Is it really only 10 years since our idea of a good cup of coffee consisted of pouring boiling water over a teaspoon of instant? We've drunk a few lattes since then, but have we come far enough? Here in our coffee special we filter out the finest beans, steam through the best gadgets, sip from the hottest cups and top it off with a sprinkling of recipes well worth the caffeine kick. But first, Sybil Kapoor on why it's time for the Starbucks generation to wake up and smell the coffee...

Coffee has become a latter-day elixir for entrepreneurs. Over the past decade, everything it has touched seems to have turned to gold. Dodgy property developers waft its sexy scent around apartments to promote a quick sale. Book shops, supermarkets and now even banks are opening comfy cafés in their premises so customers can relax over a fragrant cup of coffee, feel happy and spend more. It may sound improbable, but Abbey National increased sales of its banking products by 50 per cent in branches that were redesigned to incorporate a Costa Coffee outlet.

Coffee has become a latter-day elixir for entrepreneurs. Over the past decade, everything it has touched seems to have turned to gold. Dodgy property developers waft its sexy scent around apartments to promote a quick sale. Book shops, supermarkets and now even banks are opening comfy cafés in their premises so customers can relax over a fragrant cup of coffee, feel happy and spend more. It may sound improbable, but Abbey National increased sales of its banking products by 50 per cent in branches that were redesigned to incorporate a Costa Coffee outlet.

Nowhere, however, has coffee's golden reputation been so potent as on the high street where, until recently, opening a coffee bar in a prime location was regarded as a sure-fire way to make money. Create a brand, start a small chain and voilà, you could become a latte millionaire. In the boom years, it wasn't just the coffee firms that were on to a good thing. Their drinks were better than the instant freeze-dried brews most British people made at home, so they impressed us and we jumped on the bandwagon.

As with all such goldrushes, the end has to come, and coffee bars would appear to be no exception. After all, last year Coffee Republic suffered a £7.5m loss, Jacqmotte (a chain of six bars owned by Douwe Egberts) pulled out of the UK altogether, and even the mighty Starbucks is rumoured to be making a loss in Britain. Yet the world-market price of coffee beans themselves is at a 30-year low. So what is happening?

It's not easy to clear away the mist. If you ask the coffee chains, they say that losses are a blip, a necessary stage in their plans for expansion. Caffè Nero, for example, believes that the current practice of ploughing profits back into buying new property to steal a march on competitors is giving the false impression that coffee bars are unprofitable. Fierce competition for good sites has pushed up rents, which in turn means that you have to sell a lot of coffee to make money – even with vast mark-ups on the price of the raw product. Caffè Nero owns 108 sites in Britain, while Starbucks and Costa Coffee have 300 each. Buying three or four stores a month naturally has an adverse affect on Caffè Nero's profitability but, says a spokesperson, if they stopped tomorrow, their figures would show profits.

If this expansion is to be successful, the chains need to make us want to use them more. They need to rediscover the very thing that made them so successful in the first instance: impressive coffee. And as we drink more coffee and learn more about it, so their standards must rise. Sadly, though, quality is not at the centre of the coffee wars.

Geoffrey Young, director of the retail consultants Allegra Strategies, makes it his business to analyse this type of situation. In his opinion, the growth is being built around location and branding. His company's research shows that we choose our coffee bars primarily for their location, rather than price. And because many of us would like to buy something to eat at the same time, coffee bars could evolve into just another form of sandwich bar and die out all together. It's a fate that happened to previous coffee-culture booms (see right) which saw cafés shift their emphasis and end up primarily as food outlets.

Young believes that as the market becomes more competitive, it is going to be dominated increasingly by a few large players, with the battle for growth taking place outside London, which is now approaching saturation point. "The coffee-bar market is going to continue to grow," he explains, "but the days of small, independent operators are limited. It's all about offering customers a nice, branded concept," he states cheerfully. His vision of the future encompasses companies such as Starbucks or Costa Coffee opening sites in petrol stations, bowling alleys, banks, garden and DIY centres. Somehow, it conjures up a bland, corporate world lived in a film set from Friends. I need a double espresso.

Stephen Hurst, the owner of Mercanta, a small specialist coffee importer, has an alternative vision of how the market could grow. As a nation, we have traditionally been comparatively ignorant when it comes to appreciating the finer details of freshly roasted coffee. This may make the UK an attractive market for the big firms, which perhaps feel they haven't so far had to provide truly gourmet brews. Hurst believes it's by keeping pace with and encouraging our own rising standards that the market will grow.

"The more a country appreciates good coffee, the more it will drink," Hurst says, citing as an example the Nordic countries, where "24 million relatively well-informed Nordics consume 4 million [60kg] bags of coffee, virtually all arabica beans. Sixty million ill-informed UK residents consume just over 2 million bags of coffee. The number-one UK import is Vietnam robusta." This is not good, as most Vietnam robusta is a bit of dog in the coffee-bean world. "No one will admit it, but you can see a direct link between the decline in coffee consumption in the US and the decline of quality in their beans," adds Hurst.

Having cut his teeth working in a coffee trading position at Goldman Sachs, he knows what he is talking about. Hurst is now on a mission to open our taste buds to the incredible variety and quality of fine coffee (see our guide on page 53). Forget your milky cappuccinos and flavoured lattes, chuck out the instant and delve into the complex world of speciality coffee. "It's like discovering new-world wines, it takes time to differentiate, but in time everyone will be able to make informed decisions," he says.

