A Realistic Look at the Numbers Game

by Tracy Ging

Stocks take another dive as new employment figures are released, analysts warn of further declines, and as I write this, the coffee market has just experienced 18 straight sessions of higher highs. Understandably, there is a palpable edginess in the coffee industry now—an unease that is centered mostly on the question: What if coffee prices continue to rise?

It’s worth noting that for the most part, roasters and retailers have successfully adjusted to a rising market last year and again earlier this year, but the fear is that the value proposition has been pushed to its upper limits. There is a lot of speculation and naturally some trepidation, particularly the closer you get to retail. Roasters share stories of push back, even suggestions to compromise quality if necessary. Specialty coffee is being tested. Can the industry keep pushing forward, driving quality and expanding the points of value, or will it make fundamental sacrifices?

While prior statistics can’t necessarily predict the future, they can inform our theories. There is evidence to suggest a degree of optimism is in order. The numbers show stable consumption, price inelasticity, and retail sales growth among specialty coffee operators. More importantly, the numbers make a case for quality.

People are Still Drinking Coffee

Consumption is up and incidence of past day coffee consumption has been stable overall since the late 1970s.1

Consumption among younger populations (18–24 year olds and 25–39 year olds) is also up and number of cups per day is slightly higher on average.2

Coffee continues on as a favorite beverage and younger consumers show a preference for gourmet and espresso-style beverages, a trend that bodes well for specialty. Furthermore, population rates are rising and a sizable generation of consumers (often referred to as Gen Y or Millennials) has yet to enter their coffee-drinking years.

Sales are Strong

Coffee has retained its popularity independent of employment figures. The vast majority (80 percent) of consumers claim to have not changed their coffee consumption because of their personal financial situation3.

At the beginning of the year, after many roasters and retailers passed on the costs of rising inputs (primarily coffee and milk), sales trended up. From the SCAA Sector Report (April 2011), 1Q11 sales results were meaningfully ahead of operator expectations. Industry sales were up 8–9 percent in 1Q11 compared to up 6–7 percent in 4Q10.

Traffic and ticket both contributed to sales growth—only a portion of the increase is attributable to higher prices. Overall, the SCAA Sector Report (April 2011) indicates specialty coffeehouse operators raised prices 5–6 percent on average during calendar 1Q11. This likely helped average ticket (no meaningful examples of negative mix shift) and had no real impact on traffic.

Coffee Drinkers Continue to Desire Better 

From the SCAA Sector Report (July 2011), the sales recovery within the specialty coffee industry has outpaced the rest of food service. Research on the food service segment indicates that casual dining comps hit positive territory for the first time in 3Q/4Q10 and indicates the momentum has continued into 1Q11. QSR sales have trended up 0–2 percent steadily during the last year.

Sales for publicly traded coffee chains have been improving directionally since late 2008. The growth rate has settled to up 4–6 percent during the last year or so.

Quality Remains the Most Important Aspect 

It appears tastes have adjusted and that, while there may be more nuanced demands for value, coffee drinkers show no signs of compromising. This is where the trend–line becomes most revealing. Thirty years ago, coffee consumption was in decline and then the trend reversed. There is a reason the data tells a mostly happy story around increasing consumption, relatively strong sales performance, and continued interest in specialty—coffee got better. That isn’t meant to oversimplify the market pressure of today, but to acknowledge one salient piece of assurance as businesses try to predict what is ahead. Even with all of the economic uncertainty, fear, and some shifting patterns of consumption, a consistently positive trend remains for specialty coffee: quality.

FOOTNOTES:

1 National Coffee Drinking Trends Study, 2011. The National Coffee Association USA. Available through: http://www.ncausa.org/i4a/pages/Index.cfm?pageID=731

2 Also from the National Coffee Drinking Trends Study, 2011.

3 Also from the National Coffee Drinking Trends Study, 2011.

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