In the first blog about coffee in the US we were able to read about the history of consumption and the coffee industry until the second and third waves. In the second blog, we saw the examples of Starbucks and Keurig Green Mountain that took 2 different paths to end up among the big shots of coffee. In this blog we will see how companies come together in alliances, crossing boundaries inside and outside the coffee industry, ending up in the hegemony of only 4 blocks. Thousands of small and medium businesses have to find their niches in order to operate. Also something about habits and new trends in consumption.
Coffee in the USA – Part 3
April 28, 2023. Jos Algra
Roasters, coffee shops and Ready to Drink
In 2014 Keurig Green Mountain entered into an alliance with Coca-Cola, to develop drinks based on iced coffee, Keurig Kold, which is being made. The product fails and the alliance is dissolved, Coca-Cola looks for another partner. Keurig acquires in 2018 the Dr. Pepper Snapple Group, another soft drink company that spun off from Cadbury Schweppes. The company is now known as Keurig Dr. Pepper, KDP.
Behind these strategies and alliances is the strong growth of the Ready to Drink segment. In Asia and the Pacific, particularly Japan, consumption is large, accounting for 81% of global consumption. It is also growing strongly in the US, with 37% in volume in the 5 years to 2021. Euromonitor forecasts annual sales value growth of 5% between 2022 and 2027 to more than $1.4 billion, growth of nearly double that of pods. It is very popular among young people, while the consumption of soft drinks is declining, and companies want to make sure they capture the new generation.
Euromonitor, January 2023. US Coffee Outlook 2023
Between organic growth, acquisitions, the success of the K-cup and alliances, KDP has become the largest roaster in the United States with 20.5% of sales in the retail market in 2022. In 2016 KDP was bought by JAB Holding, of German origin, the same as Peet’s Coffee, with 2.5% the fifth largest roaster in the United States. JAB is challenging Nestlé for first place in the global roasted coffee business; its strong brands in Europe are Jacobs and Douwe Egberts which have been merged with Peet’s Coffee into JDE Peet’s. KDP continues as an independent company within the group.
With a market share of 58% (foodservice value) in 2021, Starbucks dominates the coffee shop chains in the United States, followed by Dunkin’ with 26%. Starbucks joined PepsiCo in the North American Coffee Partnership from 1994 to manufacture and distribute RTD beverages, Frappuccino and Double Shot brands, which accounted for 61.8% of the $4.4 billion market in 2021. For the sale of capsules with its Starbucks brand, it entered into an alliance with KDP for its manufacture in 2011.
In the retail market, Starbucks was not very successful, so in 2018 it entered the Global Coffee Alliance with Nestlé, which has a large international distribution network. Nestle paid $7.15 billion for the distribution right. Starbucks in turn sold the Seattles Best coffee shop chain to Nestlé in January 2023.
The Global Coffee Alliance Nestlé – Starbucks sold 7.1 billion dollars in the US retail market in 2022, of which 3.9 billion products under the Starbucks brand, an increase of 1.6 billion compared to 2018, when the alliance started. The Global Coffee Alliance Nestlé – Starbucks sold 7.1 billion dollars in the US retail market in 2022, of which 3.9 billion products are under the Starbucks brand, an increase of 1.6 billion compared to 2018, when the alliance started.
In 2021, sales related to the coffee business had a total bill of more than 60 billion dollars, which were distributed between 67% in foodservice coffee shops, offices, etc.), 26% retail and 7% RTD, as a separate category. 63% was in the hands of only 4 business conglomerates: Starbucks in alliances with Nestlé and PepsiCo 37%, JM Smucker in alliances with Dunkin’ Donuts and Coca Cola 14%, the JAB Holding group with KDP and Peet’s Coffee 6%, and Kraft 5%.
Euromonitor, Nov. 2022. Coffee in the US Euromonitor, Feb. 2022. Cafés / Bars in the US Euromonitor, Feb. 2022. RTD Coffee in the US
In terms of volume, the picture is different. Putting together different sources of information, it is possible to calculate what volume is distributed through retail channels and what is through food service and other channels. In terms of volume, the dominance of the alliances with Starbucks is less dominant (25%), JAB Holding and Kraft weigh more (both 14%), with 10% for the JM Smucker alliances. Together they still control more than 60% of the market.
