Private Equity vs. the Coffee Workers

Welcome to the second article in a series investigating private equity and venture capital in the coffee industry. If you missed it, you can read the first piece here. This series has involved so much research, many interviews, and looking up the difference between private equity and venture capital embarrassingly often. If you value this kind of in depth writing about the coffee industry, why not consider becoming a paid subscriber? Okay enough of that. Now, on with the show.

It was an offer that seemed hard to refuse. Get in on the ground floor of a tech-focused, venture capital-backed specialty coffee company, one with the vision and funding to disrupt the industry and capitalise on the pandemic-inspired growth of at-home coffee drinkers. 

At the time, Rachel Apple was working as the quality control manager for George Howell Coffee in Massachusetts, a roaster and importer that had become integral to coffee startup Cometeer’s beginnings. Apple was part of the team that helped develop Cometeer’s flash-frozen instant coffee pods, tasting and giving feedback on different iterations of the product. When the company later recruited her, it offered remuneration rarely seen elsewhere in the industry.

“Definitely the benefits package, the 401(k), the PTO that they were able to offer because of the [venture capital], that was a shiny draw”, Apple tells me. “A lot of roasteries are not able to offer that, and even though this is my 18th year in coffee, I’ve never had access to those things. And there was equity involved too. So you start to world-build about, ‘Oh, maybe my life could look different in the future,’ or maybe, as an elder millennial, you can have a retirement plan”.

That was in 2021. Less than two years later, Apple was one of a number of Cometeer employees laid off—Forbes put the number at close to 50%—as growth slowed amid reports of behind-the-scenes dysfunction and leadership changes. Around that time, oat milk company Oatly—another coffee-adjacent, venture capital-fueled brand banking on perpetual growth—conducted layoffs that impacted many in its coffee department, while the VC-backed “beanless” coffee company Atomo reportedly cut staff due to a “strategic realignment and restructuring”.

As private equity, its offshoot venture capital, and other investment funding has poured into the coffee industry, opportunities for fast growth and big returns have soared. The number of VC-backed companies has increased—in India, for example, venture capital funding in specialty coffee companies has risen from less than $1 million in 2018 to $67 million in 2023. A piece in Inc notes that coffee startups received $600 million in funding in the first seven months of 2018, more than four times the entirety of the previous year. It is almost certainly orders of magnitude more by now.

As they’ve grown, many of these newly minted companies have sought to hire experienced specialty coffee professionals to lend their expertise and gravitas. But as soon as things go wrong, those workers are often the first out the door.

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Base Hits and Home Runs

Coffee is a notoriously underpaid industry. All across the supply chain, from baristas and roasters to coffee pickers and farmers, companies squeeze and exploit workers to keep costs down. Coffee is a multibillion-dollar industry, but just 10% of profits stay in origin countries. Meanwhile, Indeed reports that the average barista pay in the United States is $14.99 per hour—MIT calculates the U.S. living wage is $25 per hour for a family of four—while other surveys put baristas’ average pay even lower.

For many coffee workers, essentials like health insurance and paid time off are simply not on offer, and moving into more senior roles doesn’t always bring commensurate benefits. Even as workers’ expertise, knowledge, and skills increase over the years, their pay usually lags far behind. So, when the opportunity to use that experience and be properly compensated arises, it’s no surprise that many find it hard to pass up.

More and more, private equity- and venture capital-funded coffee companies dominate the specialty market. Think of Philz and Gregorys Coffee in the U.S.; WatchHouse, Origin, and Grind in the U.K.; Padre Coffee in Australia; and Seesaw Coffee in China. And that’s just the cafes—there are cold brew makers, techy roasters, smart scales, robot kiosks. Blank Street Coffee, the poster child of cash-fueled coffee startups, was literally founded by venture capitalists.

Venture capital, which usually invests in startups and early-stage companies, puts money in to supercharge growth and earn a big payday at sale. Private equity firms want to take money out—they are generally bigger and looking for more mature companies to buy up and extract wealth from. Both are prevalent in the coffee industry.

As Dr. Eileen Appelbaum, co-director of the Center for Economic and Policy Research in Washington, DC, explains it, “Private equity is looking for a base hit from any one of the companies it thinks it is going to be able to sell for a profit. Venture capital is looking for a home run—so it will invest in a lot of startups and then see which ones look like they’re really going to make it.” The others, whether or not they’re profitable, are cut loose.

As I wrote in the first article in this series, investment isn’t inherently bad; companies need cash at various points in order to succeed. However, there are questions to ask about the sheer amount of money now flowing into coffee—and particularly about the effects that money is having on the people working within the industry.

‘A Frustrating Place to Work’

As a customer, VC- or PE-backed coffee companies are now almost impossible to avoid (although you might not know it). The same is true for many coffee professionals. Juliana LaVita worked at both Blank Street and Blue Bottle, another venture capital-backed company which was bought by Nestlé in 2017, and noticed the difference compared to her previous roles at smaller, more independent coffee shops.

“Every business obviously wants to succeed, demonstrating that they are profitable each quarter, but the way management is hyper-focused on their reports and how to cut any excess spending possible seems to outweigh the experience of the store itself”, LaVita tells me. While bigger companies can have more structure and organisation, “On the other hand, there is almost zero creativity in big business on a store level. Ideas trickle down from the top, and your job becomes committed to those recipes and patterns”.

LaVita noticed that Blank Street seemed especially keen to hire workers with specialty coffee experience because “they would understand the flow of the business and be able to work alone or with maybe one other person on a shift”. However, she says, “Looking back, it seemed like another way to cut corners by only staffing one person at a time”.

