Coffee Wars

Sydney Morning Herald

Thursday September 22, 2005

Mark Chipperfield

The claims are as strong as a good espresso: a coffee cartel using sweeteners and "bribes" to control our cafe trade. Mark Chipperfield reports on a billion-dollar battle.

We may drink it for fun, but for thousands of Sydney cafes, restaurants and takeaways the humble latte or macchiato is a matter of financial survival. Five decades after the first espresso machine arrived on these shores, coffee accounts for an estimated $1.12 billion of their trade each year.

With cafes on every street corner and espresso machines invading shops, pubs, car washes and RSL clubs, you might be forgiven for thinking that the coffee fad has peaked. In fact, our thirst for the black gold seems limitless. Coffee consumption in Sydney now tops 450 million cups a year, excluding the stuff we brew at home or work.

But as new cafes keep opening, the battle to supply their needs intensifies. Established local roasters such as Vittoria, owned by Cantarella Bros, now face stiff competition from both foreign importers, micro-roasters and multinational food companies.

Dazzled by Australia's continued passion for coffee (out-of-home consumption is growing by about 15 per cent a year), investors are vying for a slice of the lucrative trade - Coca-Cola Amatil recently bought the Grinders Coffee Group for an undisclosed figure.

But the action is not limited to the boardroom. Glossy cafes have found themselves on the caffeine frontline as the major coffee houses jostle for their business. Down on the street things are getting downright aggressive. Cafe owners claim that a "coffee cartel" now operates in Sydney, manipulating the market with cash, free coffee beans and other inducements. It is a claim denied by the coffee companies, which say the practice is being driven by cafe owners keen to exploit the boom times.

Either way, the battle lines are clearly drawn. On the one side Vittoria, Lavazza, Mocopan, Mokador, Segafredo and the other coffee brands - on the other, the thousands of cafes that are trying to extract the best possible deal from the coffee companies, and the optimum number of cups from the beans they supply.

Sweeteners are commonplace. Cafe owners accuse some of the coffee companies of using inducements, intimidating tactics and bribery to secure control of their espresso machines - and the right to display the name of their coffee brand on street umbrellas, windbreaks and awnings. Territorial domination is a crucial issue for the big coffee companies - hence the proliferation of cafes within walking distance of one another.

"I was offered $20,000 in cash to drop my current coffee supplier," says the owner of a busy CBD cafe, who asked not to be identified. "If I'd accepted they would have called it 'an advance' to cover the price of signage or some other bullshit, but it was a cash advance, a sweetener."

Other cafe owners claim they have been offered airline tickets to Europe, interest-free business loans and free supplies of coffee or bottled water. "One day I had three sales reps from the same company in here," says the manager of a Leichhardt cafe. "They were all in those shiny suits looking like used car salesmen saying 'we'll give you this, we'll give you that'. Three of them, mind you. But what they really wanted was our site and exposure for their brand."

Getting to speak to cafe owners is not easy. You have to lure them away from the espresso machine - success in this trade relies on quick rotation; an experienced barista can make up to five cups of coffee a minute. Then owners and managers are reluctant to disclose too many trade secrets - competition is frenetic enough without too much public scrutiny. Thanks to this code of silence the use of incentives - no one uses the word bribe - is rarely discussed publicly. But the story is different behind the "closed" sign, where owners seem to talk of little else.

Exactly who is driving the practice is hard to say: cafe owners blame the sales reps, while the major suppliers claim that avaricious cafe owners demand cash, gifts and other sweeteners before signing on the dotted line.

"A mate of mine got two return air tickets to Italy in return for signing a contract," says one cafe owner in central Sydney. "They'll often give you 100 kilos of coffee for nothing. Or cut the price so much they're virtually giving it away. You wouldn't believe what goes on these days."

