Research Points to Growth for Ready-to-Drink Coffee

It’s no surprise to anyone in the coffee business that the last 5-year trend has been one of growth. In 2007, coffee sales through all retail channels reached $6.5 billion, growing 36 percent in current prices and 19 percent after accounting for inflation from 2002 to 2007.

The good news is the next 5-year period is expected to follow this trend, as consumers enjoy the convenience of ready-to-drink coffee and as coffee roasters and service providers continue to expose consumers to more variety.

These are some of the key insights of a 2007 market study on coffee by the Mintel Group, a research organization. The report was based on responses to questionnaires sent to 1,554 consumers 18 years and older in late 2007 over the Internet

Worksite coffee providers are winning their fair share of the coffee market, the report indicates. However, worksite coffee providers continue to face stiff competition for consumers’ coffee purchases, and alternative beverages are beginning to invade the space that coffee has historically held as an energy booster.

HIGHER PRICING AND OTHER FACTORS DRIVE GROWTH

Factors driving the growth include:

  • Premium/specialty products (higher price points);
  • Continued growth and popularity of coffee houses;
  • Higher prices;
  • Popularity of ready-to-drink (RTD) coffee.

Ready-to-drink coffee sales increased by 102 percentage points in the 5-year period, compared to ground, instant and whole bean sales, which grew by 15 percentage points.
Key factors driving the growth of ready-to-drink sales are the convenience and the ability to relive the coffeehouse experience outside of the coffee house.

The report noted that single-cup coffee systems are an attempt to target consumers who like a “perfect cup” of fresh coffee matching that of professionally brewed coffee.

WHERE THEY DRINK COFFEE

Although 83 percent of coffee-drinking respondents say they drink coffee at home, the home faces competition from numerous venues, with coffeehouses as the biggest competitor (40 percent).

Respondents aged 18- to 34-years old are least likely to prepare coffee at home; this group is 55 percent more likely than the average to visit coffeehouses.

Although respondents from all income groups exhibit similar incidence of drinking coffee at home, the incidence of drinking coffee at coffeehouses increases with household income of respondents. This suggests that affluent coffee drinkers, who are more likely to use premium brands, are drinking coffee at home less frequently.

Hispanics are 53 percent more likely than the average coffee-drinking population to visit coffeehouses. This population group is experiencing double-digit population growth, and sales won by coffeehouses translate into lost sales for coffee for home consumption.

WORK PLACE IS COMPETITIVE WITH OTHER CHANNELS

Chart 2 indicates that the work place is competitive with other away-from-home channels.

The younger groups are more frequent consumers of the coffee houses. This partly reflects the freedom these consumers have with their time. But it also indicates where they are picking up their consumption habits.

The younger consumers are also more frequent consumers of convenience stores and donut shops, which reflects the marketing that these channels have been doing.
The chart also indicates that work place providers are relying more on the younger age groups.

Looking at income levels, the most affluent consumers are doing the most buying at the coffee houses.

The work place providers are relying more on the more affluent consumers as well.

REASONS FOR DRINKING COFFEE

Taste is the most frequent (74 percent) reason respondents drink coffee — a reason that becomes more likely as respondent age increases, demonstrating a higher degree of loyalty among older respondents, who may have the coffee habit.

Coffee has traditionally been associated with waking up and enhancing efficiency, which is why a majority of respondents (64 percent) identify it as a get-me-going tool in the morning.

Among younger consumers (who comprise energy drinks core market), opportunities exist to drive sales by connecting creamer to the “coffeehouse experience” and emphasizing “energy boost”– which may reduce sales erosion to energy drinks.

Two fifths of respondents report drinking coffee to get an energy boost and a fifth for improving concentration.

Coffee marketers could foray into targeting 18- to 24-year-olds (most likely to cite these reasons) through functional benefit messages, much like energy drinks manufacturers do, the report noted.

CONSUMPTION SLIGHTLY DECLINES

Over half of coffee-drinking respondents report drinking about the same amount of coffee this year as they drank last year. A less rosy statistic suggests that the number of people likely to have reduced consumption (24 percent) compared to last year outnumbers the percentage of people likely to have increased consumption (20 percent).

Health is the leading reason (34 percent) for reducing coffee consumption. There remains a lack of education from coffee marketers in communicating health benefits to consumers through marketing messages.

One in five respondents has traded coffee for tea and one in 10 has switched coffee with energy drinks.

Respondents aged 55 and older are significantly more likely than the average population (31 percent versus 20 percent) to trade coffee for tea, likely embracing tea for health-promoting properties.

Respondents aged 18- to 34-years-old are a little more likely than the average (14 percent versus 10 percent) to switch from coffee to energy drinks. There remains a lack of (exciting) marketing targeting these adults in the coffee market, the report noted, which marketers should look to fill.

OTHER BEVERAGES BEGIN TO REPLACE COFFEE

Nearly one in six respondents report trading other beverages for coffee. However, among respondents drinking less coffee, 20 percent said they have started drinking tea, 10 percent that they have started drinking energy drinks, and 30 percent that they are drinking “other kinds of beverages,” which underscores competitive difficulties coffee may be having with other beverages, especially fast-growing segments such as tea and energy drinks.

One in two respondents reported drinking more coffee because they have been exposed to more kinds of coffee. This can be attributed to the coffeehouse phenomenon, which has introduced consumers to a wider variety of high-grade coffee and an increasing number of convenient outlets.

Nearly one half of respondents reported increasing coffee consumption because they want to get more energy boost from their beverage, while one in five has used more of it in socializing. This could be due to the increasing influence of premium brands at retail, where people share their favorite brand coffee experience with friends.

