Your Latte Costs $4. But Where Does That Money Go?
With several locations throughout Philadelphia, Evan Inatome of Elixr Coffee knows his customer base. As self-described “coffee purist” he caters to those who want an organic, fair trade espresso and are willing to pay for it. Which is why he can charge $4 for a 12-ounce latte.
“The biggest factor is what will the market accept. If I could get away with pricing a latte at $5 and no one would think twice about it then I would but if I can’t then I just have got to accept whatever price the market will bear,” he said.
Despite it’s quality, a latte is still just a handful of beans, water, and a few ounces of milk. So where does the rest of that money go?
“Across all of our offerings we try to get hopefully the cost of goods of 25 percent or less if we can,” he elaborated.
Determining the price of latte can be a balancing act for some coffee shop owners who have to not only take into consideration the price of goods (coffee beans, milk, etc.) but also their profit margins and overhead expenses.
However, as a consumer knowing how the cost behind a drink such as a latte is determined can provide insight as to how small, independent coffee shops are able to function at a high level in cities like Philly despite competition.
Macro Trends and Business Insider were the prime tools I used to obtain historical data on coffee bean prices over a 40 year period. In addition, the USDA published regarding the retail of milk in each month of 2018 for various cities that I was able to use as part of my data to help understand the expenses that a $4 latte covers for a coffee shop.
-Coffee is a Commodity:
Coffee beans are a highly-traded soft commodity which means that the product/good is grown rather than put through the process of mining or extracting. Because of this coffee beans are very sought after globally which causes the price to vary on a day-to-day basis usually by the pound.
For coffee shop owners, the bean price can rely on whether they decide to roast the coffee beans themselves or buying them from another roaster. Joe Fultano of Engrain Coffee Bar in Pitman, NJ found a financial benefit in roasting coffee beans himself.
“I was paying about a 60 percent markup on the coffee from other specialty roasters. By cutting that out we were able to keep prices steady but add a nice chunk to the profit side,” Fultano said.
However, Joe Livewell of The Riverwards Cafe in Port Richmond decided that roasting the coffee himself was not a necessary step for his coffee shop to make. So instead he buys his beans wholesale from another roaster.
“It does keep costs a little higher than if I was doing it in-house. But in-house coffee roasting requires a certain level of dedication that’s not a direct cost but an indirect cost meaning labor wise and hours to roast,” Livewell explained.
-Milk Money:
Similar to coffee beans, milk experiences its fair share of highs and lows in the retail market. Whole milk is primarily the main type of milk that’s used in a latte however the bar chart below shows the breakdown in prices for other types of milk in Philly last year.
Fultano added his perspective about milk prices by mentioning that minor changes in the prices do not affect his overall profits significantly.
“The analogy I use is that in one gallon of milk the first latte you make covers the cost of that gallon and the rest of the milk is profit,” he said.
-Profit Margins & Markups:
Aside from the cost of the ingredients, profit margins and markups also factor into the cost of lattes and other coffee drinks in order to pay for rent, overhead and other expenses related to the actual running of the coffee shop. Below is a rough breakdown of the percentage that markups can factor into latte costs according to Meredith Waldman of Rally Coffee Shop in South Philly.
-Neighborhood is Key:
Location is key for a coffee shop. A lot of times the prices that surrounding coffee shops set for a latte will determine the pricing for an up-and-coming coffee shop. Click on each coffee mug on the map below to see the neighborhoods of all three locations of Elixr, Riverwards Cafe and Rally along with the prices of lattes for each shop.
On the map it’s evident how the prices will slightly differ depending on the area. For instance, every Elixr location is located in very busy areas such as Center City and West Philly. Therefore their latte prices are $4 to $4.25 which is normal for those areas. However, Livewell acknowledged that Port Richmond is a newer neighborhood for coffee shops like his. This factored into him setting the price of a latte at $3.75.
“Explaining things like what a latte is is somewhat common here. So therefore the price needs to be something I felt was attainable and also lower than other shops so that it wasn’t a barrier for instance,” Livewell said.
Although the price differences among the coffee shops featured in this article are small, eventually they begin to add up for coffee shop within the period of a day, week or a month.
-For Your Next Coffee Shop Visit:
Obviously course coffee shops sell more than just lattes between having other coffee drinks and food items. However, this knowledge and these perspectives from coffee shop owners should help increase a consumer’s understanding and appreciation of how these small businesses are able to operate through delivering quality coffee drinks. Also, how their purchase whether it be a $4 latte or something else really goes into keeping these businesses thriving. Lastly, don’t forget to tip your barista because every dollar and penny counts!
Data sources used: USDA 2018 Report on Milk Prices, Coffee Bean Prices Over a 45 Year Period, Business Insider Coffee Price Tracker
