Dear Front Fundr investors and interested investors. As the Trump administration has been wreaking havoc with their ever-evolving tariffs, we have been parsing through it all and evaluating the impacts on the coffee landscape and our business considering the most recent update on April 2. Here is a summary of our take:

What is going on in coffee?

The Trump administration’s tariffs on imports are raising raw green coffee prices by 10%-46% across 15 of the top 20 coffee-producing countries. The global benchmark for Arabica coffee, known as the “C” (Centrals) price, has reached a record high of $4.30 per pound, compared to a 60-year average of $1.67.

A major driver of the price increase was frost-depleted yields in Brazil which is the world’s largest coffee producer, but our take is this was a straw for an eventual collapse of centuries long unsustainable economic and distribution systems underpinning coffee’s commodification.

Fortunately, we don’t anticipate massive harm to our margins as we’ve always paid higher than commercial coffee prices (see table of our costs vs. commercial and fair trade certified costs per pound). Our purchasing practice is rooted in what we believe is the true sustainable cost, tied to a differential atop what a coffee farmer’s costs to produce are, not an artificial value based on global supply and demand determined by a handful of leading traders and multinational roasting companies.

This said, we're staying in close contact with our exporters, importers, and peers during this unprecedented time! One thing is clear: the new economic reality will reshape the coffee industry and consumer value to this product long term.

How is Dispatch impacted?

1) Tariffs: Compared to a US roasting company who immediately faces 10%-46% cost increase overnight, we are fortunately positioned at Dispatch. The US tariffs will only increase 20% of our annual coffee contracts, as 80% of our coffee comes through Montreal and avoids tariffs. The remaining 20% lands in New Jersey before being trucked to Montreal, where it's subject to tariffs. Fun fact: Only 50% of the coffee producing countries on Trump's tariff list are origins we buy from.

2) Unprecedented high Commodities “C” price for coffee [1] (see footnote for C Price definition): This will have minimal negative impact on our business (see insights section may likely help us accelerate competitive advantage against larger commercial coffee roasters in the at home market.)

We are fairly insulated from commodity price fluctuations as we’ve been paying an average of 300% above the C price since we began roasting coffee in 2014. Our higher price model seeks to improve on C price and Fair Trade certification models, which unfortunately do not cover the average cost of production for farmers today. See the chart comparing our green coffee costs to the C price and Fair Trade minimum. vs. smallholder farmers known average cost of production.

[2] sources for Cost of Production.

Risk mitigation efforts at Dispatch

1) A slight price increase. We raised prices in our cafes (3%-8% on drinks) effective March 15th, in and by May 1st we will be lifting our retail coffee prices online and in store by 10%, and reducing our bag format from 333g to 300g format to make the end unit price stay within the range of our competitors and this specialty coffee price benchmark. We raised prices on our cafe menus and in store retail bags in Q1 2024, however have not raised our subscription prices since 2022 despite a 15% cumulative increase to labor and green coffee from 2022-2024. Our efforts to not pass on inflation to our customers in our subscription channel will be a core feature of our messaging to offset churn, as will data transparency about our rising costs, and higher than industry payments to growers since inception.

[3) Specialty Coffee Retail Index: a research initiative out of Emory University benchmarking the retail prices of 55 specialty coffee roasters in North America. This is a companion initiative to the Specialty Transaction Guide, a research project that we have contributed coffee contract pricing data to for over 4 years. 

2) Increase our marketing campaigns and efforts to highlight our differentiated purchasing model that delivered a better economic return to farmers than commercial benchmarks and Fair Trade minimum pricing on the retail price. This year we will publishing for the first time our coffee costs paid to farmer vs. the cost of production. This is the result of our research triangulating data on cost of production from 4 studies across 8 producing countries we buy from. No roasters in the world currently benchmark the price paid to farmer atop a cost of production, largely because accurate cost of production information is nearly impossible with varying farm sizes, yields, cost structures making up the average farm structure in the industry. We believe it is important to take the first step to publish a cost of production, based on available research, and start the conversation with consumers about farmers costs of production and a differential atop that as one methodology to define a dignified price for coffee.

3) We are exploring pathways to import 100% of our coffee to Montreal (this may require us to sever ties with longstanding producer groups we purchase from, who export with US-only importers, which is a key consideration and consequence as we navigate the tariff policy evolution in the US).

