffee has gotten more expensive”. I’m not saying this is a bad thing – but it is evident of a particular problem that belongs to our subset of the wider coffee industry.

Seeing a steady increase in price would only add further fragility to an already fragile supply chain on the consumer side. Roasteries would either have to up prices (and fear of losing out to cheaper competition will prevent them doing so), or they put the prices up and pass the pressure on up to the cafe. While coffee beans are not a large part of a cafes total outgoing, they are still significant.

I wanted to include the green coffee situation, but I don’t think it is entirely appropriate to explore it in depth in this series of three posts.

In the final part tomorrow I will explain what I think will happen in the next few years, and what the likely repercussions will be of the coffee industry becoming, in many ways, the victim of its own success.

  1. This is from Allegra’s “Future of Coffee” report.  ↩︎
Part 3: Implications and Predictions
In the previous two parts I’ve explained how I currently see the market in speciality around the world, and how it has evolved to date. I am happy to state that generally humans aren’t particularly good at predictions of the future, even in the 3–5 year range we are discussing here. However, in this situation I am happy to be wrong. As a business owner, if I act on these concerns – and what I believe to be likely – then my business should not suffer (though perhaps its growth would be slower).

A Market Correction

What I believe we are heading towards is, simply, a situation where we have more cafes than we have customers for them. This leads to a pretty obvious conclusion: a substantial number of cafes are going to close.

They are going to close at a variety of points in the business cycle. Some will hit a break in their lease and decide enough is enough. Selling a lease will, for some, yield better profits than the previous years of trade. For others the business may simply fail. Experience tells us that many businesses aren’t very good at closing and tend to hit a wall of either cashflow failure or they simply exhaust the patience of creditors. These businesses are the biggest concern as their failure passes something back down the supply chain: debt.

Cafes have come and gone for decades, until recently it was normal for most people to be dismissive of them as high risk businesses (like restaurants) with very high rates of failure. That tone has changed in the past decade. What we’re likely to see is quite a large number of cafes close in a relatively short time frame. This will pass back a wave of debt onto roasters. Those roasters who’ve chosen to lower prices, and offer longer credit terms, will be hit with those debts and will likely suffer cashflow issues. In particular younger companies that have had less time to build cash reserves, or businesses where cash has regularly been pulled from the business. As such I would expect to see some coffee roasting companies fail.

It is not unlikely that a green coffee importing business or two be damaged or taken out if a few of their roaster customers happen to fail.

I think it will be a difficult time, but the upside is that it will damped the rate of new openings and we’re likely to see the market stabilise at a more sustainable size. I doubt it will be as positive an environment for growth on the other side, but it will also be less fragile.

We’re already beginning to see this. Talking with various people in Korea, I was told that the most common business closure in Seoul is now a coffee shop – this a city that had an unprecedented explosion in coffee. A city with 800 coffee roasting companies, and over 2,000 cafes.

To be clear: I don’t think everyone will fail. I don’t think the majority of businesses will fail. I do believe a substantial correction will occur in the next three to five years in a variety of markets around the world.

One other sector is also in a difficult position here: equipment suppliers. Certain manufacturers produce machines that are both popular in speciality coffee, and also able to retain their value when sold second hand. A higher level of failure in speciality will be particularly bad news for equipment manufacturers as the growth in the second hand market will doubtless impact new equipment sales. I know some of them are already aware of this and beginning to strategise.


Consolidation is a word on everyone’s lips at the moment, primarily due to the aggressive movement of JAB Holdings in the coffee sector, and also off the back of Blue Bottle’s funding and growth model. I think we’re likely to see plenty more in the future. I believe a few different factors will drive this:

Looking at other industries that have gone through consolidation, I believe the primary driver is the desire for scale to achieve sufficient profitability. In a competitive market prices and margins are driven down, and one solution to grow net profit is to acquire larger scale through inorganic growth. Companies successful in the market early, and companies compelling enough to acquire funding to do so, will use capital to acquire other businesses that either fit well due to commonalities – i.e. a roaster buying other roasters, and sharing green coffee resources between all of them – or acquiring complimentary business such as a chain of cafes acquiring a bakery. One might consider Starbucks as an example of this kind of behaviour.

The increased number of businesses suffering from the market correction also presents an increased number of relatively cheap acquisitions. This itself will spur some level of opportunistic consolidation.

None of this seems particular surprising when looking at other industries that have historically gone through a boom and bust cycle, and seen the consolidation that went with it. (Beer would be a good example, and not unlikely to happen again in that industry in the near future). I don’t think this HBR article is completely accurate in describing this phenomenon, but I think plenty applies.

Is it all just doom and gloom?

I started out with the results of a survey that show immense levels of positivity in speciality coffee about the future of the industry. My goal was to share my reasoning behind my caution, and concern about our shared future. I’m interested in speciality coffee being both successful and sustainable and I believe we’re not considering the implications of our growth.

Around the world coffee suppliers regularly meet with people opening cafes for all the wrong reason. They hate their office job (while it may pay well, they feel their soul is being crushed), and they’ve always loved cafes. They have no experience in running a business and no experience in coffee.

To date, as an industry, we’ve sold the idea that if they just serve good coffee then all will be well. If they buy the right machine, buy the right coffee from the right roaster who buys from the right farmer, then success is assured. We know this isn’t true, and we really need to stop pretending it is.

For the short term gain of a sale a level of instability and fragility is introduced into our marketplace. I believe we need to consider our long term actions more carefully.

Should I Start a Coffee Business?

I gave a talk similar to this in Prague earlier in the year, and someone asked this in the Q&A. It’s a fair question – am I trying to discourage people from opening new businesses, do I think there are no opportunities left?

The answer is not simple, but I would say “Yes, you should open a coffee business.” It comes with a few caveats…

It is a crowded and competitive market. Do not enter if you do not believe you have something notably different or better. Make sure that you have a good understanding of the existing financial model of the category you are entering and have a good idea as to how you’ll compete.

Have something to say. People will always respond to individuals and businesses with vision, with personality and authenticity. I don’t think anyone in this industry believes we can have too many businesses like that.

I’ve shared my thoughts here because I think it is important we talk about the challenges we face openly. My mind is not fixed, I’m open to other people’s thoughts and ideas, criticisms or suggestions. I hope to start a continued conversation online and in person.