What is it about coffee today that makes it such a lightning rod for consumer indignation and class warfare? Nobody expresses outrage over a $400 bottle of wine, a $110,000 MSRP Mercedes-Benz, or even a $300,000 diamond-encrusted smart phone. But should someone dare sell a cup of coffee for $12, the world is coming to an end.

Angry mobs confront the $12 cup of coffeeAnd it’s not just the price tag that gets people taking up torches to Frankenstein’s castle either. Bring up a $12 cup of coffee, and angry mobs start asking about how much is going back to the farmers — or how much of the perceived price gouging should be donated to charity instead. Yet this reaction never happens with expensive wine, cars, or mobile phones. (We’ve even noted how this doesn’t even happen with tea.)

Because everything you do is really about me, me, me

People willing to splurge once in a while on a $12 cup of coffee are then invariably labeled “idiots.” But the same could be said of any passion or hobby that each of us spends our discretionary income on: wine, automobiles, NFL tickets, cable TV subscriptions, golf memberships, works of art, Disney vacations, etc. So why all the hostility as if a $12 cup of coffee were a personal threat?

In pearls before swine parlance, we are all swine about something that others deeply value. What makes coffee different is that we resent the suggestion of being “swine” when it comes to something we already relate to and experience. What could be presumed is that our taste in coffee is no longer good enough — as if what someone else drinks is somehow a value judgment about ourselves. Talk about insecurity.

Jezebel & Newser chime in on the designer coffee debateOne of the reasons for this cultural dissonance is that coffee is still largely perceived as a universal, utilitarian beverage of only marginal quality differences — an old notion rooted in coffee’s mass production in the 20th century. Another reason is the sense that specialty coffee has gotten too fancy for its own good. But yet another reason is that very few people in our complex society honestly know what things really cost — even if we all think we do.

Cost breakdown of a cup of coffee

Oscar Wilde once famously said that a cynic knows the price of everything but the value of nothing. Most consumers know the price of everything but the cost of nothing. Coffee is a prime example. This is what makes layman reporters’ eyes bug out when they see the $18,000 MSRP price tag for a Slayer machine. They think you’re launching the thing on a mission to Mars for that price, completely oblivious of the fact that a decent — and more “pedestrian” — La Marzocco GB/5 machine runs for more than $20,000.

When people complain about the mythical $4 cup of coffee — or the “How I bought a house by making my own coffee at home” myth — they commonly operate with the false perception that retail coffee is $0.20 ingredients and $3.80 pure profit. We’ve vainly tried to explain that the biggest expense in a cup of retail coffee is labor, not coffee beans, so this time we’ll try to back it up with public data.

One major challenge is that every coffee shop is different. Another challenge is that the figures are often obscured in research reports costing thousands of dollars. We unfortunately couldn’t reproduce a recent chart for Starbucks showing how much labor costs were their biggest expense in a cup of coffee. However, here we’ve plotted data from one UK report in 2007 and a BIS Shrapnel report from 2006 showing the production costs of a retail flat white (call it a cappuccino for American purposes).

Data from a 2007 UK study on the costs behind a retail cup of coffee Data from a 2006 Australian study on the average component costs to produce a retail flat white

The chart at left represents the cost breakdown for a major coffee retailer, such as Starbucks. It not only includes labor, profit, and local taxes, but there’s also an administration overhead that covers things like advertising and marketing expenses, utilities, insurance, etc. The chart at right does not include the overheard of rent, administration, nor profit; it more closely represents just production costs.

The thing to note here is how little the actual coffee represents in the price of a retail coffee — and how much its price reflects labor, rent, utilities, and other costs.

So when you’re buying a specialty, limited supply, microlot coffee for $12 a cup, the cost of the coffee beans can increase by an order of magnitude. But don’t overlook the impact of labor costs on the end price. A delicate, pedigree coffee can be wasted by “normal” brewing methods. While vacuum pots and Hario drippers do a far better job of showcasing the coffee beans, they are far more labor intensive than brewing in a basic French press or generic coffee urn.

New York City or Yakima, WA: Who has the more sophisticated palates?

Even if you can successfully explain the constituent costs in a $12 cup of coffee, that still doesn’t explain the recent media freak-out in New York City over it. Aren’t New Yorkers supposed to be the cultural sophisticates — and not the ones stepping off the Greyhound bus on 42nd Street yelling, “Golly!!! That there sure is one tall combine!” like some wide-eyed Kansas farm boy?

Contrast New York City’s recent reaction with a $14 cup of microlot coffee that ranked no greater than a mere footnote in the Yakima Herald in 2008:

And while supplies last, you can order up a $14 cup of coffee made from Nicaraguan beans that Stumptown bought at auction for $47.06 per pound. According to buystumptowncoffee.com: “Its thick caramel notes, Granny Smith apple, kiwi and apricot flavors had us awestruck and thirsting for more.”

When it comes to coffee, it’s as if New York City keeps inventing new ways to embarrass itself.

UPDATE: June 6, 2010
Tadias Magazine, which reaches out to the Ethiopian-American community in the U.S., published this article questioning why the same rare coffee can go for $12 in New York and $2.69 in Seattle: $12 Cup Joe in New York? Same Coffee Goes for $2.69 in Seattle at Tadias Magazine. Once again, to paraphrase Lance Armstrong, it’s not about the coffee. It’s about the labor. While the profit margins may differ, a huge part of the costs behind their pricing depends on how one café prepares the coffee versus another. Not to mention cost of living differences between café locations.

Please repeat after me, aspiring journalists and laymen alike: when you buy food or drink retail, you’re mostly buying labor. When you drop three bills for dinner at The French Laundry, you’re not primarily paying for a grocery shopping list of ingredients. This really shouldn’t be that hard to understand.

UPDATE: Sept. 23, 2013
Today the Daily Mail cited an Allegra Strategies study noting the breakdown of the price of a cup of coffee — down to labor costs (the biggest) and even how the beans cost less than the disposable cup it comes in: Coffee, the surprising reality: CUP costs twice as much as beans that are flown in from South America | Mail Online. Ironically, this news came out the same day that a blowhard in Australia, Michael Pascoe, gripes about the cheap materials cost of coffee while clearly clueless that it amounts to less than the price of the paper cup it comes in: The great coffee rip-off is no myth. Labor, Mr. Pascoe, perhaps you’ve heard of it? Or perhaps you write for free, as it shows in your analytical business skills.