Despite the outward bonhomie and generous gifts, relations between cafe owners and coffee companies are becoming tetchy. In June this year, Cantarella Bros (which owns the Vittoria and Aurora brands) took a small cafe at Fox Studios to the Supreme Court for dropping its coffee in favour of a rival brand. Co-owner Maia Andreasen told the court that the cafe had switched after complaints from the cast and crew working on the movie The Matrix. "Your old coffee was the fuel that kept Star Wars going, but this film is going to grind to a halt if you keep serving Vittoria," one crew member allegedly told Andreasen.

Les Schirato, the chief executive of Cantarella Bros, strenuously challenges the allegation, saying that no cast member from the movie ever complained about Vittoria coffee - and certainly not Keanu Reeves, as was widely reported. "There was never any complaint from anyone involved in the movie," he says. "Keanu Reeves wasn't involved at all ... absolute garbage." He claims Cantarella Bros secured a statutory declaration from the executive producer of The Matrix denying that any member of the cast or crew had complained about the coffee.

Cantarella Bros, which is seeking $60,000 costs, claims the cafe's owners are using the allegations about Vittoria coffee as a distraction from the fact they broke their contract.

(When the(sydney)magazine tried to contact the owners of Fox Espresso, our calls were not returned. The Supreme Court is expected to hand down a judgement later this year.)

Other cafe owners see the Fox Studios case as a worrying development - an indication of just how powerful the leading coffee companies are becoming. "All the big players can get aggressive, but they're pretty choosy as well," says barista George Nahas as he serves a long line of business types at the Andronicus Espresso Bar in Sussex Street. "If you're doing 20 or 30 kilos [a week in coffee beans] no one wants to know you, but if you're doing, say, 40 or 50 kilos they'll offer you a scheme."

Standard packages include a free espresso machine (with 24-hour servicing), a professional electric grinder, barista training, staff uniforms, aprons, printed menus, unlimited cups and saucers, umbrellas, windbreaks and, of course, endless supplies of discounted coffee beans. The total value of such a package could be more than $40,000.

Astute cafe owners, especially those in prime city and suburban locations, have become adept at playing off the coffee companies. With about 70 roasters and importers now operating in Sydney, there is plenty of scope for extracting a sweetener or two. "Every week I get at least two new reps trying to sell me their blend - even though they know we've signed a contract with Nestle," says Nahas. "It doesn't make any difference, they still keep coming in."

For their part, the coffee companies argue that a three-year contract, the industry standard, is the only way they can defend their investment in training, equipment, discounted coffee and other support. "We're talking big bucks," says one cafe owner who has managed to extract preferential treatment without signing a contract. "The espresso machine alone is worth up to $10,000. Then they'll supply umbrellas, aprons and as many cups and saucers as you want. Don't ever worry about breaking a cup in your local cafe - the owner can get as many as he likes from the coffee supplier."

The pressure to sign on first-time cafe owners is intense, but a good coffee deal won't necessarily save a cafe from going down the tubes - it has been estimated that one in 10 new cafes fails within 12 months of opening.

Of course, the major coffee suppliers (which include local roasters such as Vittoria and big imported brands such as Lavazza, illy and Segafredo) place a rather different interpretation on the support they provide, preferring to see themselves as working in partnership with individual cafes and restaurants - not dictating to them.

"You've got to appreciate just how competitive food service and hospitality are in Sydney - even more so than Melbourne," says Rob Tanna, general manager (finance and commercial) at Mocopan. "Like all coffee distributors we offer incentives to cafes, but cash inducements are not on. They are neither smart nor sustainable."

Most of the big companies are understandably coy about their arrangements with individual cafes. All categorically deny offering cash incentives, free holidays or other gifts - although they acknowledge that the practice does exist in Sydney. "We don't do it," says John Russell Storey, food services marketing manager (beverages) for Lavazza coffee. "We walk away from accounts that ask. We will spend an agreed amount of money on signage, awnings, menu cards or umbrellas, but never cash. Bad ethics, bad for business."

