Why small specialty coffee traders will start establishing commercial divisions

coffee bags loaded on truck
  • Smaller specialty coffee traders are gradually adding more commercial offerings 
  • There is a growing demand for coffees in the 80-83 point range – with a reported 17% increase  
  • Traders are adapting to both these  changes in demand and new economic realities

A NOTICEABLE shift is underway as some of the smaller-sized specialty coffee traders are gradually moving away from their traditional focus on niche specialty lots towards more standardised, commercial offerings. 

This transformation marks a significant departure from the bespoke, high-quality approach that has long defined the specialty coffee industry. Instead, these traders are now embracing a more commercial strategy that aims to compete more effectively against larger multinationals and specialty coffee traders with superior cash flow and credit lines.

A report from the Specialty Coffee Transaction Guide underscores a dramatic 20% decrease in the number of “fancy coffees” (defined as 84+) along with a notable 17% increase in “regular coffee” (defined as 80-83 points) contracts.

By offering these coffees, small traders can cater to a wider audience that values quality but may not be seeking the highest-end, ultra-specialty lots.

While the highest-rated specialty coffees command premium prices, they often come with limited volumes and higher production costs. By focusing on specialty coffees in the lower bracket, traders can achieve a balance between quality and volume, potentially increasing their profitability through higher sales volumes.

“Smaller boutique importer brands are probably shifting to more commercial opportunities to shift the bar to volume – in order to get more margin dollars for their time, rather than just focus on the margin percentage of each transaction,” says David Paparelli, CEO of M-Cultivo. “As they mature, they seek higher volume, and higher value transactions.”

This shift could help attract a wider range of consumers who may be looking for premium coffees without the premium price tag. This broader appeal can help small traders expand their customer base and reach new markets – a lifebuoy for them as they grapple with a green coffee trading crisis and the sharp competition that comes with sector consolidation.

Capital is no longer cheap, and small traders have to get creative to stay in the game   

The current green coffee pricing landscape has put significant pressure on profit margins, making it increasingly challenging for small traders to sustain their business models solely on high-priced, limited-volume specialty lots. 

Additionally, the escalating competition in the coffee market, coupled with a wave of consolidation among major industry players, has further intensified the need for smaller traders to adapt and evolve.

“I think one of the main reasons this is happening is that money is no longer free,” says David. 

“For a long time, you had a cost of capital that was incredibly low – no more than 5 percent for European banks. Now we’re looking at 8,9, or 10 percent in many cases. That can be the entire margin of these multinationals, who start to get under economic pressure. This extends to boutique importers who are faced with a choice of either failing or shifting business model.” 

The higher end the coffee is, the more expensive it is, and the more costly it becomes to finance. A coffee at 7 to 10 USD per pound financed at 10 percent can quickly become an expensive project. It’s more advantageous to carry coffees that are less capital-intensive and of arguably only marginally lower quality. 

By expanding their offerings to more commercial coffee ranges, small traders can differentiate themselves from larger multinationals and specialty coffee traders while still maintaining a level of quality that sets them apart from mainstream commercial coffee suppliers.

green coffee warehouse

Crisis response or long term business model shift?   

This shift towards commercial divisions could merely be a transient crisis response – or it could be a fundamental reconfiguration of business models. 

It seems that traders are looking at much more than just product or client diversification as an end in itself. They are looking at the long game, and adapting to broader industry changes.

The prevailing arguments put forth by these traders underscore the necessity of adapting to new market realities. Phrases such as “every coffee makes a difference,” “don’t be a snob,” and “be more inclusive” reflect a broader ethos of embracing diversity and accessibility in the coffee industry. 

Moreover, the recognition that low-volume, high-quality coffee alone may not provide a sustainable livelihood for producers underscores the importance of achieving economies of scale to benefit all stakeholders in the supply chain.

“The producers we’re talking to today are different from those we were talking to 20 years ago,” says David. “They’re highly educated and globally connected – thinking about building their brand on a global basis and accessing the lowest cost of capital. It can be a means to an end – selling commercial lots to generate sufficient cash flow to fund higher-end specialty coffee lots.”

This shift to commercial divisions in specialty coffee is just an extension of a broader operational change that is already happening with many traders. According to David, we’ve shifted to more of a service model approach where traders aren’t necessarily buying and selling.

“It’s more about assembling supply chains, organising finance through exporters, then organising finance through multinational importers,” he says. “And then connecting back to back contracts with producers to roasters, where traders don’t really have to own the coffees but rather facilitate the transaction.”

The transition towards commercial divisions by small specialty coffee traders represents a strategic industry evolution. While this shift may have been catalysed by immediate challenges, its long-term implications suggest a fundamental reorientation towards a more diversified and resilient business model. 

By embracing change and expanding their horizons, these traders are charting a new course that will likely reshape the landscape of the coffee industry for years to come.

Coffee Intelligence

Want to read more articles like this? Sign up for our newsletter here.