Coffee Supply Chain Crisis and Recommendations for Coffee Companies
Coffee chains’ well development has been raising drink prices, and these companies’ sales and profits have been falling. In late February 2022, it was revealed that the prices of coffee drinks in chain coffee shops, such as Starbucks, Luckin, and Tims, have risen, ranging from 1 to 3 yuan. On February 1, Starbucks disclosed its financial results for the first quarter of fiscal 2022 (October 4, 2021, to January 2, 2022). The same-store sales in the Chinese market fell by 14% in the quarter, mainly due to a 9% decline in the average transaction value and a 6% decline in overall sales value. A large part of this spike in coffee prices is due to the global shortage of coffee beans, whose impact will last for the next two to three years. Firstly, the global bean shortage is partially caused by a sharp decline in the production of Arabica coffee beans in Brazil, which account for 60 percent of the world’s total coffee bean production, resulting from extreme weather conditions. Secondly, the global mounting crisis makes it even more difficult and expensive to ship the coffee beans to their destinations in China. Thirdly, covid-19 has affected labor supply on the farms, either directly due to disease or indirectly due to social distancing measures, quarantines, and travel restrictions on the movement of farmers and migrant workers.
If the problems caused by the shortage of coffee bean supply to downstream retailers cannot be effectively solved, then it will be consumers that bear higher prices, with inconsistent bean quality and even the absence of coffee drinks they want. Simultaneously, the downstream coffee chains cannot earn sufficient profits to keep their business running smoothly. To create resilience in the face of the coffee supply chain crisis, the solutions I propose are generally from two aspects: increasing the retailer inventory and diversifying the sources of coffee bean supply. According to the latest report on the coffee bean industry, the global coffee inventory tends to decline further, thus the importance of procurement and inventory management is highlighted. To minimize the risk of sudden unavailability of coffee bean supply, downstream enterprises could brace for the global shortage ahead. Therefore, increasing the coffee bean inventory seems to be a relatively optimal alternative for these coffee retailers. For example, Nguyen Coffee Supply is a U.S.-based importer and roaster of fine Vietnamese coffee. Faced with unforeseen logistical problems, they are forced to order Vietnam coffee beans far in advance to make sure the commodity could arrive within the expected lead time.
However, although it’s a valid method to be prepared for the uncertainties, it may require prohibitive procurement and storage costs with such overwhelming demand. Additionally, on the cost side, prices for Arabica coffee beans have more than doubled in the past year due to dry weather in Brazil, supply chain turmoil, and freight costs. According to monitoring by the Intercontinental Exchange, coffee stocks have fallen to a 22-year low. Not only that, but it has caused the price of Arabica coffee beans on the Intercontinental Exchange to climb to $2.59 per pound, a 10-year high. Another solution to achieve risk diversification is to find out more access to the sources of coffee bean supply, which may refer to coffee suppliers of similar quality from geographical locations within easy reach such as the Yunnan coffee beans for Chinese coffee retailers. For instance, faced with the possibility of late delivery which may take place at any time, Sucafina’s solution is to track the transportation on a daily basis and keep the customer informed at least once a week. If the customer cannot get the coffee beans at the time they initially agreed, then Sucafina’s team will be the first to give the customer an equivalent alternative coffee bean. By providing substitutes that equate to the initial coffee bean in both quantity and quality, customers’ demands can be met as well. Likewise, let’s take the Yunnan coffee bean suppliers as an example, which now have profound potential as possible coffee bean suppliers. The current situation states that there are more enterprises mainly for coffee primary processing and supply, and compared to mature foreign processing enterprises their production scale, quality, and technology lag behind a lot due to the different levels of development of each enterprise, the quality of the coffee beans supplied is not the same. In this case, the coffee suppliers in Yunnan are bound to promote the technology, efficiency, and scale of production as soon as possible to keep up with the giant suppliers in the coffee bean industry. Therefore, I also call for technological innovation in the Yunnan coffee bean industry.
Yimeng CHEN
