Why Coffee Shop Prices Are So High

Coffee shop prices seem high these days, a fact that leads many casual coffee consumers to wonder how a latte can be so darn expensive. A 20-ounce espresso drink at a coffee shop can cost as much as a 20-ounce beer at a sports bar.

There is a reason for prices being as high as they are in coffee shops. I run a coffee shop. I know exactly how the prices are set and why it is so hard to set them any lower.

Before we get into how coffee drinks are priced, let’s take a look at a more primary question: Are coffee shop prices really high?

When people are fine with the price of fountain soda and draft beer, but upset with the price of coffee, what we have is a perception gap. This doesn’t make a latte any cheaper, but it changes the meaning of the prices. At least, this should change the meaning if we’re being honest about what prices are fair and what prices are high.

The Perception Gap
Looking at the beer vs.coffee comparison we can start to see that “high coffee prices” exist as a result of perception…

When you order a beer at a bar, you’re not walking away with the glass. The bar keeps the glass, so it doesn’t get included in the cost equation. The mark-up for the single-substance, near-zero preparation required draft beer is close to 400 percent, with the cost of a pint around $1 and the price of a pint set at $4 or more.

For espresso drinks like Mochas and Carmel Macchiatos, the mark-up is closer to just 100 percent for a drink composed of multiple ingredients and freshly prepared in front of you. Plus, you get to take the cup with you. The cup, the heat sleeve, the chocolate, the espresso and the milk all add up to the cost of producing the drink.

A tall, cold beer is well-worth the price most of the time and, in my experience, people aren’t very likely to gripe about a $5 beer. They are fairly likely, however, to complain about a $5 White Chocolate Mocha.

There seems to be an idea that prices on drinks at a coffee shop are supposed to be lower than drinks at a bar. If there is a reason behind this, I can’t explain it, but I can tell you what goes into the price of a coffee drink and how it gets to be what it is.

I run a small coffee shop in the Mohave Desert and I’m well aware of the challenge of finding the right price point. My business partner and I have tried everything to keep our prices down since opening in 2009, but we’ve been forced to raise the price on many of our menu items over those three years.

Coffee Shop Owners Are Not in Control of the Market

As the owners of a coffee shop, we discovered that our control over the prices of our coffee drinks is far from 100 percent. Obviously, prices have to find a compromise between being set too low – where no money will be made by selling at that price – and too high – where no one will want to buy the drinks.

You may think that there is quite a bit of wiggle room in this simple equation, but we have to consider a few more things. The rent must be paid. A portion of every drink sale is, by default, dedicated to paying the rent and keeping the doors open.

The staff must be paid. And the cost of ingredients needs to be covered by the sale price as well. These are the realities of almost all businesses. This is overhead. Overhead dictates pricing. But what dictates the overhead costs?

Without going into too much detail, overhead for a coffee shop is determined by the size of the operation, both in square footage and in the number of employees.

Additionally, like full-scale, sit-down restaurants the coffee shop is subject to the global trend in rising food costs. Coupled with the rent and the size of the staff, food prices are the final piece in the calculation of overhead costs.

Food Prices on the Rise

As you know, a latte is made up of steamed milk and espresso. (Mochas and other flavored coffee drinks all share the same base of milk and espresso.) Since 2009, the cost of green, unroasted coffee beans has risen nearly 100 percent, increasing 92 percent from 2010 to 2011. The cost of milk has also risen steadily as food prices in general have continued to increase over the last few years.

With the rising costs of the two central ingredients for espresso drinks, the real wonder is how coffee shops have managed to maintain prices as well as they have.

Sources:

LA Times – – Micromatic.com