Insights - long term opportunities for Dispatch in a changing coffee landscape

1)   Specialty coffee has grown rapidly over the past decade, driven by Millennial preferences (now the largest living generation in North America) aligning with specialty roasters and cafes. With rising green coffee prices, budget brands may raise prices by 20-30%, narrowing the price gap. This could make it easier for consumers to try higher-cost brands like Dispatch. Already, 70% of our subscription customers choose Dispatch over Starbucks and Kicking Horse, the next step down from Dispatch and craft-roasters in quality and premium price in the home coffee category.

2)  Larger commercial roasters have been acquiring smaller, quality-focused brands like Dispatch for the past 20 years (e.g., Kicking Horse, Blue Bottle, Stumptown). We expect this trend to accelerate as the price gap between low and high-quality coffee narrows.

3)  We expect a decline in out of home coffee consumption over the next 10 years which is the segment we are positioning to capture more market share in through growth of our subscription product. This segment is already a growth market we’re excited by, since Covid and the work from home lifestyle shift. WIth cafe drink prices rising, a precarious economic outlook and uncertain job market for the Genz and Millennial generations, and inflationary landscape, possibly looming global recession depending on how far Trump will push the tariff policy.

4)  Our Expansion efforts should be targeted within Canada next 3 years (already our focus for growth to the next revenue milestone of $6M from $3M today). Currently exporting roasted coffee from Canada into the US may be subject to tariffs.

Conclusion

The coffee industry is facing unprecedented change ahead, and rising prices for consumers. Our take is the industry is catching up to centuries of unsustainable economics, paying farmers lower than it costs them to produce, and with traders and roasters capturing the highest margins in the value chain. We are in a minority quadrant of roasting companies that are positively impacted and insulated at this time, due to a history of paying high and sustainable prices for coffee and producing a product of high quality that appeals to the largest consumer generation today, Millennials. With the price gap closing between low quality and high quality roasters in the years ahead, we are excited by the opportunities for gaining more market share in the premium grocery segment, and acquisition and merger opportunities.

[1]The “C (centrals) price” is the global de-facto benchmark for the price of a pound of raw green Arabica coffee. The C price was established on principles of global supply and demand for unroasted coffee. The C price is also heavily influenced by what stock traders and hedgers co-construct the value of coffee to be - so with looming threats of Trump’s tariffs on coffee producing countries (which has now manifested) purchase of Arabica C futures plummeted by 100,000 bags.

This way of valuing coffee has always been problematic to us, as it is a key driver of the poverty crisis in the coffee lands, as mentioned in this Price Crisis task force report commissioned by the the Specialty Coffee Association when the C price dropped in 2018 to below $1.00 USD per LB, well below the cost for a farmer to produce a pound. Additionally, the C price has been condemned by coffee producers who have carried the most negative impact with C price volatility of any industry actor in this “market system”.

Want to learn more? I highly recommend this book we resell and podcast interview with Karl Weinhold, researcher, MBA in global management and advocate for alternative pricing models that serve smallholder farmers in tropical countries.

I am not an economist, but as you know, social impact is part of our DNA and brand promise at Dispatch, and we have invested a decade in researching and designing a more responsible pricing model to the C price standard, because 80% of our world’s smallholder farming families living in extreme poverty and current economic systems do not work for them.

Furthermore, one doesn’t need to be an economist to run the math that the C price averaging $1.67 last 60 years, vs. the the well researched average cost to produce a pound of coffee being $2.19 USD per pound means the C price is not enough for a farmer to cover their operating costs.

[2] Our research on Cost of Production across five analyzed coffee producing countries and costs to produce coffee on smallholder farms (Under 10 hectares, the archetypical Dispatch farm supplier). Sources: Cost of production studies Cornell University + Fair Trade: The cost of financially sustainable production, 2015, Caravella importers Peca program study, 2018, Fair Trade Living Income Study - Honduras, Colombia 2022

[3) Specialty Coffee Retail Index: a research initiative out of Emory University benchmarking the retail prices of 55 specialty coffee roasters in North America. This is a companion initiative to the Specialty Transaction Guide, a research project that we have contributed coffee contract pricing data to for over 4 years.