The End of Cheap Coffee: Why the Diner Staple Is About to Become a Luxury

Posted by Zak Stone and Dan Matutina

Coffee, Starbucks, GOOD 025, The Next Big Thing

On a rainy Wednesday afternoon in Venice, California, Dan Kougan spreads out three shot glasses in front of a curious audience. The champagne-colored liquid bubbling on the left is a homemade hops soda. The creamy, tan shot in the middle is a barley-chocolate malt topped with a tuft of steamed milk. And the chestnut-hued beverage on the right, the raison d’être of this whole ordeal, gives off the unmistakable scent of fresh espresso, extracted from the highest-quality coffee beans the developing world has to offer.

“Thanks, Dan, I’m really excited!” says Elaine Levia. She smiles as she eyes the Flight of Three—the name given to the triptych of shot glasses on the glass-top bar before her. “Do you have drinking instructions?” she asks.

Of course he does. For a month, Kougan has been planning the details of each beverage for his hops-themed menu. It’s his week to curate the Slow Bar, the backspace of the coffee shop Intelligentsia, where baristas take turns designing and executing a custom menu. The venue is part laboratory, part classroom, and part theater. Coffee groupies sit on bleacherlike benches in a precaffeinated state of awe, waiting for a barstool to open up.

Sip from lightest to darkest, instructs Kougan. “The hops will kind of ramp up in bitterness and effervescence. And then the chocolate malt will curb that flavor, and the espresso will take it back up.”

Levia complies. The coffee alchemy works its magic. “Absolutely phenomenal,” she says. As a fellow barista at the shop, she’s no stranger to the Slow Bar’s signature blend of high-quality espresso—from a refurbished 1972 La Marzocco machine— and baroque flourishes. During her week as curator, Levia opted for a “vintage coffee experience,” pairing each brew with a different bite-sized pastry. “It turned into a focus on the drinkware, actually,” she admits. “I served Turkish coffee in Moka pots and tried to make it really, like, ’50s housewife style.” She laughs. “With Fiesta ware.” Another barista highlighted alternative milks—from macadamias, cashews, and Brazil nuts.

The idea of the Slow Bar is to “give the customer an experience that expands their idea of what coffee is,” says Charles Babinski, who trains the staff in different brewing techniques and hosts educational events for customers. It’s a place where customers can sit down and ask questions about coffee, but it’s “not meant to be beating people over the heads with education as much as just creating different coffee experiences.”

“Customer education” and “coffee experiences” are terms you hear a lot when talking to the roasters and baristas who make up the ultra-high-end coffee movement, a trend that’s been percolating for the past decade. If you visit a shop like Intelligentsia—or Blue Bottle in San Francisco or Stumptown in Portland or Third Rail Coffee in New York City—you’ll encounter a staff eager to discuss the distinct regional characteristics (or terroir) and flavor profile of each coffee on the menu, sourced from a handful of elite farms known as “microlots” in places like El Salvador, Kenya, and Indonesia. You’ll be encouraged to try a cup of lightly roasted, brewed coffee, which had become all but passé with the Starbucks-backed ascendancy of dark roasts, espressos, and lattes in the late 1990s. You’ll look on as a brewer takes several minutes to unleash a stream of boiling water from a silver kettle into a cone full of coffee grounds—the meticulous process behind every mug of individually brewed “pour over” coffee—to unlock the beverage’s most subtle flavors.

But perhaps the most memorable part of the experience comes at the register: a cool $5 for an unadorned cup of brewed coffee. And that’s if the bean is more common. This fall, a cup of Intelligentsia’s Kenya Tegu was selling for $6.50. “Ethereal and luminous,” a description on the company’s website reads. “Lychee, persimmon and botanical notes bring a weightlessness to the muscular and expansive Tegu. Marmalade and sweet herbs float in the background while the finish hangs onto a hint of spice.”

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“We think our coffee is ridiculously cheap,” says Ben Kaminsky, director of quality control at Ritual Roasters in San Francisco, where a pound of beans starts at $19.95. His sentiment is echoed by many working in high-end coffee. “It’s interesting to me that the same consumer that will go to 7-11 and buy a bottle of Fiji Water for five dollars will go crazy and complain about a cup of coffee,” says Geoff Watts, Intelligentsia’s vice president and green (unroasted, that is) coffee buyer. “This is a meticulously grown agricultural product from halfway around the world that was hand-harvested, hand-picked, and roasted and brewed. It’s got all these different flavor characteristics. It’s got antioxidants. It’s got all the things you could want in a drink.”

