The Economics of a Cup of Coffee, why is coffee so expensive?

Full Coffee cost breakdown, 2024.

Have you ever wondered why the cost of your morning cup of coffee is so expensive? From coffee bean farmers earning pennies to the surprising cost of disposable cups, this comprehensive breakdown reveals exactly where your money goes when buying a coffee. With rising costs for everything from rent to milk, the true cost of your coffee is far more than just the beans. We'll analyze every component - from raw ingredients and labor costs to hidden expenses like insurance and utilities - that contributes to your daily caffeine fix. Whether you're a curious consumer or café owner, understanding the true cost behind each cup offers fascinating insights into the coffee industry's economics and challenges facing both independent cafés and major chains

Breakdown of the Cost of a Cup of Coffee

Coffee Beans - 8%
Milk - 3.5%
Disposables - 4%
Wages - 30%
Other Costs - 4%
Rent - 12%
Utilities - 3%
Profits - 7.5%
Tax - 28%

Coffee Beans, 4% - 10.25%

The average cup of coffee sold in a Café uses 18 grammes of Coffee. Farmers in the third world, in places like Ethiopia, Kenya, Honduras and Columbia, are paid between £1.29 and £0.50 per kilogram of coffee. Which means that for the £3.50 or so you spend on a typical cup of coffee in the UK, farmers in the third world are getting paid between one pence and 0.4 pence, before their own costs for materials, equipment and labour.

After this, the coffee is transported to europe, to a roasters, and to a distributor. Cafés pay around £8 per kg at the budget end of the spectrum, and high quality beans can cost coffee shops around £18per kg. Super premium coffee beans can cost up to £30 per kg, but few Cafés spend that much on their standard bean. There is such a wide range here because there is such a wide variety of quality coffee bean, and because of programmes like fairtrade, which adds considerable cost to get a more liveable price for coffee farmers.

Assuming the coffee shop uses 18 grammes of coffee beans in a regular coffee, at a price of £8 - £20 this means a cost of coffee beans per cup of 14p - 36p, depending on quality and participation in ethical programmes.

Milk, 3.5%

For a full breakdown on the amount of milk and cost of milk a café uses, check out this guide. Different types of coffee use different amount of milk, but when you average out the amount of milk different coffees use (flat white 120 ml, Latte 250 ml, Americano 0 ml) etc, by the popularity of different types of coffee (flat white 22.3%, Latte 18.8%, and Americano 22%) you learn that the average cup of coffee sold in the UK uses just over 103ml of milk. 28.4% of coffees sold in UK cafés now use oat-milk, which costs around £2 per litre, while traditional dairy milk costs around £0.95. This means that the amount of milk in an average cup of coffee, with the mix of almond vs dairy, costs just under 13 pence. ((0.103 x 2 x .284) + ((0.103 x 0.95 x 0.716)) = 12.8p

Disposables, 4 - 6%

Disposable lids and coffee cups cost a lot more than most people imagine. Unbranded standard paper cups cost 5.5p to 7p, depending on size and manufacture. Branded paper cups cost 9p - 11p, per cup. Lids are more expensive than standard cups. Plastic Lids cost 4p - 8p (large - small) and bio-degradable lids cost a little more. Napkins in bulk cost 2 - 4p per unit, depending on quality, which can really add up with many customers using 2 - 4 napkins each. Coffee cup sleeves cost 3 - 4p each, with around 20-30% of customers electing to use them. Put this all together and it becomes a substantial cost. For a medium cup of coffee costs for disposables can easily cost 15 - 20p.

Wages and Costs of Employment, 25 - 35%

Employee costs are the single largest category of cost for the majority of cafés, and are therefore a major contributor to the cost of coffee, something which has gotten worse with the cost of living crisis which has caused many employees to demand higher wages to keep up with inflation.

From the perspective of the employer there is more to consider than just the wage they pay employees. Alongside wages they have to make National insurance Contributions of 13.8% on monthly earnings of employees above £737 and they also have to spend time and money on training and recruiting new staff, which they have to do often as the turnover of baristas is very high - according to the wall street journal a quarter of baristas quit their jobs in the first three months. All of these costs are then passed on to consumers in the price of their cup of coffee.

