Trouble Brewing At The Coffee Bar

Over the past few years, millions of Americans have become addicted to novel forms of coffee: such concoctions as a $2.20 double tall latte--two shots of espresso drowned in steamed milk. And many who once bought cans of Folger's or Maxwell House are buying beans with such names as Colombian Supremo or Irish Cream, selling for up to $8 a pound.

But now, such trendsetters will have their newfound dedication to gourmet coffee tested. Two severe frosts in Brazil in June and July have sent prices soaring on commodity exchanges, and the rises are being passed on to the consumer. That could turn off some of the newly initiated and lead to a shakeout in the booming business.

After dropping in the 1960s and 1970s, consumption in the U.S., the world's largest coffee market, has been climbing, largely because of specialty brews. In the '90s, that segment has grown by 7% to 10% a year, as such cafe chains as Starbucks and Gloria Jean's opened outlets across the country. Entrepreneurs jumped in, too, offering lattes and mochas on street corners.

Until this year, though, basic green-coffee prices remained low. That's because the International Coffee Agreement, a cartel that for years propped up prices, fell apart in 1989. As prices softened, world production fell this harvest season, to an estimated 90.6 million bags--well below consumption of about 100 million bags per year.

FAST KICK. Next year's crop was expected to decline even more. Then the frosts hit Brazil, which grows one-third of the world's coffee, and wiped out an estimated 45% of its 1995 harvest. That sent coffee prices up 100% on New York's Coffee, Sugar, & Cocoa Sugar Exchange, to a high of $2.74 a pound on July 13.

In the U.S., the big three producers reacted quickly. Procter & Gamble, Kraft General Foods, and Nestle, which together control 70% of the market, kicked prices up 45%, or about $1.35 per pound. Hikes by gourmet-coffee producers, with fatter margins, have been somewhat less. Brothers Gourmet Coffees in Boca Raton, Fla., the largest supplier to U.S. supermarkets, raised its prices 65 cents per pound.

Consumer agencies are taking notice. On July 7, Richard M. Kessel, executive director of the New York State Consumer Protection Board, called on the Justice Dept. to investigate the surge in retail prices. "Coffee already on store shelves has nothing to do with this year's crop," Kessel says.

Seattle's Starbucks Coffee Co., whose 383 outlets make it the nation's No.1 operator of specialty coffee shops, claims that its planned 10% price hike on July 22 is minimal. "We did not raise our price to cover current replacement costs, only to cover incremental costs in fiscal 1995," says Starbucks President Mrin Smith. He and other gourmet sellers are sticking to their growth plans. They're betting that consumers hooked on lattes won't mind spending an extra nickel or dime for their morning fix.

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