A luxury drink, that is. “Coffee as cheap fuel for the masses is a historical anomaly,” says Peter Giuliano, director of coffee at the North Carolina-based roaster Counter Culture. “There’s no nutritive value. It’s drunk just for the pleasure of it. It’s a total miracle of global agriculture, a feat that spans cultures and countries.”

Mother Nature might be on the side of Giuliano and his cohorts. At the exact moment that rare beans are becoming all the rage, all beans are becoming rarer. The price of a cup of coffee—whether it be a $6 pour-over, a $2.50 dark roast at Starbucks, or a $1.50 mug of diner swill—is being driven up by a complex combination of weather events, pest and fungus outbreaks, speculation on commodities exchanges, an unstable labor market in the developing world, and an unprecedented thirst for good coffee among a growing global middle class. The problem, in simple economic terms, is that supply has gone down and demand has gone up.

“We’re going back to where coffee began,” Giuliano says, “as an exotic, beloved culinary experience.”

* * *

Arabica, the strain of coffee that makes up most of the world’s supply, is a notoriously fickle organism, “the Barbra Streisand of plants: a diva,” as coffee writer Taylor Clark told The New York Times. To develop the complex flavors that drive coffee nerds wild, the best beans demand a lot from their surroundings: tropical climates with warm, sunny days that fade into chilly evenings; altitudes between 1,800 and 2,400 meters; copious rains at certain times of the year; dry spells at others. Low-quality Arabica is abundant throughout low-lying regions of Brazil, where one-third of all coffee comes from. But just a few regions on Earth are hospitable to such a needy guest as the world’s best beans, which grow only in the high peaks of the tropics in East Africa, Central and South America, and Southeast Asia.

The delicate balance in those ecosystems is being thrown off kilter. In Colombia, the world’s third-biggest coffee producer, agricultural scientist Peter Baker has watched while record rainfall, increased heat, and frequent plagues have devastated farms across the country’s Andean coffee- growing region. It was 2005 when Baker “started to think seriously that climate change was not just about the future but was already happening.” Today, the signs are plentiful. Average temperatures have risen nearly 2 degrees in some areas over the past 30 years, “especially nighttime minimum temperatures,” says Baker, “a tell-tale signature of [man-made] climate change.” Hotter, rainier weather nourishes pests and disease, particularly coffee rust, a fungal plague that’s ascended Colombia’s mountain peaks, which were formerly too chilly for the organism. Heavy rains damage Arabica’s delicate blossoms—the same blossoms that eventually turn into coffee cherries, whose seeds are coffee beans. As heat and pests climb Colombia’s mountains, “the lower limit at which coffee is grown is starting to go up,” says Baker. As growers move higher into the mountains, they run into another problem: mountains have tops.

“Over the last four or five years nearly every farmer in every country I work with has experienced climate events that they’ve described as completely out of whack,” says Watts, who helped found Intelligentsia in Chicago 16 years ago. “And these are people that have been growing coffee on those farms for 20, 30, 40 years. ... They’re seeing rain when they had droughts before; they’re seeing droughts when they usually have a lot of rain. They’re seeing hail and frost in places where it didn’t exist before.” Extreme weather events “are happening simultaneously in every part of the coffee-growing world,” he adds.

The result? Between 2006 and 2009, the Colombian yield shrank by a quarter—from 12 million bags to 7.8 million, the lowest yield in 33 years. The forecast doesn’t look good for the rest of the coffee-growing world, either: more pests in East Africa, more hurricanes in Central America, more droughts in Indonesia. Global coffee stockpiles are close to record lows. “There is simply not enough coffee in the world,” Jose Sette, now the former executive director of the International Coffee Organization, told Bloomberg in February. Combine this with other economic realities—the rising cost of fertilizer and the fact that young people, bound for the cities, aren’t following in their parents’ coffee-growing footsteps—and you can understand the term that Peter Baker has coined as a warning: “peak coffee.” Just like with oil, the world is maxing out the volume of coffee it can sustain.

Now Baker is trying to come up with “a toolbox of different methods” to help farmers cope with the rising temperature. But he says that researchers are only in the “early stages of thinking about what we can do for farmers that’s practical. At the moment a lot of people are taking measurements and looking at models and mapping out likely changes.” A game-changing solution, like developing heat-tolerant hybrids, for example, will take at least 10 to 15 years, says Tim Schilling, executive director of the Global Coffee Quality Research Initiative.