Nearly one in six respondents reported trading other beverages for coffee – a lower percentage than those who are drinking less coffee because they have started using other drinks – which underscores competitive difficulties coffee may be having with other beverages, especially fast-growing segments such as tea and energy drinks.

ENTRY OF “MID-PRICED” PREMIUMS

During 2002/2007, premium brands enjoyed dollar sales growth significantly higher than the non-premium brands. For example, combined retail sales of premium brands Starbuck’s, Green Mountain, Peet’s, Seattle’s Best, and Tully’s grew nearly 42 percent while that of Folgers and Maxwell House Classic grew only 15 percent during 2002/2007.

However, growth in the biggest premium brand, Starbuck’s, is slowing down, which could be attributed to consumers’ quest for value along with the proliferation of other premium retail brands.

Additionally, a number of “mid-priced” premium brands have surfaced during the review period priced between budget brands such as Folgers (Classic) and premium such as Starbuck’s.

During 2002 and 2005, Starbuck’s grew 10 percent to 14 percent annually, but in 2006 and 2007, the brand experienced only 4 percent growth. According to Starbucks’ annual report, sales of coffee beans through its stores also declined, from 5 percent of total sales in 2004 to 3 percent of total sales in 2006.

Iconic brands such as Folgers and Maxwell House are reviewing their portfolios and launching products to meet enhanced consumer expectations for high-quality coffee. In 2006, Folgers launched a premium line extension, Folgers Gourmet Selection, with eight varieties.

Similarly, Sam’s Club’s Bom Dia’s Marques de Paiva – a Fair-Trade certified brand – has tripled in sales since it launched in 2003. The brand is priced at $9.88, a 47 percent discount to Starbuck’s displayed next to it in the shelf.

As such, the report noted, consumers will be met with an expanding array of higher-quality coffees at prices that straddle the current premium-regular chasm, boosting revenue for the traditional, old-line brands, and putting pressure on current premium offerings.

THE HEALTH FACTOR

Increasing research and media attention to coffee’s health-promoting benefits may drive growth, the report noted.

Scientists are increasingly exploring the health-promoting benefits of coffee. Research performed in recent years is likely to benefit the coffee market in the future much in the same way as such studies have benefited the tea market.

Total U.S. sales of coffee are predicted to increase 35 percent at current prices and to increase 19 percent at constant prices from 2007 to 2012. By comparison, from 2002 to 2007, total U.S. sales of coffee increased by 36 percent at current prices and increased 19 percent at constant 2007 prices.

COMPETITIVE BEVERAGES COULD IMPACT FUTURE SALES

The forecast for U.S. sales of coffee will be affected by changes in the following factors:

  • Competition from other beverages: Alternative drinks to coffee including tea and energy drinks are competitors to coffee in the broader market of stimulating beverages. The forecast recognizes that demand for and sales of coffee during the next five years will be affected by the preferences of consumers for these alternatives. If there were an increased switch to alternatives to coffee during the forecast period, whether for taste, price, lifestyle, or other factors, it would be likely that sales of coffee would be less than forecast.
  • Competition from coffeehouses and restaurants: The coffee market is primarily a do-it-yourself market that implies additional work by consumers to obtain the end product of a cup of coffee. Time-starved consumers, seeking convenience and consistent, high-quality coffee, have increasingly turned to coffeehouses and restaurants to purchase ready-made coffee, both near their workplaces and homes. If there were a greater than expected reliance by consumers on coffee purchased at coffeehouses and restaurants during the next five years, ready-to-drink sales will exceed the forecast.
  • Health factors: Any new scientific research on the health benefits or risks of coffee consumption will likely shift consumption of coffee and cause future sales to differ from the forecast accordingly. As has happened in the tea market, research that suggests that antioxidants in caffeine and lower risk of cirrhosis of the liver among high-frequency coffee drinkers will potentially cause sales of coffee to increase. If there were future medical studies during the forecast period that suggest clear benefits or risks of coffee consumption, future sales would be expected to differ from the forecast.
  • Price changes: Consumer demand for coffee is inelastic: any percentage increase in price will result in a lower percentage decrease in units sold with the result that total dollar sales will increase. This was the scenario during the steep price increase of 2005.

Coffee prices are expected to increase during the next five years. Any unexpected rise or fall in the price of coffee during the next five years would be expected to cause future sales to exceed or fall short of the forecast, respectively.

The number of new organic coffee products increased steadily during 2002 through 2004, but appears to have cooled down in 2006 and 2007. Shoppers looking for products free from chemical additives, preservatives and pesticides are consuming natural and organic foods.

ORGANIC SALES TO INCREASE

According to Mintel’s Organic Beverages, another research report released in 2007, 51 percent of consumers purchased organic foods or beverages in the past year. Despite the lower offerings in 2006/2007, organic brands have found a favorable consumer response.

During 2004/2006, many organic brands, including Newman’s Own (Green Mountain), and The Organic Coffee Co. have experienced double-digit growth. Additionally, most premium brands such as Starbuck’s, Mountain Green, and Kraft (Yuban coffee) offer an organic selection as part of their total selection.

Ethical coffee has also gained ground amid increasing media attention to the plight of coffee farmers and concern for coffee producing countries’ environments. During 2002 to 2005, the sales of Fair-Trade certified coffee tripled. Most premium brands offer a selection of fair-trade certified coffee.

Coffee service providers will need to meet the changing needs of consumers in order to win their fair share of coffee sales. As competitive beverage begin to replace coffee for some consumers, coffee service operators have an opportunity to capture these sales as well.

Meanwhile, worksite coffee providers continue to face stiff competition for consumers’ coffee purchases.

Loading