Exact numbers are hard to come by, outside of major publicly traded corporations. We know that Starbucks spends a little over a quarter of their total revenue worldwide on wages, making it their largest individual cost.

For independent café’s - which generally serve a lot fewer customers in total, and achieve a lower number of coffees sold per employee, the proportion is even higher than 25%. Anecdotally speaking, as there are no industry wide reports because private firms do not disclose this kind of information, small to medium sized independent cafe stores' wages make up in the region of 30 - 35% of their expenses.

Other, 3 - 5%

Other refers to items like waste collection, insurance, repairs and replacements, loan payments and a host of other categories.

Cafés are legally mandated to have certain types of insurance like public liability insurance and employers liability insurance, and there are many more types of insurance a café may elect to purchase. Costs will vary between different businesses according to the level of coverage they elect to pay for, the different types of optional insurance they select, their providers, the characteristics of their business and their insurance history. Many Cafés get by on less than £40 a month, while others pay over ten times that price.

Waste disposal will differ between cafés, especially depending on the level of food the café prepares, but often costs into the hundreds of pounds per month.

Rent and Rates, 3.5 - 18.5%

Rent varies massively between different cafés depending on their size and location. Prime London rents can easily be ten times the cost of rent on a quiet street in a small regional town. A medium sized café will be in the region of 40 - 60 square meters, with a lot of variation.

Rents in London for a café in a medium attractiveness location cost around £30,000 - £45,000 per annum, while in a quiet town a cafe might cost less than £10,000 per annum.

A busy london cafe might expect to sell around 300 - 350 cups of coffee per day, and we will go with the figure of 250 for our quieter county café, meaning in London rent costs per cup of around 28 - 35p per coffee, and around 11p in our quiet cafe. (assuming the cafe is open 350 days a year).

In addition cafés have to pay business rates. Business rates are calculated by the valuation office agency (VOA) in the UK. Typically business rates in the UK amount to around half of rent, although small businesses can claim rate relief, which lessens the cost of rates by 100% on properties with a rateable value of £12,000 or less, and between 99% at £12,001 and 0% at £15,000. This means our small cafe will pay no rates, while the busy london cafe will have to pay £7,500 - £15,000, adding 5 to 12p per cup of coffee.

Utilities, 2.5 - 3.5%

Electricity costs for cafés depend on large part on both (a) how much heating they have to do - newer buildings usually have a much lower energy bill, and (b) how much cooking they do. Lighting and refrigeration accounts for much of the rest of the electricity bill. Preparing a coffee actually uses very little electricity, though refrigeration is expensive. For a café selling 200 - 300 coffees per day we would attribute in the region of 11p - 8p of electricity per cup of coffee.

Water - Cafés use a lot of water. The average café uses around 3000 - 3500 liters of water a day. For comparison the average UK household uses under 150 liters of water a day. 1000 litres of water costs around £1.75, - it varies with usages and suppliers - meaning the cost of water adds a little under 2p to the price of your coffee.

Profit - 7.5%

Profits are another category which varies substantially between cafés, with many struggling to stay afloat, and others doing very well indeed. For an averagely financially healthy café a standard margin on a cup of coffee would be around 7.5% - 10%, meaning 26.5 - 35p profit per cup of coffee.

However, the government will then take corporation tax from that. In the UK corporation tax is variable: 19% on taxes below £50,000, 25% on taxes above £250,000 with “marginal relief” on taxes in between. This means that taxes gradually increase between £50,000 and £250,000 from 19% to 25%. Very few Cafés will be making over £250,000 in profit, and few will make over £150,000, so we can say the average corporation tax will be in the region of 19 - 22%. This is still substantial for café operators, and for customers, as it accounts for around 5 - 8p of your cup of coffee.

Tax, 28%

Tax - Vat is taxed at 20% so, 70p on your £3.50 cup of coffee goes to the government through VAT, but also, as we mentioned, the government charges Corporation Tax of between 19% and 25% on profits, which accounts for around 5 - 8p per cup of coffee. Additionally rates account for 0 to 12p per cup of coffee. National insurance contributions by employers of 13.8% on wages over £737 per month, and National insurance and income taxes paid by employees out of their wages, take the amount of money the government gets for every £3.50 coffee sold to over £1.