The economy in a cup of coffee
A decade or two ago, we saw strong volume growth in beer and spirits. Today, coffee has probably become the fastest-growing beverage consumed outside the home.
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A decade or two ago, we saw strong volume growth in beer and spirits. Today, coffee has probably become the fastest-growing beverage consumed outside the home.
Coffee has been on my mind lately. A few weeks ago, during a café run that riders are known to enjoy, I pulled out a couple of bills to pay for my cup at Starbucks. Expecting a few large coins as change, I was surprised instead to receive only a handful of smaller ones. The price of an Americano had risen — again.
Starbucks is not the only coffee stop for riders. There are several lesser-known cafés in my area that form part of my café-run habit and can compete with the coffee giant through good coffee, filling meals and homey charm.
Curious about inflation, I reviewed the cost of each café run. The Americano, which consists of one or two shots of espresso and hot water, costs P120 to P180 per cup. At street, kiosk, or trailer-type coffee shops, a cup costs less, meaning the difference largely reflects the cost of air-conditioning and rent.
Another observation is that the price of the smallest cup of coffee in these cafés can equal the cost of the food served, such as pastries. In traditional restaurants, meals account for the bulk of the bill, not beverages. The other establishment where the food-to-beverage cost ratio is similarly reversed is a bar. That is understandable because people generally go to bars to drink alcoholic beverages, while meals are merely complementary.
Because of this similarity, cafés compete with bars for consumers’ share of wallet. There are a couple of key differences, however, that give cafés an advantage. First, their customers are not limited to adults. Second, customer traffic is not necessarily concentrated at night.
Comparing the two also suggests that consumer preferences are changing. Globally, volumes of alcoholic beverages, whether wine or spirits, are declining or remaining flat. Although local data are limited, I suspect the Philippine market is following the same trend.
A decade or two ago, we saw strong volume growth in beer and spirits, such as gin, brandy, tequila and rum. Today, coffee has probably become the fastest-growing beverage consumed outside the home. It is reported that Filipinos consume more than three times the coffee produced locally and, according to another estimate, average 2.5 cups a day — second only to Japan.
Combined with a younger generation that prefers coffee or healthier alternatives to alcoholic beverages (although that remains debatable, considering many coffee-based drinks contain more sugar), the implications for our food manufacturing industry could be significant.
The Philippines is one of the world’s largest producers of gin and rum, while beer remains a major component of the country’s food and beverage industry. This shift in consumer demand presents both risks and opportunities that local manufacturers can either manage or capitalize on. Failure to recognize the trend could leave the market open to foreign competitors. The acquisition by the country’s leading quick-service restaurant chain of coffee brands in Vietnam and South Korea demonstrates this strategic effort to defend wallet share.
From a gross domestic product (GDP) perspective, money spent on coffee in cafés does not generate as much income for Filipinos as spending on locally produced beer. Most of the value created comes from retail services. Since the Philippines imports more coffee than it produces, however, a substantial portion of that economic value flows to exporting countries such as Vietnam and Indonesia.
On a net GDP contribution, a cup of coffee probably contributes less than a bottle of locally produced beer.
This is not to suggest that people should drink beer instead of coffee. We should take a page from Japan, which excels in both beer and coffee manufacturing. The local food manufacturing industry should harness the country’s natural resources and human talent to lower the cost of coffee, make it competitive with beer and eventually become an exporter.
Returning to inflation, coffee consumed at home, such as sachet and instant coffee, forms part of the food component of the consumer price index (CPI). Coffee consumed outside the home, such as in cafés, falls under the restaurant and accommodation component of the CPI. When computing core inflation — which excludes food and energy — restaurant and accommodation likely become key contributors.
Last week, the Philippine Statistics Authority (PSA) reported that headline inflation decelerated further to 6.4 percent in June, a positive development. Core inflation, however, continued to accelerate, rising to 4.4 percent in June — the sixth consecutive month of increase.
Core inflation remains a key concern for the Bangko Sentral ng Pilipinas, which has maintained its tightening stance.
A cup of coffee can offer surprising insight into core inflation and the outlook for economic growth.
That single cup reflects a weaker peso, higher wages, rising rents, stronger competition, and an insufficient supply of a fast-growing, high-value agricultural crop. There is more to that cup of Americano than meets the eye.