Russell Storey describes Lavazza's business approach as more collaborative, helping cafes to achieve a high professional standard of coffee and service by providing training, technical support and marketing advice. Over the past 10 years the company has trained 15,000 people at its barista schools in Australia.

Vittoria is equally unapologetic for locking cafes into contracts - and for taking legal action against anyone who doesn't honour the agreement. "People claim there's a coffee cartel in Sydney," says Schirato. "But I don't agree it's a coffee cartel. The cafe owners have a lot of power. You only have to drive down the street and see all those umbrellas carrying the names of different coffee brands. A cafe can always say 'no' and buy coffee from someone else."

According to Schirato, many cafe owners are their own worst enemies, and should stop blaming the coffee companies for their problems. "What you're seeing [in Sydney] are more and more cafes that look the same," he says. "They don't care about the quality of the coffee. What they're interested in is the short term: 'What do I get?' And that's not good for anyone."

But as the Vittoria boss freely acknowledges, skirmishes with cafes are little more than a distraction. A far bigger challenge is looming in the shape of multinational food and beverage companies that are eyeing the coffee market.

When Coca-Cola Amatil bought the Melbourne-based Grinders Coffee Group in August, the acquisition sent tremors through the coffee industry, which fears such takeovers will undermine what has always been a free-wheeling trade. Pepsi is being touted as a corporate threat, alongside Australia's big wine and brewing companies.

Schirato says he has rebuffed a number of lucrative offers to sell the company, which has a roasting operation in North Ryde and will open a new $15 million facility in Silverwater next year. Cantarella supplies 5000 cafes in Australia, plus many leading restaurants, including Tetsuya's and Rockpool. The family-owned company, which was founded in 1958, controls 41 per cent of the retail market in Australia, and a large slice of the cafe and restaurant trade.

"We've been approached by brewing companies, grocery companies and merchant banks," Schirato says. "We get offers to sell every couple of weeks. Soft drink companies see coffee as a huge growth area."

Marketers say that Coca-Cola's takeover of Grinders, which supplies 2000 cafes, means that Coke will be able to "bundle" services - such as fridges and bottled water - offered to cafe owners, undercutting independents and changing the whole coffee-drinking experience. "One of the things that makes coffee so attractive is its boutique image and personalised service," says Tanna. "If the experience becomes too corporatised, consumers will switch."

Despite the money generated by coffee, the industry remains at heart a cottage operation where anyone can set themselves up with a roasting machine, hang out a sign and tout for business. Even the major coffee chains have failed to affect the underlying coffee culture in Sydney - Starbucks, Gloria Jean's and McCafe account for only an estimated 3 per cent of coffee sales in Australia.

But they are multiplying fast. Led by Gloria Jean's, Jamaica Blue and Starbucks, the chains are quickly invading the city and suburbs. In the past nine years, Gloria Jean's has opened 280 outlets throughout Australia - eight of them in the CBD. Starbucks has opened 24 stores in Sydney and is looking for new opportunities, including drive-through cafes. McCafe, a concept invented in Australia, is now being exported to the world.

"This is a great market to be in. You can put forward an innovative product and people just get it," says Aasha Murthy, managing director of Starbucks Coffee Australia. "We haven't got a [growth] ceiling in Sydney because that's how quickly the market here is changing."

Consumption of pure coffee at home (a market still dominated by tea and instant coffee) is also expected to start growing again with the introduction of new coffee-pod technology, which uses disposable pre-packed coffee baskets and a simplified espresso system. Even the most cautious market analyst sees no end to our current infatuation with coffee - a quintessential part of 21st century urban life and the fuel that drives a restless, overworked population. Marketers call this the "virtuous cycle" - the ideal capitalist paradigm of fulfilment leading to more desire, and consumption.

First consumed in 15th-century Yemen, coffee is now the world's second most traded legal commodity after oil; most of the world's coffee is bought and sold on the New York Coffee, Sugar and Cocoa Exchange, with smaller quantities sold through the Futures and Options Exchange in London.