Curiously, when I spoke to the four market leaders of coffee bars, such a vision seemed a little too threatening to company policy, although Starbucks does already highlight some special blends and single-estate coffee beans. Across the board, product differentiation seems to be dependent on flavoured syrups and in-house gizmos, rather on quality.

It's surprising because by addressing the demand for better-quality brews from high-grade beans, the chains would solve another looming problem threatening coffee culture and the ambitious plans of the big brands. Coffee fetches an incredibly low price on the world market – it has fallen by 50 per cent in the past three years – but though it may be cheap for the chains to buy, the crash is not working in their favour for the long-term.

Growing quality coffee is labour-intensive. Ideally, the coffee "cherries" (the fruit from which the bean is taken) have to be hand-picked as they ripen throughout the season. Their quality can only be assessed once the outer layer of the coffee cherry is removed to reveal the bean. The majority of "green" (unroasted) beans are then exported and sold on the global market as a commodity, just like oil. But now that many farmers are living on a subsistence level, corners are having to be cut. Harvesting all the beans in one go may be cheaper for the farmers, but it means that not all of the crop is perfectly ripe. Already this has led to a rapid decline in quality.

Low-grade coffee is also likely to be have more carcinogens. The current levels are well below the World Health Authority's recommendations, but since the EU is moving towards trying to eliminate anything potentially toxic in our food, European coffee importers are keen to eradicate the problem completely.

Oxfam recently published a hard-hitting report titled Mugged, Poverty in Your Coffee Cup, explaining the complex reasons for coffee's low price on the world market. Unlike many other crops, coffee can grow on relatively inaccessible sites, such as halfway up a mountain, making it perfect for small farmers with poor land. Around 70 per cent of the world's 25 million coffee growers are smallholders with less than 10 hectares. Once fully established, the coffee bushes will continue to bear fruit for up to 50 years.

It is this ease with which coffee can be grown in many developing countries that has led to the massive over-supply for the market's demand, and this in turn has led to the low prices. Vietnam, for example, jumped into the market in the 1990s and is now one of the largest producers of robusta beans. There are currently 40 million bags of excess coffee on the market and that figure looks likely to grow – last year coffee production exceeded consumption by 9 million bags.

The International Coffee Agreement managed the market until it broke down in 1989 when the US disagreed with its restrictive policies and left. This has allowed the major transnational roaster companies to have a bonanza. They buy about 40 per cent of the world's green coffee beans and turn them into roast and ground or instant coffee. Four main roasters dominate the world, the first three of which are based in the US: Kraft (Maxwell House, Cafe Hag, Catre Noire), Sara Lee (Maison du Cafe, Douwe Egberts), Procter & Gamble (Folgers, Millstone) and the European-based Nestlé (Nescafé, Gold Blend).

As the quality of their coffee fell with the price, so the roasters developed new technology and techniques – such as the addition of a steaming process – to mask its bitterness. This, in turn, has allowed them to buy even cheaper, lower-quality beans, and perpetuate the vicious circle of low prices and bad coffee for a short-term profit. Oxfam estimates that if you drink one coffee a day for a year, it will cost you £12.48. While the coffee company will get £9.31, the farmer is left with a mere 55p. Among other things, Oxfam wants consumers to put more pressure on the big roasters to change the way they buy coffee, and to patronise Fairtrade labels, which work directly with local co-operatives of small farmers to ensure that they get a good, fair price for their coffee. The Fairtrade scheme is designed to support them throughout the year and any surplus profit is reinvested into the community. If successful, this would inevitably improve not only the welfare of the growers, but also the quality of the coffee we drink.

Interestingly, in the past year both Costa Coffee and British Starbucks have started offering a Fairtrade coffee in their bars. Both are extremely vague when pressed on how well it is selling, which suggests that it forms a small percentage of their sales. However, Sylvie Barr, head of marketing for Cafédirect, a Fairtrade company which supplies Costa Coffee, says, "This is a very fast-growing sector of the market and it's still very early days." She may well be right: ethical food purchases in supermarkets is increasing by a staggering 24 per cent a year.

While the International Coffee Organisation, which represents both coffee exporters and importers, takes on the problems of over-production, it is, in a sense, also up to us to decide whether we are content to drink any old coffee – whether buying a latte from a coffee chain or beans from a supermarket. After all, in theory, discriminatory coffee drinking could bring about a revolutionary new approach to international trade and global responsibility. It will also give you a delicious cup of coffee. *

Storm in a coffee cup

Modern coffee culture began in 1977, when Costa Coffee opened its first coffee shop in Vauxhall, London, and grew into a chain during the mid 1980s. Then came Aroma (1989), the Seattle Coffee Company and Coffee Republic followed (both 1995). At the end of 1996, Caffè Nero entered the market and Starbucks hit the UK in 1998.

There are around 800 coffee chain outlets in London, with more than 1,100 in the rest of the UK. By the end of next year, those figures are expected to rise to 880 and 1,300 respectively.

It's been a tempestuous business. In 1995, Whitbread bought Costa Coffee. Starbucks snapped up Seattle Coffee Company in 1998. McDonald's acquired Aroma in 1999, only to sell it to Caffè Nero in April this year. Coffee Republic bought Goodbean Coffee in 2001, and Caffè Nero, Benjy's and Easy Group have all recently tried to take over Coffee Republic.