Consumption in millions of bags GBE (conversion factor to roasted coffee factor). Figures for food service & other are calculated by deduction (total consumption – retail). Data on retail 2022 are incomplete, the report is from November.
Starbucks and Keurig Green Mountain used to highlight their direct relationship with coffee farmers. Now the two have a company that coordinates purchases in Switzerland, mainly for tax reasons: Starbucks Coffee Trading Company and Keurig Trading. They buy exclusively from commercial traders, which need to have deep pockets and be very competitive. The producers stayed behind in marketing and in some projects.
All of the transnational coffee trading houses have their branches in the United States, although many head offices are also registered in Switzerland. It is estimated that there are more than 600 active green coffee importers in the US, between small, medium and large traders, many of them specialised to be able to compete in some niche.
In the same way, there are more than 2,000 roasters, including large, medium, small and micro-roasters, many in combination with cafeterias. The Big 4 control 50% of the market, supermarket-own brands 11-12%, a few more national brands 4-5% and a third of retail sales are shared among the rest of the thousands of roasters. local and regional, which have to specialize in order to compete.
The United States has about 38,000 coffee shops, some 28,000 belong to one of the chains, which is the fastest-growing segment. Almost 10 thousand are independent coffee shops, of which just over a thousand traditional cafeterias, which offer food and coffee, and 8.5-9 thousand specialised independent cafés. The latter have had greater problems with the measures during the lockdown in 2020, the temporary closure of many businesses due to the COVID-19 pandemic. They are the main distribution channel for small specialty coffee roasters, which were equally affected. The chains also encountered problems, but they have capital reserves and have developed alternatives for selling coffee.
Consumption habits and new trends
According to a fall 2022 NCA survey, coffee is the preferred beverage of Americans. 66% of those over 18 years old had had coffee the day before. In the northeast more, 72%, young people from 18 to 24 years old only 51%, but that is an increase of 11% compared to the July 2021 survey and can be taken as an indicator that this generation of consumers is recovering.
NCA National Coffee Data Trends. Fall 2022
28% of these consumers drank coffee outside the home, almost the same as before the pandemic. 63% drank a traditional coffee the week before, 54% a cup of specialty coffee and 32% coffee with some added flavour. 30% had an iced coffee of some kind the day before. Young people from generation Z (1997-2012) have a preference for iced coffee, which is promoted, for example, by media such as TikTok. The most popular way to prepare coffee is traditional filter coffee (40%), followed by the K-cup (24%), cold brew (14%) and home espresso machine (11%).
Traditional ground coffee continues to be the largest in the retail market, with 76.8% of the total by volume, but it is declining, while sales of K-cups continue to grow, just like whole bean coffee.
The lockdown has generated a change in consumption habits in the business model of coffee shops. The consumer has become accustomed to working from home in jobs that allow it. Online sales skyrocketed by over 140% and are expected to continue growing. In response to that, chains like Starbucks are dropping the concept of “third place,” which has been a central concept in their formula.
Euromonitor, January 2023. US Coffee Outlook 2023
During the pandemic in 2020, Starbucks announced that it was closing 400 of its coffee shops in the United States and Canada and opening 300 stores where you can pick up an order made online, drive through and curbside pickup (street vendors). Existing coffee shops will have a separate order pick-up counter. It resembles the business model introduced in 2018 by Luckin Coffee, its main competition in the Chinese market.
But there are always consumers with an interest in human experiences and personal contacts, for which coffee shops are important. They want to know where the coffee comes from, under what conditions it is produced and how it got to their cup, in addition to the quality and the way it is prepared, if the producers receive a fair price, if the workers are treated well and if the environment is cared for. environment. 62% of consumers are willing to pay more, if it is all-natural, 100% organic, cares for the environment, Fair Trade or some charitable cause.