Demand - Challenging Assumptions in Coffee – Part 2
- Ryan Delany
- Mar 5
- 4 min read
The New Paradigm
An old mentor of mine once said to me, “when someone tells you that its a new paradigm, run the other way.” The message was clear, we want to be rather cautious when we throw around terms like 'New Paradigm’. However, even if there is no new paradigm, one thing we can say for sure, is that the demand recovery hasn’t exactly bounced back the way that many first thought that it would.
For one thing, the lockdowns lasted for longer than many first thought, and in some ways, they never really ended. While statistics suggest that working from home peaked in 2020, we have not returned to pre-covid levels, and likely never will. This is where the new paradigm comes in, the decline of the office.
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Percent of Americans Who Teleworked
On top of the work from home scenario, we still have a market inversion disincentivizing stock build. Additionally, the Arabica and Robusta markets are at record price levels (in nominal USD terms, Robusta traded higher when it was a British pound contract, and Arabica traded higher in inflation adjusted “Real Dollar” terms). Hopefully high prices and market inversions will not last forever, but they have certainly been persistent.
In the meantime, high prices are demanding their pound of flesh from coffee demand. Just because demand is inelastic, doesn’t mean that it is "static”. In other words, it will still react in relation to price, just not as much as other products. Looking at the chart below that we can reduce demand by raising prices, it just requires much higher prices to reduce demand.
We can see this inverse relationship between price and demand playing out very clearly when we look at US imports vs price. As the Arabica market rallies heavily in 24 and 25 we see US imports collapse. There was some recovery in demand after the lockdowns lifted and logistics improved in 2021 and 2022, but by 2023 high prices and an inverted market told consumers to drink less coffee and importers to carry less coffee.
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So is there a new paradigm?
The main paradigm shift in coffee consumption seems to be a realignment in the global workplace. While in the short term we are returning to the old model of physically commuting to large offices, I think that the digital environment is moving away from this in the longer term. Remote and telework was already increasing before COVID.
Popular self-help author Tim Ferris famously wrote his book “the 4 Hour Work Week” in 2007 that discussed how to employ remote workers on small scales. The outsourcing of call centers to international locations was already a hot topic in the 1990s. What Covid did was push the boundary of what jobs could be done remotely and also increased widespread familiarity with telecommunication tools.
Companies are finding it harder to justify why they need to pay for a Manhattan real estate address when half of their employees work from home.
My own company was founded during COVID, most of our services are provided digitally and my small team lives and works on 3 continents and in 4 different timezeones.
All this is to say that after a brief recess in the aftermath of Covid, the pervasiveness of drinking coffee at an office building is likely on the decline. This means that drivers of consumption are likely to be at-home consumption (through retail and subscription models) and in cafes and restaurants.
However, this is a shift that seems likely to primarily impact more industrialized coffee consumption markets like North America, Europe and Japan. This is a large proportion of the present coffee drinkers, however, the bulk of the world’s population (85%) live in developing countries rather than developed countries. This means that as more of the world develops and GDP per capita increases, we are likely to see larger and larger proportions of the global population consume coffee.
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So it remains to be seen whether the old paradigm of 2% consumption increase per year holds. In the short term, we think it likely that demand continues to struggle as more of developed world continues to march towards increased remote work and more efficient (eg single-serve) methods of consumption.
However, not all is lost for the demand bulls and coffee evangelists out there. In the longer term it seems likely that demand will be increasing significantly, perhaps beyond the old 2% increase per year. This demand will come not from the old markets but from the new ones. The global trend in has been for rapid industrialization and increasing GDP globally. The new technologies of AI and the internet are accelerating the pace at which countries are able to compete in the global marketplace. This is important for coffee consumption because if there is one trend that we think will continue to hold, it is that as countries become richer and more economically developed, coffee becomes an integral (and we think beneficial!) part of more people’s lives.
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