Sufis and Muslims adopted the drink in preference to alcohol because it never left the drinker incapable of "distinguishing a man from a woman or the earth from the heavens". Since then coffee has been blamed for slavery, colonisation, Third World debt and the creation of the global economy - the London Stock Exchange, Lloyds and the East India Company all began life in London's famous coffee houses.

"The introduction of coffee to England led to a brain explosion," writes Antony Wild,

the author of Coffee: A Dark History (Norton & Company). "The coffee shop man

[was] energetic, self-motivated, political, practical, reformist, well-connected, cultured and philanthropic."

Given such an illustrious heritage, Sydney's affection for the aromatic bean is understandable. And despite the plethora of fashionable caffeine-based drinks, the local cafe still offers the city worker a safe harbour, away from the toil and grind of urban life. Starbucks calls this our craving for "a third place" between home and work, while Gloria Jean's has launched a new advertising campaign entitled "Escape the daily grind" using the tagline: "Come in, hang out."

"In Italy, you see people who've been going to the same cafe every day at the same time for years," says Russell Storey. "The cafe is part of your life. That's what we really seem to be looking for in this fast-moving age. Nothing can quite compete with the romance of a barista behind an espresso machine. I can't see that disappearing, ever."

For those with longer memories, however, this current mania for real coffee (even in its most ersatz form) is still hard to digest. "Twenty-three years ago I got kicked out of every supermarket [in the country] and was told that Australians would never drink strong coffee," recalls Schirato. Cantarella Bros now has a turnover of $140 million a year and imports green beans from all over the globe, including Costa Rica, Mexico, Colombia, Papua New Guinea and Nicaragua.

Industry analysts say large-scale immigration from Italy after World War II meant Sydney was well ahead of the espresso wave now sweeping the industrialised world.

"Not only are we drinking a lot of coffee, there's been a dramatic shift in our consumption patterns - out of the home and into restaurants and cafes," says Chris Middleton, an authority on coffee, who runs the Fountainhead marketing consultancy. "Australia has the greatest penetration of espresso machines [per capita] after Italy. More than 20 per cent of Australian households now own an electric espresso machine."

Indeed, according to the consumer research group BIS Shrapnel, cappuccino is our third favourite beverage, after soft drinks and milk. But Middleton sounds a warning. "We're not the great cafe society that we claim to be," he says. "People like the idea of coffee rather than coffee itself. We're in love with the whole theatre of going to a cafe. And remember, we still drink more tea than coffee. We've been drinking tea since the time of the First Fleet - old habits are hard to break." (s)

Tricks of the trade

Supersize me The large-size takeaway coffee is an innovation forced on cafes by the big coffee chains. Ideally, a larger cup of cappuccino, latte and flat white should contain a double espresso shot. Some cafes, however, use a single shot. The rest is froth.

Beans and baristas Baristas are in high demand for three reasons: one, they can make good coffee from indifferent beans; two, they can achieve a consistent flavour; and three, they are fast - a good barista can make up to five cups a minute. The best can earn $30-$35 an hour. Most don't.

Sweet as Cafes don't charge for sugar, but wish they could. Ditto cardboard carrying trays. Sugar sticks (unit cost 0.02c) are more expensive than sachets (0.0065c), known in the trade as "pillows".

Cups ain't cups There is no such thing as a standard-size coffee cup. In fact, the ubiquitous china cappuccino cup is shrinking. Most cups used in the city are 185ml, about 40ml smaller than they used to be. Cafes get away with this by using chunkier cups with heavier rims. For real pygmies, try the airport.

Economic grind The amount of coffee used by commercial espresso machines is determined by the size of the basket - the perforated metal cup which contains the ground coffee. Coffee suppliers encourage baristas to use 26-gram baskets, but canny operators use smaller baskets (as little as 14 grams). This is more profitable for the cafe. Another trick is to add sugar to the milk, which is a good way of disguising the taste of cheap, bitter coffee.

© 2005 Sydney Morning Herald

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