While climate change’s harshest effects won’t be felt for two or three more decades, “it would not surprise me if one of these years we get a fairly serious drought” in a major coffee-producing country like Brazil, Baker says. “That could cause coffee scarcity for quite a prolonged period.” Coffee production will continue to experience booms and busts, but Baker asserts that “in the long run, people will have to get used to drinking a bit less coffee.”

Or paying a lot more for it.

* * *

Not long ago, coffee growers had the opposite problem. Coffee was dirt cheap and about as plentiful. In the late 1980s, the Reagan administration was beating the free-trade drum, and the global financial community turned against the protectionist policies of export-dependent economies. The coffee industry’s quota system met its demise in 1989, and overproduction became an issue in the 1990s, particularly in Brazil and newcomer Vietnam, where the industry grew at a breakneck, unregulated pace. At the turn of the millennium, supply often exceeded consumption by 13 percent. From the 1980s to 2002, the global price of coffee declined from a high of $2 a pound to less than 50 cents a pound—when adjusted for inflation, the lowest price paid for coffee in a century. While the value of coffee’s retail sales grew from $30 billion to $70 billion between the early 1990s and 2005, the amount that trickled down to farmers declined precipitously, from $11 billion to $5.5 billion, pushing many small growers deeper into poverty.

Watts calls the prices during that period “unsustainably low.” Farmers barely made enough money to survive, let alone invest in the long-term viability of their farms. Some growers even shifted focus: to pineapples in Costa Rica, soy in Brazil, and livestock in Colombia (as well as drug crops like coca and poppy).

With coffee supplies running short, prices escalated at a rapid clip, outpacing even gasoline’s monumental ascent. Between spring 2010 and spring 2011, coffee roughly doubled in price. On the futures exchange in New York City, the price per pound crossed a frightening milestone—the $3 mark—hitting a three-decade high on May 3, 2011. Peet’s Coffee, Green Mountain Coffee Roasters, and Starbucks announced price hikes. Low-end grocery store staples followed suit. Smuckers, the parent company of Folgers and Dunkin Donuts’ supermarket line, announced an 11 percent price increase on all coffee products. Kraft raised prices by 22 percent on brands like Maxwell House. Since spring, the commodities market has calmed, and major brands have lowered prices slightly.

The coffee industry has downplayed concerns that climate change is causing price fluctuations. “I think at the end of the day, [climate change] could be a canceling effect,” says Judy Ganes-Chase, a consultant to the coffee industry. “It’s not like the world is going to freeze and suddenly can’t grow coffee anymore.” In March of this year, Starbucks CEO Howard Schultz told Reuters that speculators were to blame. There’s still plenty of chatter about climate in the industry, though. “It’s one of the topics at almost any conference, because the conference organizer puts it in there,” Ganes-Chase adds. “Is it having a pronounced impact on the markets today? No. That’s a long-term factor.”

In the meantime, high prices are putting the squeeze on big coffee companies’ efforts to maintain quality. Low-end brands that run a volume game—think of instant coffee, cheap diner coffee, or supermarket coffee— are likely to descend the quality ranks even further. Rather than raise prices, they’re choosing to cut their beans with older coffee, lower-quality Arabica (say, Brazilian instead of Costa Rican beans), or Arabica’s ugly stepsister Robusta—cheaper, hardier stuff grown on an industrial scale in Vietnam that packs even more of the caffeinated jolt with none of the sensual complexity.

Small, high-end companies are often better situated to cope with rising prices. “As somebody that loves coffee, I’m happy to see the markup,” says Watts. “Prices are finally at a place where it is very possible that a farmer can make money and be profitable.” More revenue for farmers means more investment in the quality and the sustainability of the product. Smaller roasters feel the ripples of the price hikes coming off the commodities market, but they’re insulated from them. They often negotiate prices directly with small growers or buy coffee at local auctions. Not to mention, they’re already used to paying huge premiums for rare coffees—five or even 10 times the price of the commodity stuff. Cheap coffee is simply catching up. Still, rare and specialty coffee is a “very, very, very small percentage” of the total industry, says Ganes-Chase. “Who cares if it’s grown 300 percent? That means a cup a day. It’s still small.”

The lion’s share of coffee-shop joe is brewed from beans that coffee snobs might declare “just ok.” In a retail setting, companies peddling high volumes of midgrade beans face tough decisions as the price goes up. Skimp on quality, and an increasingly savvy customer base will notice. Refuse to compromise, and affordability goes out the window. According to Ganes-Chase, consumers might notice cup sizes go down or muffin prices go up if retailers aren’t comfortable charging more for their signature product. Coffee shops might bank on the fact that a customer won’t quit her morning ritual because of a small price increase; instead she’ll just “put less money in the tip jar for the barista,” says Ganes-Chase.