One of the stated reasons behind the unionisation drive at Blank Street that kicked off in early 2023 was understaffing—while many workers said they enjoyed the job, “[the company] didn’t mention that you’d have to basically be managing your store”, as one employee put it to HuffPost. There were also safety concerns from working alone, as well as having to deal with temperamental machinery and managerial turnover. LaVita calls it “a frustrating place to work”, noting that “there are definitely flaws in the system that must come from [Blank Street’s] need to expand so fast and not flesh out ideas”.

For LaVita, having worked at two fast-growing, heavily backed coffee companies, their success or failure comes down to how they treat their workers. “At the end of the day, expansion is not without growing pains; either the products, or the people, or sometimes both, are at risk when businesses start to expand so quickly”, she says. “I also think they need to take care of their staff, because these people are truly the backbone that even allows the business to expand”.

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‘A Number on a Spreadsheet’

When it launched in 2020, Cometeer quickly became a specialty coffee darling. It had won Best New Product at the previous year’s Specialty Coffee Expo, and at its launch, Daily Coffee News called the flash-frozen capsules “truly innovative”. Meanwhile, the wider media fawned over its many investment rounds and plan to “change an industry that’s really been stuck in its old ways”, as founder Matthew Roberts told Forbes. Cometeer made Time’s list of best inventions of 2022, and was reviewed positively by Wired, CNN, New York Magazine, Food & Wine, and the New York Times.

Getting to this point took many years of research and development, and collaboration with companies like George Howell Coffee, whose Massachusetts roastery became a laboratory for testing the various iterations Roberts came up with. “It starts at George Howell”, Apple explains of Cometeer’s birth. “George loves innovation and he loves excellent coffee, and he’s always open to hearing people when they have an idea”.

Winning Best New Product in 2019, combined with Howell’s seal of approval, allowed Cometeer to approach VC companies and secure its first funding round. Partnerships with other specialty coffee roasters like Counter Culture, Equator, and Birch Coffee gave the company industry kudos, while the millions in funding let it scale at speed. “They grew their company on the backs of specialty roasters”, Apple says. The pandemic, which boosted at-home coffee consumption across the board, helped skyrocket Cometeer’s sales—Forbes put its number of subscribers at 28,000 by the end of 2022.

But it didn’t last. Cometeer’s mixed fortunes have mirrored those of venture capital-backed startups in other industries, which, after a prosperous few years, have started to see the money dry up. The amount invested by VC firms fell 30% in 2023 compared to the year before, the worst year for such investments since 2019, while VCs themselves struggled to raise money. “Startups are dying, and venture investors aren’t saving them”, wrote the Wall Street Journal in August 2023, citing rising interest rates and a generally hesitant market, among other factors.

Forbes’ detailed dive into Cometeer portrays a company in turmoil, spending $160,000 on influencer marketing in a single month and chopping and changing leadership while trying to lower costs by switching to cheaper coffee roasters. Although its flash-frozen coffee pods were selling for about $2 per cup, the company was reportedly “lucky to make a dime per pod”, while morale in the manufacturing division was low.

“When you have private investors, they want their money back quickly”, Apple says. Once growth starts slowing and things start looking precarious, the easiest way to cut costs is to slash payroll. “How it feels as an employee, speaking for myself and others that I’ve spoken to, is you’re a number on a spreadsheet. To me, there’s humanity that gets lost when those calculations are being made”.

Pro-Union Private Equity?

What happens to these workplaces when half their workers are laid off? At least in the coffee industry—unlike other sectors awash in private equity money, like healthcare—hopefully nobody will die as a result. But Dr. Appelbaum explains that low morale, overwork, and stress will likely all increase as the remaining employees try to do the same work with fewer resources. 

“They’re understaffed, they’re overstressed, they’re afraid they’re going to be fired so they don’t feel like they can say no”, Dr. Appelbaum says. “And then there’s going to be quality problems—hopefully not like a door falling off an aeroplane—but there are going to be accidents, there’s going to be poor customer service”.

One potential solution for employees is to unionise, which in theory should offer more protection against layoffs and other workplace problems. But Dr. Appelbaum says this might not be the answer: “Our experience is that all the private equity company cares about is if it can make money. And if the workers are unionised, and it can make money with a unionised workforce? Fine. I mean, they’re anti-union, just like most other employers are anti-union, but in the end as long as the private equity company can make money, they don’t care if there’s a union there”.

The investment firms that have poured cash into the coffee gold rush over the past decade only want one thing: to extract more money than they put in. If they can achieve this aim while helping the workers on whose backs the profit is made? Great. If those same workers need to be cut loose to save a buck? So be it.

Fast forward a year or so, and nothing much has changed. The first quarter of 2024 alone has seen multiple companies raise millions in new funding, including two “beanless” coffee startups. Blank Street is still doing its thing, launching a subscription program and heading across the pond to colonise London. Cometeer is also carrying on, partnering with influencers like James Hoffmann and movie stars like Seth Rogen and being favourably reviewed by … Forbes? 

The workers, meanwhile, also carry on, understaffed and overworked—if they’re lucky enough to still be employed. “I’ve met other people in tech now that I’ve brushed up against that world, and they’re like, ‘Oh, yeah, that happens in tech all the time, you expect to get laid off in 18 months’—and how do you live like that? It’s taken me a year to process through this”, Apple says. 

As the lines between coffee and tech continue to blur, as more robot barista startups and beanless coffee companies seeking maximum profit move into the industry, so the pathologies of the firms that fund tech startups—their instability, emphasis on extraction, and tendency towards dehumanisation—seep further into coffee. The result is more displacement and marginalisation of workers who are already under-compensated and over-exposed to risk.

“People should know what they’re getting into—they will keep you as long as you’re valuable to them, and they’ll let you go as soon as they don’t need you”, says Dr. Appelbaum of such companies. “So keep your old living standards and bank the money that they give you; save your money, because it may or may not last”.