The U.S. Market for Specialty Coffee

There’s a bright spot on the horizon

By Tracy Ging

As the latte emerged from the financial crises as the emblem of over-consumption, when media report after media report suggested consumers cut back on that particular habit in order to build a stronger financial future, the specialty coffee industry held its breath. Then the National Coffee Association (NCA) released its National Coffee Drinking Trends 2009 report, showing at-home consumption had increased by five percent. Brands such as Folgers, under new management, regained some ground at grocery this year, and the NCA confirmed that for a small percentage of people, surviving the recession has meant switching to lower-priced brands. Even for the most zealous among us, it’s been hard not to ask the question, even if only in our own minds…is this the end of an era?

Not likely. Despite a challenging year for all businesses, specialty coffee isn’t relenting and in fact, there are notable examples where quite the opposite is occurring. That said, the sector shows signs of maturation and the next 20 years will certainly look different and require a different set of strategies than the past two decades. But that isn’t meant as discouragement because the good news is that specialty coffee has arrived, rising from what was largely considered a niche or passing trend to a legitimate market sector. And, in terms of the world coffee market, U.S. specialty remains the bright spot on the horizon.

POSITION IN THE WORLD

Importing more than 21.5 million bags of green coffee during the 2008/2009 coffee year, the United States accounts for almost one quarter of global green coffee imports and, as such, it constitutes the world’s largest single buyer. Specifically quantifying market share for specialty coffee is somewhat challenging because there is no system of measurement in place, but conservatively, looking at volume of known specialty players and incorporating estimates provided by the Specialty Coffee Association of America (based on membership surveys and interviews), we can conclude that the specialty coffee market share of green coffee imports must be at least 17 percent or approximately 3.8 million bags.

Specialty’s impact can be seen more readily when looking at value share. While there are some conflicting estimates on total market size, reports from Datamonitor and Mintel suggest the overall market to be just over USD$30 Billion dollars, of which specialty accounts for $13.65 Billion, or 45 percent of the total retail value of the U.S. coffee market. Specialty coffee has also been the driver of the whole bean category at retail locations for at-home consumption, accounting for 62 percent of total sales with an even more pronounced effect on value: specialty coffees averaged $10.88 per pound versus $4.28 per pound for non-specialty.
The specialty market in the U.S. is the largest in the world, both in terms of volume and value, and its dominance has attracted players from other segments to upgrade or reenergize their coffee offering, intensifying competition but also sparking innovation that continues to attract global interest and provide international opportunities for many companies in the segment.

SECTOR PERFORMANCE

The U.S. specialty industry maintains a strong global position, yet there is no question it has been challenged up and down the street. To date, the evidence has been largely anecdotal with reports of accounts shifting here and there and increased price pressure as well as some reports of attrition among coffee retailers. We haven’t seen a steep attrition among our members, so either it isn’t as bad as many think or our members are performing better. We are in the process of confirming a true attrition rate for publication in our April sector report, but in the meantime we can look at our membership and see signs of strength. In our 2009 Retailer Survey, 67 percent of our members reported increases in whole bean sales and in our more recent sector report, coffeehouses reported sales increases of 3.5 percent in the last quarter of 2009, outpacing all other foodservice sectors. In verbatim responses, the tone has been optimistic with the real limiting factor, not surprisingly, being access to credit and capital. Future sector reports will pay particular attention to growth drivers in order to better quantify opportunities, but a quick scan of our membership and their innovations around single-serve brewing, more rigorous commitment to training and education, and a greater emphasis on single-origin and coffee knowledge indicate the value proposition is rising.

KEY DRIVERS

While we maintain an optimistic view around the industry’s ability to innovate and grow, there are structural shifts and challenges to which the U.S. specialty market will need a response:

Tightening Supply for High Quality Coffee

Recent production declines in Colombia and ongoing land and labor pressures in Central America have resulted in tightened supplies of high quality washed Arabica coffees. While Colombian production is expected to recover over the next three to five years, increasing consumption in producing countries and emerging markets will compete for the world’s supply. The analysts have been predicting a shortage for some time now and it’s here—specialty will need to increase its focus on the supply chain.

Channel Movement & Intensified Competition

More traditional brands and commercial players will continue to infringe on specialty markets; however, it will be slightly more challenging for all but the largest specialty companies to go the other direction, to the same degree anyway, into at-home retail, convenience store and hospitality/foodservice channels because of distribution obstacles. That said, channel shifting could just as easily create market opportunities and provide specialty with the chance to leverage its brands, maximize niche opportunities and explore strategic partnerships.

A Shift Toward Convenience

The effects of the economy can be seen in consumer purchases with price playing a more significant role than before, but the numbers suggest convenience represents a larger portion of the value proposition and probably the greater threat to specialty. The huge success of Keurig and other single-serve brewers is fundamentally changing how consumers drink coffee at home and may be considered a game-changer. We can also point to an increasing number of drive-thru outlets, and the blur between coffee and quick serve restaurants as signs of the consumers’ desire for convenience that specialty players can’t ignore.

Emerging Demographic Segments

According to Beverage Marketing Corporation, bottled water, carbonated beverages and tea are all growing at rates faster than coffee, and energy drinks are making significant inroads with consumers as well. Health consciousness can explain growth in bottled water and to some degree tea, but much of what accounts for these trends are expanding ethnic populations and younger consumers choosing beverages other than coffee. And where coffee consumption has penetrated ethnic populations, it has done so most significantly in the soluble category (e.g, Nescafé Classico made substantial gains by targeting Hispanic consumers in recent years). This isn’t new news, but the data confirms that specialty still needs to work on broadening its appeal, in particular among young consumers.

The Good News

I recognize much of what I just explained might sound depressing and, to be honest, the picture is bleaker relative to past years. We project nominal growth over the next few years as the industry recalibrates and, as I outlined above, there are some significant challenges to address but there are certainly opportunities yet to be explored and discovered. The good news is specialty does many things extremely well and the data supports that assertion. It reversed a downward trend in per capita consumption, engaged a new customer base, introduced new words such as barista, Arabica, and single-origin to consumers, and most importantly, raised the bar for coffee quality. There is still room for differentiation and, as an industry, specialty has become far more sophisticated in identifying higher quality coffee, discovering unique varietals, commercializing smaller lots, advancing its brewing techniques, developing strong professionals, educating consumers and increasingly forging new market space. While larger companies focus on traditional drivers of consumption around product, price and distribution, specialty will continue to engage consumers on a deeper level, accessing their desire for authenticity.

If it were any other time, I’d be concerned that for at least the independent segment, even armed with a strong story, they wouldn’t have enough marketing and promotional strength to get their messages out, but the opportunity for digital engagement—building relationships with consumers before they ever even walk into a shop—will level the playing field. So, that opens opportunities for the specialty industry to tap into the more nuanced, economical, political-legal and socio-cultural purchase drivers. In other words, specialty can satisfy consumer desires of discovery, indulgence, community and increasingly their commitment to work with companies that are actively good in a way that larger companies will struggle to replicate in an authentic way.
As I stated previously, there is still room for differentiation, and the good news is that there is also room to expand and elevate the levels on which we base differentiation.

With over 15 years of marketing experience, Tracy Ging has spent the bulk of her career in the coffee industry, where she has worked on both sides of the supply-chain, developing a deep understanding of the market and the trends driving it. Ging currently serves as director of marketing and communications for the Specialty Coffee Association of America and the Coffee Quality Institute.

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