There’s one more option that midrange retailers are exploring, and it’s straight from Intelligentsia’s playbook: Create a “coffee experience” so compelling that customers won’t think twice about paying more.

* * *

Just two miles southeast of Intelligentsia’s shop in Venice, there’s a strip mall in Marina del Rey that’s home to a Starbucks. It’s one of the select, big-city locations to pilot Starbucks Reserve, the corporation’s line of high-end, single-origin coffees. “We see those trends in many independent shops, and I think we’re delivering it to our consumer through the Starbucks Reserve program,” says Dub Hay, Starbucks vice president for coffee. He says these beans are “rare and exotic and special in a particular way.” (One particular way is the packaging: “Exotic, Rare, Exquisite,” it reads.)

While Starbucks will prepare pour-over coffee at some locations, the signature technology behind the new product line is the Clover, an $11,000 contraption that was hyped as a game changer when it came out in 2006. Baristas loved the machine for the unprecedented level of control it gave over brewing conditions, the high-tech aura surrounding the invention, and its ability to offer delicious single servings of brewed coffee with the click of a button. With a certain element of coffee porn—the Clover ejaculates used grounds at the climax of its performance—“it made single-cup brewing sexy,” says Intelligentsia educator Babinski.

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Starbucks was sold. “We think that’s the finest brewed cup of coffee you can make,” Hay says. By 2007 the company was experimenting with a few Clovers in Seattle and Boston. In 2008, it bought the startup that invented the technology, the Coffee Equipment Company, and began testing the machine in more shops. While the Clover had been a hit when it was used with lightly roasted beans, early reviews of Starbucks’ Clover-brewed darker roasts were dismissive. One taste-tester from The New York Times declared, “‘I hate it. That’s really spoiled fruit, like really bad wine.’”

Since then Starbucks has scoured the Earth for better beans and come up with bags of stuff like Guatemala de Flor and Honduras Premier. The coffees, like their crosstown counterparts at Intelligentsia, have terroir and flavor notes. “When sampling these beans in our Seattle tasting room,” reads one bag, “a heady lavender scent filled the air, transporting our buyer back to a coffee estate in Guatemala’s Antigua valley.” The cashier in Marina del Rey describes the brew as “bold.” A half-pound sack retails for $15, about twice as much as Starbucks’ standard fare.

The reaction of the high-end marketplace is mixed. Intelligentsia—which consulted on the Clover’s design, according to Babinski— ditched the gadget after Starbucks’ acquisition. Babinski says that while it made great coffee, Intelligentsia is more interested in manual techniques and educating the consumer about replicating them at home. “There’s nothing a brewer can do to add quality. That quality is in the bean itself,” says Babinksi, who also criticizes the Clover’s rushed brew time and inefficient use of coffee grounds.

“I think it would be awesome if Starbucks started doing more and more specialty coffee things,” Babinski says. “But I dunno ... .” He is not one to talk down about coffee, but when he hears that the Reserve line includes Jamaica Blue Mountain coffee, he cringes. “It’s a brand,” he says. “That’s not something I necessarily associate with quality.”

The real issue, it would seem, is scale. Starbucks is so large that it’s not possible for every employee to be passionate about coffee. “This isn’t something that you can just do,” Babinski says of Intelligentsia’s dedication to quality. “I never worked in a coffee shop in my life where there’s this much of a collection of totally dedicated coffee professionals who are absolutely psyched to come to work every day,” he says. Indeed, this is how high-end companies will always be able to differentiate themselves, even as big coffee tries to catch up in the quality game. Coffee technologies and exotic beans can be commoditized, but true coffee geeks are a rare breed.

In Marina del Rey, the menu of Starbucks Reserve coffees hangs to the left of a sign announcing the return of fall drinks including the Salted-Caramel Mocha and the Pumpkin-Spice Latte. The Clover, a big black box with a faucet sticking out of it, sits behind a piece of glass to shield it from sneezing customers. A barista begins to brew a grande cup of the Guatemala for $4.45, a couple dollars more than the regular brew. The barista grinds the coffee, weighs it on a balance, dumps it into the shoot, and irrigates it with a hot water drip. The coffee disappears inside the machine, and shortly after, you can hear the sound of brewed coffee squirting into a paper cup.

The Guatemala is piping hot and a rich black. The notes of lavender are there. But the barista who made it says it’s not her favorite of the Reserve coffees. In fact, she doesn’t have one. “I don’t really drink brewed coffee,” she says. “I’m more of a tea person.”