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Inelastic Demand Protects Coffee and Tea Industries from Inflation

28 April 2022 by Matther Barry, Euromonitor International

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Inflation currently dominates discussions throughout the consumer packaged goods industries. The rising costs of labour, energy, transport, packaging and inputs are sending ripple effects through every layer of the supply chain. Hot beverages are certainly no exception. The median price growth of coffee at retail globally since last April has been 6.1%, and that of tea 1.8%. However, they are uniquely cushioned from the impact of inflation because of the highly inelastic nature of demand.

Inelastic demand patterns make hot beverages different

Hot beverages are critically important to many people’s daily routines. Because of their caffeine content and, in many cases, cultural significance, consumers are highly reluctant to cut back in volume terms. At a global level, coffee displays a one-year price elasticity of -0.26 (meaning that a 1% increase in price will, all else being equal, be expected to result in a loss of 0.26 percentage points from previous volume growth projections). Tea is at just -0.14, lower than all other beverages except drinking milk and ready-to-drink (RTD) tea.

The exceptions are subcategories that are easily substitutable with cheaper sources of caffeine and that are poorly culturally rooted. RTD coffee, for example, is highly exposed to price changes nearly everywhere, because it is usually a newer category and one that is relatively expensive compared with other caffeinated options.

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