The Iced-Coffee Economy: Why the Cold Stuff Costs More

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What's the real cost? Photo: iStockphoto

All this week, Jonathan Rubinstein, the owner of the Joe mini-chain, has gone into work wondering whether today will be The Day. Each year, there is one day when the world changes, he says. Its the day when the entire population it seems switches from hot coffee to cold, served from plastic pitchers into cups full of ice." When that happens, Rubinstein says, my whole business changes for the next four months.

Thats in a normal year, though, when his customers typically switch to iced from May through October. But with this years already steamy temperatures, Rubinstein is facing the possibility that what his baristas call The Iced Season could stretch a full six months. And, given the economics of cold-brewed iced coffee, that could cause vexing problems for high-end coffee shops.

Bodegas and diners and coffee carts still serve iced coffee by chilling their hot java, resulting in a watered-down and bitter swill that follows the same economics as hot coffee. But the best coffee shops shops like Joe, and Stumptown, and La Colombe use cold-brewed coffee. Cold brew (or Toddy, as connoisseurs call it, named after a particular brewing machine) is a relatively new phenomenon in New York. Think Coffee began serving it in 2006 and now, Rubinstein deadpans, Its no longer a trend. Its mandatory.

Lets consider the numbers for a sixteen-ounce cold-brewed coffee versus a twelve-ounce hot coffee the best comparison, as ice displaces about four ounces of liquid. The cold one will cost anywhere from a quarter to a dollar more. But the café will hardly claim the entire difference as profit.

Like the hot stuff, cold-brewing involves mixing pulverized beans with water, but the latter process requires about twice as much ground coffee. Those grounds infuse filtered water for 12 to 24 hours, creating iced-coffee concentrate. That liquid is cut with water to taste, at a ratio of about one to one. Yet even after all this dilution, a cup of cold-brewed joe can include 62 cents worth of ground coffee. A hot cup might include 35 cents worth of beans.

For a coffee shop to thrive, its owners must keep their cost-of-goods around 28 percent of menu price. This magic number, basically a four-fold mark-up, allows businesses to pay for labor, insurance, rent, equipment, and marketing. Sticking to that formula is much easier with hot coffee invest about 50 cents, including the cup and lid and sleeve then charge around $2 for a product with pretty reliable sales. The difficulty with cold brew stems both from the higher fixed costs and the unpredictability of iced season. The hardest part is just making sure were prepared for cold brew," says Caroline Bell, co-owner of four Café Grumpy locations. Youve just reminded me I need to order more plastic cups.

The first added cost for cold brew comes from those clear plastic cups, or the compostable versions made from farming by-products that some shops prefer, both with wholesale prices that fluctuate based on the petroleum or corn markets. In either case, the cold cups can cost twice as much as the paper cups for hot beverages. The paper ones average around six cents, the plastic ones for cold brew go for nine to twelve. When we first opened in New York two years ago, I had to be convinced clear cups were necessary, says James Freeman, CEO of Blue Bottle Coffee. But with iced coffee, the humidity in New York makes the paper ones disintegrate. (Out West, Blue Bottle still uses paper cups, no matter the drinks temperature).

The straw adds one or two cents more. The clumps of napkins customers swipe for sweaty glasses and foreheads alike further drive down margins. My paper costs, which include cups and straws, increase by about 20 percent, says Jason Scherr, the owner of Think, before adding: Summer stresses me out.

Renting an ice machine, a common practice among cafés, costs up to twelve bucks a day. And if that machine breaks, bags of ice bought en masse from Gristedes will add twenty or thirty cents to each cups bottom line a nightmare scenario Rubinstein had one sweltering Upper West Side day.

All told, these variables, along with the extra coffee required for cold-brewing, add up to a goods cost of about 80 cents (and that doesnt include milk, of which Rubinstein estimates customers use 20 percent more during the Iced Season). That means owners must charge at least $3 to keep their margins healthy. Those who charge less are consigning their iced coffee to be much less profitable. For years, I was afraid to ask my customers for more than $2.50, says Kenneth Nye, the owner of Ninth Street Espresso. Until I realized that, every summer, my coffee-bean bills would skyrocket, and sales [revenues] would increase, but my grosses werent following it. He now charges three dollars, his margins are even, and no customers have complained.

For cafes, the high fixed costs of cold brew are offset by some advantages. Unlike hot coffee, which goes bad in twenty or thirty minutes, concentrate lasts a week, resulting in less waste. Profit-minded owners could, in theory, hire lesser-trained (and cheaper) employees to man the pitchers during Iced Season, cycling out skilled employees who specialize in things like cappuccinos. And the fact that cold brewed coffee is pre-prepared means that queues move along more quickly.

Unfortunately, after Memorial Day, the customers who would fill those queues are in short supply. Coffee houses may see a higher ticket per guest, thanks to the increased price that comes with iced, but theyll also get fewer total tickets. Its never our best season, especially in Chelsea explains Bell. Because New York City just empties out.

That leaves cafes to hope to serve enough cold brews on unseasonably nice spring and fall days when employees serve an influx of special-occasion drinkers along with the regulars who are ready to drop more dough for a taste of sweet iced goodness to make up not just for the increased costs but the drop-off in business over the summer. And, by extension, to root for early heat waves like this one.

Back to Rubinstein: Each weekend in August, he sees his business drop 10 to 15 percent a loss hes hoping the current temperatures will help reverse. When we have a nice spring day early, we bump up about 10 percent from a normal day, he says. Maybe an extra $200 to $400. Which may not seem like much, but quickly adds up when The Day today, for example comes in March instead of May.