Starbucks

The cost of coffee in Hong Kong

Do the coffee chains overcharge? Yes, but by how much

PUBLISHED : Monday, 20 August, 2012, 12:00am
UPDATED : Monday, 20 August, 2012, 4:21am

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Paying more than HK$30 for a cup of coffee would once have been unthinkable, but many Hongkongers now dip into their pockets on a daily basis to get their caffeine fix.

So popular has a regular latte or cappuccino become that there are now more than 120 Starbucks outlets across Hong Kong, with other coffee chains expanding fast.

But do these so-called designer coffees offer value for money, or is it worth considering lattes at cheaper outlets, such as 7-Eleven?

Money Post went shopping to compare the cost and quality of a medium latte from five major coffee outlets in Hong Kong.

The cost of a latte ranged from HK$15 at 7-Eleven to HK$38 at Caffe Habitu, both for a 400ml cup.

The actual cost of the raw materials for a latte is a closely guarded secret among coffee shop chains, although it is speculated that the mark-up is about 300 per cent.

Given that Starbucks allows customers to add an extra shot of espresso to a latte for just HK$3 dollars, and 400 ml of milk can be purchased at a supermarket for the equivalent of HK$4, that estimate sounds on the mark.

But the raw materials are only part of the equation. Staff costs and shop rent also need consideration.

Carl Berrisford, an analyst at CIO Research, UBS Wealth Management, says coffee chains rely on a big recurring customer base. To get this they need a prime location, which comes at a cost.

He estimates that once the cost of rent and wages are factored in, the operating margins on a cup of coffee fall to about 14 per cent for a company such as Starbucks.

And this is where chains such as McCafe (a coffee offshoot of McDonald's) and 7-Eleven have a distinct advantage over dedicated coffee houses. They have other activities going on, such as the sale of burgers or papers and drinks, which offset the rent and wages.

These businesses also generate more foot traffic than seen at the coffee chains. 7-Eleven also uses its space more efficiently - you don't linger with your coffee. This allows the store to sell a latte at a much lower price than the rest of the comparison group. (See table.)

"McDonald's and 7-Eleven are being opportunistic. There is a captive market of coffee drinkers and it costs them very little to sell it," says Berrisford. "They can offer coffee much cheaper but still get good margins because their multi-product retail format already secures the foot traffic."

The arrangement allows McCafe to run promotions, such as the current offer of a small cappuccino for HK$12, with a bagel, muffin or ciabatta for an extra HK$9.

By contrast, the coffee chains have to find ways to encourage customers to spend more each visit, such as by offering organic milk, a shot of flavoured syrup or by offering food with superior ingredients than seen at most fast-food outlets.

Pacific Coffee even offers products aimed at children, with its HK$6 babyccino. And Caffe Habitu regularly offers seasonal specialities to tempt customers, such as its white truffle hazelnut latte, sold in the run-up to Christmas.

Persuading customers to buy food also helps to boost turnover.

Although the margins on food are much lower than on coffee, the major coffee chains are enjoying double digit growth on food sales, according to Berrisford.

Rating the taste of coffee is a fairly subjective business, but during the mystery shopping exercise I found that the more expensive lattes were not always better than the cheaper ones.

I rated Caffe Habitu's latte highest, with Starbucks and 7-Eleven a close second, followed by Pacific Coffee and McCafe.

But in reality, all of the lattes were pretty good. The real difference, however, was in the environment in which the coffee could be enjoyed.

When asked why its prices were higher than McCafe and 7-Eleven, Jonathan Somerville, chief operating officer of Pacific Coffee, said: "We provide our customers with an affordable luxury. Our customers are not after a fast-food service, but a spacious time-out zone to relax."

Starbucks goes even further, claiming it aims to be its customers' third favourite place after their home and office, while Caffe Habitu says it is not overpriced for the quality of the coffee and experience it offers.

The more expensive chains also personalise their products. Starbucks has a leaflet to let customers know the options for ordering coffee, from the range of different milks, syrups and the number of extra espresso shots.

It will also heat the milk to a temperature requested by the customer. If the aim is to take an hour out to relax and slowly sip a coffee, then it is probably worth paying more for the ambience at a coffee house chain.

But for a cheap takeaway latte for work, 7-Eleven is hard to beat.

moneypost@scmp.com

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