A slump in coffee sales gave one retailer advance warning of the recession, writes Brendon Lau.
Clairvoyants may swear by tea leaves for forecasting the future but when it comes to consumer spending patterns, coffee beans might be better suited to the task.
The hypothesis that coffee sales are a leading indicator to a turnaround in spending led the managing director of Villa & Hut Group, Franz Madlener, to develop his Latte Index.
Mr Madlener is probably in a better position than other coffee retailers to test the theory as the group owns furniture outlets around the country that also incorporate cafes.
Customers at Villa & Hut ’s cafes have consistently spent around $11.30 per person. But in January last year that plummeted to $8.
"I said to anyone who would listen that there is something going on out there in the economy because people have all of a sudden reduced their spending, and they have reduced it in areas that make no difference," said Mr Madlener.
This pullback is believed to be a knee-jerk reaction, as the cost of a cup of coffee has an insignificant impact on household budgets and is seen as a discretionary purchase.
Interestingly, sales at Villa & Hut ’s furniture and homeware business were still going strong a year ago when coffee sales fell.
People don ’t wake up one morning and decide to buy a dining table. It ’s something that ’s been on their minds for many months. So a lot of people were committed to those bigger purchase items even though they were cutting back on other areas," Mr Madlener said.
"It took until May-June [before] the big-ticket items dropped right off." Coffee sales at his cafes remained depressed through to late October, when they suddenly bounced back to the $11.30 mark.
~ was almost like the feeling of confidence was starting to come back. Maybe people just took stock and thought ~well yeah OK, there are issues in the rest of the world, but life goes on ’," said Mr Madlener.
Coincidentally in November, the Westpac-Melbourne Institute Index of Consumer Sentiment rose 4.3 per cent, before jumping by another 7.5 per cent to 92.0 in December.
Lower petrol prices and interest rates, along with the federal government ’s $10.4 billion fiscal stimulus package were the key drivers for the improvement. The consumer sentiment index is now 3.3 per cent above the average reading for 2008.
But trying to compare coffee sales with those in the last few recessions in Australia may be a fruitless task. Tim Emmerson from industry research firm BIS Shrapnel believes that the explosive growth of the coffee culture here since 2000 makes past comparisons difficult, if not impossible.
"Going out for an espresso coffee has really become a way of life now. During difficult economic times, people would still reward themselves with a cup of coffee in the same way as they do not stop eating out. But they instead trade down, ’ said Mr Emmerson.
While that is good news for cafes around city and town centres, Mr Emmerson believes cafes in tourist belts will suffer due to the expected drop in tourism.
Sales at Australia ’s largest coffee chain appear to back BIS Shrapnel ’s fmdings. Gloria Jean ’s executive chairman Nabi Saleh said sales were flat at the onset of the financial turmoil over a year ago, but have since risen 3 per cent.
~We have earmarked at least 50 new stores this coming year and I would even go so far as to say coffee is recession proof," said Mr Saleh.
Australian Financial Reviews.
Latte Index a hot indicator
