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Maintaining Margins: Why Iced Coffee Costs More

Pricing Iced Coffee and MarginsIn the coffee industry, unseasonably warm temperatures this early spring may be leading to an extended iced coffee season. For those cafes that are cold-brewing their iced coffee products, that may mean a significant impact on margins.

A recent Grub Street New York report takes a hard look at the numbers for cafe owners hoping to maintain profitability as a sizable chunk of their patrons switched from hot brew to cold:

Like the hot stuff, cold-brewing involves mixing pulverized beans with water, but the latter process requires about twice as much ground coffee. Those grounds infuse filtered water for 12 to 24 hours, creating iced-coffee concentrate. That liquid is cut with water to taste, at a ratio of about one to one. Yet even after all this dilution, a cup of cold-brewed joe can include 62 cents worth of ground coffee. A hot cup might include 35 cents’ worth of beans.

of course, this explains why a cup of iced coffee costs more than a cup of hot coffee. But are cafes properly pricing their cold drinks to maintain the same margins?:

For a coffee shop to thrive, its owners must keep their cost-of-goods around 28 percent of menu price. This magic number, basically a four-fold mark-up, allows businesses to pay for labor, insurance, rent, equipment, and marketing. Sticking to that formula is much easier with hot coffee — invest about 50 cents, including the cup and lid and sleeve — then charge around $2 for a product with pretty reliable sales. The difficulty with cold brew stems both from the higher fixed costs and the unpredictability of iced season.

The report also notes significant other costs, including 50 to 100 percent more per cup for plastic cups rather than paper cups, straws that cost a penny or two each, and the significant cost of running and maintaining an ice machine:

All told, these variables, along with the extra coffee required for cold-brewing, add up to a goods cost of about 80 cents (and that doesn’t include milk, of which Rubinstein estimates customers use 20 percent more during the Iced Season). That means owners must charge at least $3 to keep their margins healthy.

The full story: Grub Street New York