Coffee Industry Shifts Under Tough Economy

For example, there will be several thousand fewer specialty coffee shops in 2010 ‑ yet thousands of new outlets with espresso machines will spend unprecedented sums advertising premium coffee.

Customer behavior continues its shift from indulgence to value as coffee drinkers forego $4 lattes ‑ yet consumption of foodservice coffee will increase and the amount of coffee prepared in-home will rise.

Total dollars spent on both grocery and foodservice coffee will increase.

To better understand these contradictions, Specialty Coffee Retailer sought the counsel of 25 industry leaders including association executives, suppliers, coffee growers, traders, buyers and, most important, retailers and retail roasters.

This series appears in print and online, permitting readers to comment and suggest constructive solutions to the many challenges faced by this industry in transition.

CHANGING RETAIL LANDSCAPE

The National Coffee Association’s annual survey on consumption found a reassuring 80 percent of coffee drinkers are doing nothing different despite the economic downturn. The remainder are visiting coffee shops less often, trading down, making more coffee at home, buying less-expensive brewed coffee and looking for sales.

Coffee remains an important part of their routine.

Independent shops report holding their own thanks to loyal customers who are cutting back but not going away.

“Our members are showing signs of strength, which leads us to be more optimistic than not,” says Specialty Coffee Association of America (SCAA) Executive Director Ric Rhinehart.

Respondents to the Association’s 2009 Retailer Survey report steady sales. “Nearly half reported increases, albeit more modest than in previous surveys,” says Rhinehart. “Respondents were generally optimistic about the future.”

Between 2000 and 2005 the number of coffee shops increased by 70 percent, reaching a count of 21,400 or roughly one coffeehouse for every 14,000 Americans, according to Mintel International a market research firm based in Chicago.

“Every new opening increases demand by pulling in customers who pass by while going about their daily routines and this self-feeding cycle of growth has shown no signs of slowing or market saturation,” Mintel analyst Billy Hulkower observed in 2005.

He estimated saturation would occur at one shop in 10,000, based on the fact that Seattle shops continued to thrive despite the nation’s highest concentration of shops per 100,000 residents. His prediction was realized in 2008 as the total number of shops neared 30,000.

This represents a net gain of about 2,000 stores since the last survey, a total that includes the closing of 1,000 shops in the 4th quarter of 2008, he says.

“Based on what’s been reported thus far in 2009, we would expect to see another 2,000 drop in outlets this year,” says Rhinehart.

A correction was overdue, says Bob Phibbs, a consultant and former coffee chain marketing director known as the Retail Doctor. He estimates closures will reduce the all-time high by 20 percent, or 5,000 shops before the recession ends.

“As far as total employment, we only measured full-time equivalents, but 54 percent of respondents in our recent 2009 Retailer Survey employed one to five full-time workers,” says Rhinehart.

“What’s interesting is that 27 percent employed 6 to 10 workers compared with around 6 percent in the 2005 Gourmet Retailer/SCAA Specialty Coffee Survey. SCAA’s latest survey shows 20 percent of respondents had more than 10 employees compared with about 3.5 percent in previous studies,” says Rhinehart, who cautioned that the sample population was different between the two studies; the most recent study surveyed only current SCAA members.

MARKET OVERVIEW

No longer is America the country that simply drinks the most coffee – sales figures from 2008 reveal Americans are willing to pay for good coffee.

Specialty coffee today accounts for $13.65 billion in sales, one-third of the nation’s $40 billion coffee industry.

Last year growth in value of coffee surpassed volume growth. This is largely because demand for premium coffee such as Fair Trade, single origin, organic and Rainforest Alliance has transformed the overall market.

Fair Trade coffee sales grew by 32 percent last year. Both Rainforest Certified and organic coffees had double-digit increases. Imports of all three will soon pass 100 million pounds, according to Daniele Giovannucci, one of the coffee world's leading consultants.

“If you add other forms of differentiation – including specialty or gourmet coffees of course – you have more than 60 percent of the U.S. market (by value) making the U.S. now primarily a market for differentiated coffees,” says Giovannucci.

The Philadelphia-based consultant says the sales growth rate for the specialty segment is four times that of traditional coffee with projections the category will top $18 billion by 2012. His latest North American Organic Coffee Survey of organic coffees shows that sales topped $1.3 billion, about 10 percent of specialty coffee sales. Last year Americans and Canadians imported 89 million pounds of organic coffee.

Americans drank 146 billion cups last year, consumed nine pounds of coffee annually and while three out of four cups are prepared at home, 87 percent of the dollars they spend are on foodservice coffee. Almost 20 percent of coffee drinkers prefer espresso drinks.

“This category of coffees has, quite surprisingly perhaps, actually thrived in these difficult times,” says Giovannucci, who annually surveys North American coffee importers. “My early calculations are that the certified sustainable coffees such as Fair Trade, Rainforest Alliance and Organic are doing quite well from late 2008 into early 2009,” says Giovannucci. "We seem to have extraordinary levels of customer loyalty to value-based purchasing. …. helping others has not gone out of style in the U.S. and Canada."

The SCAA survey of whole bean and ground coffee retailers found that 67 percent experienced sales gains in 2008. A similar percentage (62 percent) reported an increase in beverage sales. Only 12 percent experienced ground and whole bean sales declines. Independent coffee shops earned $12 billion in 2007. The average shop sold 230 cups a day.

Commodity coffee blends are also improving to satisfy customer preference and green coffee prices are rising, another good indicator as improving prices are critical for stability..

Last year’s sale of Folgers Coffee Co. to J M Smucker Co. for $3 billion stimulated competition in this segment. In addition to Folgers, Procter & Gamble™ sold Millstone® and Dunkin’ Donuts® coffee brands in the deal making Smucker Co. the largest U.S. coffee manufacturer by sales. Look for a response from multinationals including Kraft, Unilever, Nestlé and ConAgra, the nation’s leading hot drink brands.

Looking ahead, much of the industry’s growth will remain in the specialty coffee segment. The shift to quality is apparent, but growth in retail beverage sales is not a given for independent shops unless they can recast their value propositions to higher prices for better coffee beverages.

Click below to review comments from industry leaders on ten trends that will most impact the retail coffee trade in 2010.