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A Percolating Investment

Published on 03/06/2021

Since the 1990s, demand for coffee has increased by 50% worldwide, and today the global coffee industry is valued at $100 billion. So go grab yourself a cup of joe and get ready to delve into what Business Insider labelled the second most sought-after commodity in the entire world.

On average 2.25 billion cups of coffee are consumed around the world daily - it is a staple in the majority of households and is served in restaurants, shops, cafes and bars, but is it worth investing in?

One of the most famous coffee shop chains in the world, Starbucks, was born in the early 1980s when a young man from Brooklyn took a trip to Italy and saw the community fostered in coffee houses there. He tried to replicate this when starting Starbucks and grew it to the global brand it is today, valued at $110.2 billion.

The birth of Starbucks revolutionised American’s relationship with coffee, and now they are one of many brands globally that replicate this “modern” coffee shop experience. There are hundreds of coffee brands both publicly traded and private.

But the coffee market isn’t just coffee shops, it’s home-prepared beans too, like Keurig and Nespresso where suave men like George Clooney show you how glamorous your life could be if you treated yourself to a semi-pro coffee machine. Nestle has an annual sales income of $9.3 billion from their Nescafe and Nespresso brands, whilst Keurig Dr Pepper sits at $3.2 billion from its K-Cups and Green Mountain brands.

But these beans have to come from somewhere. Approximately 80% of coffee beans grown globally are produced by 25 million smallholders around the world, who employ around 125 million people. These farmers and workers produce more than 22.7 billion pounds of beans each year with a production value of $24.6 billion. This then gets bought by corporations, roasted and sold. Coffee shops can buy a pound of coffee for as little as $1.50 and after roasting and brewing, can extract as much as $50 in revenue from it.

Coffee is produced almost exclusively in developing nations with South America ranked as the largest producer, and Brazil producing around 43.2 million bags of coffee per annum. This amounts to about 27% of the almost 159 million bags of coffee globally produced each year.

Three areas have driven growth in global coffee consumption over the past 20 years: Brazil, with its growing middle class, the EU and the United States. Combined, these three consume 50% more coffee per year than they did in 1998. The country that takes the top spot of most consumed coffee in the world is Finland who’s coffee-loving residents consume an average of 26.45 pounds of coffee per capita per year. The US languishes at 25th largest consumption at just 9.26 pounds, and UK residents even further down the list.

Well, this all sounds rather promising, but there are two further considerations to take into account. Firstly, environmental factors - climate change, changing land regulations, legislation around pesticides and agricultural chemicals, as well as more stringent global regulations around fair trade and workers rights.

Secondly, we should consider the coffee drinkers market. With a continued societal focus on shopping local rather than global in smaller one-off establishments, as well as shopping ethically and organically, the market could be moving away from the coffee house giants. But it doesn’t look like these developments will impact demand too much as according to recent statistics, the market is expected to grow annually by 8.28% in the next four years, and coffee futures are up 52% from 2019.

The proof will always be in the fundamental research, and in the brew.

There’s a science to brewing a spectacular coffee, and a science to being right.

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