the Future There are, of course, foodservice or HORECA establishments whose own brand can replace that of the coffee company. This will continue. It is the hotel that simply pours coffee out of an unmarked pot into an unmarked cup – and the roaster that delivered that coffee – that will come under pressure. Look for large beverage companies to enter the coffee segment As we wrote in our report Coffee Joins the Beverage Party, coffee is no longer a standalone category within beverages, sold separately in dedicated coffee shops or in a different section of the grocery store. Coffee is now another beverage that must be included in the broader portfolio. For many larger non-alcoholic drinks companies, it is a white space to fill. Most importantly, younger consumers view coffee as another category competing for the same occasions as every other beverage brand. Over the next 10 years, we expect to see three things change in a blurred-lines world: • Tie-ups between coffee companies and non-coffee beverage companies will continue. Following the Keurig-Dr Pepper merger, we expect Coke and/or Pepsi to make a much bigger move in coffee, and we see room for Starbucks to expand further into tea and water, or even into milk and dairy alternatives. While big coffee brands might expand into new categories, we think it’s most likely that other powerful non-alcoholic brands will further expand into coffee. • RTD coffee volume to triple in the US, and finally reach critical mass in Europe. The U.S. increase would be driven by intense competition between Pepsi/Starbucks, Coca Cola/Dunkin’ Donuts, and Keurig/Dr Pepper. This growth would put RTD coffee just above the current size of the energy drink market and would likely benefit from the continuing shift away from soft drinks in general and colas specifically. • QSRs will compete more directly with coffee shops as they provide higher-quality offerings. McDonalds has over 15,000 locations in North America and serves McCafé in almost all of them. JAB companies have invested in numerous foodservice platforms, from Panera to Krispy Kreme and Einstein Bros Bagels. Starbucks has highlighted the importance of food offerings at its locations, looking to double food revenue in the next five years, and Dunkin’ Donuts may drop the ‘Donuts’ from its name. In this world, medium-sized coffee chains, and smaller, non-specialty, mom-and-pop coffee locations will suffer, as the number of locations where consumers can find both good food and coffee expand.
Mobile order-and-pay already accounts for 30 percent of in-store Starbucks revenue in the U.S. The company has seen 12-percent growth in its active rewards members, reaching 15 million customers, with sales per member up mid single-digits. Once in the app ecosystem, the time to pick up your coffee goes down, consumers get targeted promotions and discounts, and Starbucks learns how to tailor its offerings to boost sales at the store level. This makes it much harder for a mobile order and pay customer to switch to a new coffee shop. Starbucks seems to have the upper hand in this world, while smaller independent coffee shops and delis or convenience stores that use coffee to drive foot traffic will likely lose out. In the midst of all this change, those companies that build brands, create sticky consumer connections, and best leverage the healthy attributes of the coffee bean will be positioned to capture more than their share of the growth. For all the necessary focus on the coffee bean and supply chain, it is important to remember that changing consumer desires and a new consumer view of coffee are constantly redefining the segment. Coffee companies need to consider how to compete in a world where consumption patterns are completely different, and attention is harder to earn. Imagine a consumer whose entire coffee world consists of a Starbucks app, bean-to-cup machine app (for both brewing and re-ordering), the new JAB-backed website Trade for special beans and equipment and a six pack of RTD in the fridge. This consumer will not be walking up and down the roast and ground aisle of the grocery store – you will need new ways to reach them. Consolidation pressure will weigh heavily on those on the wrong sides of these trends, especially companies that lack relevant brands and channels to communicate directly with consumers. Developing brands is a long process, and acquiring them is expensive too – scale and partnerships are obvious ways to help. Scale and investment will be equally important in finding ways to communicate the natural, sustainable and healthy qualities of its products directly to consumers.
Loyalty apps and subscriptions will drive sales Beverage consumers, especially the younger ones, live online. An Experian study found that 40 percent of millennials spend more time interacting with their phones than with the people around them. Currently, having a strong digital presence is a strategic advantage for a coffee brand owner – but far from a necessity. This will change. Let’s look at two examples of digital interaction in particular: subscription services and loyalty apps. We have seen the usefulness of subscription services littered around the consumer space – from the success of the Dollar Shave Club to wine club memberships and Amazon Subscribe & Save. It’s a way to lock in consumers, drive repeatable sales and create an audience to learn from. Keurig revealed in its last conference call that it makes twice the amount of revenue from subscribers than it does from other customers, which helps explain why Blue Bottle acquired Tonx (subscription-only coffee) in 2014. Online sales are not necessarily the domain of the bigger companies, but more accurately of forward-thinking companies. According to One Click Retail, beverages accounted for nine out of ten bestselling grocery items on Amazon in Q1 2018, and coffee sales grew 44 percent YOY in the US, to USD 145m. As subscriptions pick up, there is a problem brewing for traditional roast and ground brands. Tired brands in a tired category have little to look forward to in a subscription model, as this is a model that takes a strong consumer connection and builds a structure around it. In that sense, it is more viable for a younger brand that is generating excitement in the market or as a venue for a new bean-to-cup company to drive revenue after an initial purchase.
10 August/September 2018